The housing market in the Hudson Valley continues to sizzle, with sellers often receiving an avalanche of viewings the first week a home goes on the market, followed by multiple offers, cash offers, and bidding wars. It appears the market won’t cool down until enough homes hit the market to alleviate the critical shortage of housing inventory that keeps properties and prices white-hot.
If you are selling your home, or intend to in the near future, be prepared for one thing – the multiple offer situation.
For most homes listed for sale today, multiple offers on a house are nearly guaranteed unless the property has some obvious defect – excessive road noise, a quirky layout, a funky neighborhood, or, most commonly, too high a listing price.
Having multiple offers to choose from is a wonderful position for a seller to be in. It can be tricky, however, to decide which offer is the best for you.
Obviously, the amount of money offered is important, but that’s not the only factor in evaluating competing offers. You will probably not have the luxury of just choosing the highest bidder. It’s almost always more complicated than that. You have to ask yourself:
- How solid is the buyer’s financing?
- Which is better, a buyer bidding 5% over the asking price or one at the asking price with 20% down?
- Should I be concerned if the buyer needs to sell his house first?
To help you answer questions about dealing with multiple offers on a house, start by examining your situation.
- Why are you selling in the first place?
- Do you have to sell because of divorce or job relocation?
- Are you “cashing out” to retire
- Are you in a short-sale situation where your house is worth less than the amount you owe on it?
There are factors in selling a house that are not just about money.
- What is your timing?
- Do you need to sell now, or can you be flexible?
- Do you have somewhere to go after you sell, or will you become a buyer competing for a place to buy?
Work with your Realtor to get a firm idea of what factors are important to you in selling your home.
All Cash Offers
Price is just one of the considerations when evaluating competing offers. Not most, but many offers come in as an all-cash deal or with a significant amount of cash and some financing.
The value of a cash offer in a real estate bidding war is that it excludes one major potential hurdle – that, for some reason, the buyer’s lender won’t approve the loan and kill the deal.
An all-cash offer isn’t a suitcase full of cash. New York State limits currency in a real estate transaction to $10,000, and the details of the transaction must be reported to the state.
Also, an all-cash offer doesn’t refer to where the money is from – the buyer may still be using financing to purchase your home.
A cash offer means that the home’s sale is not contingent on the buyer getting a loan for either all or part of the transaction. Since your buyer doesn’t rely on lender approval, it makes for a quicker, smoother closing.
If you are considering an all-cash offer, always require Proof of Funds. This is usually a letter from the buyer’s bank or source of funds demonstrating the buyer’s ability to pay.
Comparing Buyers’ Financial Strength
In today’s market, the buyer’s financial strength is considered a factor in comparing multiple offers on a house. The next best way for buyers to show their financial strength is a Buyer Pre-Approval letter from their lender stating that the buyer is approved to get the loan required to back up their generous offer.
Another show of financial strength is the amount of money the buyer puts down on the mortgage. While 20% was once the expected down payment, strong buyers will often put down much more. This is attractive to sellers because it means less chance the property won’t appraise at the offered price.
The type of buyer financing is also a consideration for sellers. Conventional loans are more attractive for sellers than FHA loans for two reasons. FHA loans have strict guidelines imposed because the loans are government-insured.
One reason is that if the home appraises for less than the accepted price, the seller must drop his price to match the appraisal, or the deal will fall through. There is no opportunity to negotiate. A seller can either lower the price or re-list the home. The appraisal stays with the property for 120 days.
The other reason sellers shy away from FHA loans is that the guidelines require appraisers to look for specific defects that could affect habitability for the buyers’ health, safety, or security. If any defects are found, the seller is required to repair them before the sale.
Buyers will normally attach certain contingencies to an offer, which act as a protection for them. Contingencies act as conditions that must be met before the buyer will agree to the deal. Don’t overlook them because they have the potential to kill an otherwise solid agreement.
There are three common kinds of contingencies: the home inspection, the lender’s appraisal, and the buyer’s financing.
Contingent Upon Inspection
This is a contingency stating that if any negative significant conditions regarding the house or its land are discovered during the inspection, the buyer has a right to withdraw his offer. If such a condition is discovered – usually something major such as a buried oil tank, a cracked or eroding foundation, or major structural problems, the seller can fix the problem or credit the buyer at closing with a discount on the property sufficient to correct it.
This is part of an offer in which the buyer says, “If my offer on your house is more than my lender thinks it’s worth or is willing to lend, I’ll either make up the difference or exercise my right to squelch the deal.”
Buyers use these contingencies to protect themselves if they can’t qualify for financing and don’t have enough cash to buy the house outright. An appraisal contingency may stipulate that the buyer has a specific amount of time to arrange for sufficient financing.
A financial contingency protects the buyer in case his financing falls through. Included in this category is a Contingency to Sell, in which the buyer agrees to buy the house for the price offered IF he can sell his own property first.
Sellers should be wary of buyers who need to sell their existing home because it can put them in a predicament should they need to close in a specified amount of time.
Recently, some lenders have created “bridge loans” for buyers needing to sell. One such program now active in 18 markets around the country is offered by mortgage lender Knock, which has introduced its Home Swap program to help families secure a new home without relying on the proceeds of selling their current house.
Knock acts as the lender, and its loan provides the down payment, any pre-market home preparations, and covers the mortgage as part of a $250,000 interest-free bridge loan.
Sellers should regard offers containing many contingencies with a skeptical eye because the fewer hurdles you have to overcome, the better – even if the dollar amount of the offer is tempting.
In today’s market, many buyers are making offers with one or more contingencies waived. They do this to make their offer more appealing to sellers. Waiving financial and/or inspection contingencies is a powerful statement about the buyer’s ability and commitment to making the deal happen.
Sellers still hold the upper hand when it comes to dealing with buyers in the Hudson Valley. Knowing how to handle multiple offers on a house is a powerful tool for sellers in evaluating which offer is best for them.