It’s Not Just About Price, It’s About What’s Hiding in the Contract. Six Part Series: Part Four
Buying or Selling a home in Maine? It’s Not Just About Price, It’s About What’s Hiding in the Contract
Want to get the very most money and best contract terms for your home in this hot sellers’ market?
Most people don’t realize there is much more to selling a home than taking a few photos and throwing it in Uncle Henry’s, Zillow or on Maine Listings (Maine’s Multi-Listing Service (MLS)), especially if you want the best price and the best contract terms for your property.
This is why Balsam Realty created our series, “Get the Most for Your House In a Hot Seller’s Market” - to help you (and anyone you know) maximize the profits from the sale of what may be one of your biggest assets. This is part four in our six-part series and is a must-read for any property owner.
In this part of the series, we talk terms and contingencies and the little known clauses in the purchase & sale contract that could actually keep you from getting to the closing table. We will also explain why a cash offer is not always the best offer to choose.
PRICE Is Just The Beginning of The Conversation
When most sellers get an offer, they sometimes focus on price -- but there are so many other terms critical to making it to closing. Surprisingly, often the terms and timelines can be the key stumbling blocks along the way.
Depending on the other terms in the contract, the offer you accept could be full of deadlines, third-party dependent clauses and contingencies that may require extended negotiations after taking your property off the market. The contract can also determine how quickly you need to be out of your home.
But, on the pricing front, the critical focus is net price (the net funds seller receives at settlement) not the price listed on the top of the purchase contract. We must also consider closing cost credits, rent back fees, and any escalation clauses. These can significantly increase or decrease the net amount to the seller.
For each offer our client receives, we provide an estimated Seller’s Net Sheet which calculates net proceeds based on the contract in hand -- inclusive of things like commissions, closing costs, transfer taxes, closing credits to the buyer and title charges -- all based on the agreed upon settlement date.
This will help you determine what offer is the very best for you because the highest priced offer is not always the best offer.
The TERMS of the Contract are critical to the success of the sale.
Sellers want the best price and also deserve the best terms that work for their particular situation and timeline. Moreover, a more favorable offer is one that is most likely going to make it to settlement with the least amount of hassles or surprises.
Here’s a run down of the most important terms to negotiate:
Appraisal Contingency - An appraisal contingency clause is a provision included in the contract that allows homebuyers to back out of their contract if a home is appraised for less than the purchase price included in the contract. Even if your buyer doesn’t include an appraisal contingency in their offer, their lender is likely sending out an appraiser. When offers (and escalation clauses) drive the price over what the seller is asking (and what the market comparables will support) the appraisal becomes key to getting the contract to closing. If the buyer can’t get a loan because the appraisal amount comes in lower than the contract price, the deal is often dead. Alternatively, an appraisal contingency could include a promise from the buyer that they will cover the difference in cash, either entirely or up to a certain amount.
Appraisals can be wholly dependent on the public records for the house (which can be inaccurate - e.g. square footage, improvements missing, etc.). That is why at Balsam, we meet with appraisers to discuss updates to the house, comparable houses on the market and the offers received. This ensures the appraiser has all the critical facts to make an accurate assessment.
Financing contingency - a financing contingency refers to a clause that expresses that the offer is contingent on the buyer securing financing for the property. A financing contingency provides the buyer with protection from potential legal ramifications in case the deal fails to close. Most sellers are surprised to learn this clause can stay in place all the way until closing. So the buyer could lose their job the day before closing, void the contract and get their earnest money deposit back. This is why most sellers either don’t agree to financing contingency, accept a cash-offer or require buyers to have financing in place (“pre-approval letter” from a lender) and/or proof of cash on hand before accepting their offer.
Lender choice - Sellers often want to see what lender the buyer is using before accepting their offer. Of course, buyers can use any lender they want to finance their purchase, but choice of lender can determine the entire course of the settlement process. We recommend sellers ask for the buyer’s pre-approval letter -- but we also follow up with the lender to ensure they have been supplied with all the information they need to secure the loan. Buyer must adhere to specific duties and timelines to secure financing and we make sure these are on track. These terms should be specifically spelled out in the contract.
Earnest Money Deposit (“EMD”) - Earnest money is a deposit (amount negotiated) made to a seller that represents a buyer's “good faith” to buy a home. The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing. The EMD is placed in escrow, and can be forfeited by the buyer if they fail to meet specific responsibilities detailed in the contract. It’s important to have a truly “earnest” amount (3-5%) based on the negotiated sales price. Sometimes the buyer may have special circumstances (depending on loan type and financial ability to pay EMD). The seller must remember this may be the only pool of money available if the contract falls through.
As-Is Clause - An “as is” clause will protect a seller from the duty to disclose property defects if the seller is unaware of the defects -- or if the seller knows of the defect but remains silent, and the defect is one that is readily discoverable by the buyer through reasonable investigation. There are conditions that the seller must disclose by law (lead paint, etc.), but this clause can protect the seller from property defects that are reasonably discoverable. In a seller’s market this is becoming a more common term.
Home Inspection Contingency - An inspection contingency (or “due diligence contingency”) gives the buyer the right to have the home inspected within a specified time period, such as five to seven days. It protects the buyer, who can cancel the contract or negotiate repairs based on the findings of a professional home inspector. If the home inspection identifies property defects, the parties can renegotiate the price to adjust for the cost of repairs. A good negotiator can: minimize the time the buyer has to conduct the inspection and provide a list of repairs, allow for pre-inspections, or ask the buyer to waive a home inspection entirely. Often in a seller’s market the inspection is only to inform the buyer of problems, but does not allow them to cancel the sale. This is colloquially called an “information only” inspection.
Title Contingency - Commonly, sellers are responsible for making sure the title to the property is “clean” for transfer to the buyer - this is normally required within a certain timeline. In some circumstances, problems (often called a “cloud on title”) are found with the property’s record of ownership. It may be that there is an unsettled lien from a previous owner or judgment on the property if there was a divorce or unpaid taxes, for instance. In these situations, the ownership issues can cause a buyer to back out of a contract without penalty if the attorneys or title company cannot resolve them. These “clouds” can be common and our team will work diligently with the parties to resolve any issues. In the past, this has required tracking down a person to sign off rights to the property or determining ownership - we work tirelessly to resolve these issues.
Settlement/Closing Date - We suggest a preferred settlement date that suits your ideal timeline. Although we can’t guarantee that every buyer will be able to agree to an exact date, this is commonly negotiated in the seller’s favor - whether that is a quick closing date to get the deal secured and the settlement money transferred -- or a longer time frame to accommodate a seller’s need to transition more slowly.
Rent Back - A rent-back agreement gives the sellers extra time to live in the home after closing, essentially letting the seller become the new buyer’s temporary tenant. There are usually time limits and rent is negotiated (often escalating after term expires)—but it will give sellers a chance to close on their new home and pack up for the big move. It can also benefit the buyer because they can offer something unique to the seller if they have time to wait (which helps them win the contract), while also getting rent for the property before they move in. In today’s market, the seller can even negotiate free rent-back terms for a few months. This is one of the many ways Balsam can help a seller sell their home and still have the time to find new digs.
Proration of property or transfer taxes negotiation - Buyer and seller normally prorate property taxes for the closing, and split the transfer tax. Buyers looking for an advantage in negotiation can agree to pay for these or even all of the seller’s closing costs.
Attorney/Settlement Company/Title Company choice - Technically speaking, the buyer chooses the title/settlement company or attorney to handle the closing, but the seller can suggest providers they prefer. Choice of providers is key for a smooth path and the right timeline to close. Balsam Realty has preferred Maine companies to recommend based on our experience.
Home Sale Contingency (or “Home to Close”) -In a home sale contingency the contract is dependent on the sale of the buyer’s current property. Buyers may need to sell their home to secure cash to buy the seller’s home - sometimes they will make an offer and not disclose that their ability to pay is dependent on selling their own home. Often the seller’s agent will address this issue by requiring buyers to supply “proof of funds” or bank statements showing they have the cash to close (downpayment, appraisal gap coverage, closing costs) with their offers.
Escalation Clause - An escalation clause states that if a competing offer is made on the property, the bid will automatically increase by a certain amount of money to surpass the new offer, with an upper price point limit (e.g. “buyer will outbid other offers by $1000 up to $400,000.” So if another buyer offers $310,000 for the property the escalation clause will increase the first buyer’s offer up to $311,000. The final agreed upon escalation price will depend on the nature of all other offers and whether they also have escalation clauses. There is a specific strategy and expertise to negotiating these clauses that require an experienced real estate agent. At Balsam, we also have a detailed spreadsheet we created to present each offer and escalation so you know where the escalated prices land once we review all of the offers.
Why A Cash Offer Is Not Always The Best Offer
In bidding wars, cash is often viewed as king. Cash offers can win over offers requiring financing because they do not require jumping through as many hoops as a closing involving a lender. However, the absence of a lender can mean the parties will not have as much guidance and the attorney or title/settlement company becomes more critical. Also, cash offers may not be the highest offer, or may contain terms, timelines and contingencies that are not as favorable to the seller as an offer that requires financing. Also, as noted above, buyers may be offering cash but may not be able to provide proof of funds because the cash they are promising is coming from the sale of their own home or from outside sources (a loan from family, etc.)
It’s All About You
Don’t focus solely on price (even net price). Getting to the settlement table-- and move-out day-- on your terms and timelines-- can be even more critical, especially when offers are close, escalated or difficult to compare. We will be with you every step of the way to help you get the best price and terms and stay on track to a successful closing.
Don’t worry, we will do your homework©.
If you or anyone you know is thinking about buying a home, we’d love to help. Email us at homework@balsamrealty.com.
Here comes the disclaimer: While we pride ourselves at Balsam for our legal training - but we are not your lawyer nor are should you rely on this article as legal advice. Every set of circumstances in a contract negotiation is unique. We recommend seeking out a great real estate attorney to review every document and contract for the finer points and analysis.
Some of these terms are in a standard real estate contract and some will arrive separately, by “addendum.” Either way, understanding your legal rights and obligations in your unique set of parameters is essential and that requires a legal analysis from a qualified attorney.