5 Reasons The Highest Offer Doesn't Always Win

It’s no secret that buying real estate right now is more like a contact sport than the leisurely transactions of yesteryear. Low rates are driving high demand and there isn’t so much supply.

How do you compete if you don’t have unlimited sums of cash in the bank you want to throw at a piece of real estate?

Surprisingly, some sellers will accept offers that aren’t the highest.

What?

Naturally, the highest offer is going to catch the attention of sellers, but sometimes sellers have other needs they favor more than an extra $10K. Maybe even more than an extra $50K.

Below are 5 strategies and why they work. Spoiler alert! They all relate to the amount of risk a seller is taking by accepting a particular offer.

1. All cash

We all know cash is king. Assuming verifiable, liquid funds can be shown for the deposit, closing costs and closing, a cash offer will likely represent the lowest amount of risk to a seller that a deal won’t close.

Cash buyers still often ask for inspection and appraisal contingencies, so the risk is not zero, but the odds are good.

What if you don’t have cash? There are companies out there that will front you cash to buy, but understanding their business model is beyond the scope of a simple blog post. Grab time on our calendar and we’ll happily talk to you about how these companies work.

And don’t forget about the Bank of Mom & Dad, if it’s an option. You can always put a mortgage on your new home after closing, if you have relatives who can offer a bridge to acquire the property.

2. Short Escrow

It is a crazy kiss of death for a property to sit on the market for any extended period of time. I can’t explain the psychology of it all, but I’ve seen properties with perfectly explainable reasons why they are 60 days on market, and it usually takes a price cut to move them.

So, a seller with a good agent is always evaluating offers for the risks of not closing quickly, or at all. If escrow is short, a property can actually fall out and come back to market without too big a scar. This is why short escrows get brownie points. Shortened contingency periods also support shorter escrows. 

Is your lender telling you you can’t get funded in less than 30 days? You need a different lender. One of my favorites can close jumbo loans in 21 days, but this takes upfront legwork to pre-underwrite you. Need to know my lender? Text us at 424.226.7201 with the word LENDER and we’ll get you the information.

3. Sentimental Sales

When a seller has owned a property for decades and built many happy memories, sometimes they care that the buyer will respect and take care of their property. This is where “Buyer Love Letters” got their start.

These love letters have recently fallen out of favor with brokers because they have inherent risks of opening up sellers to fair housing discrimination claims.

That doesn’t mean that your agent shouldn’t be probing about sentimental motivations. If a seller cares that their house won’t get razed, it can be legally conveyed that you want to love the house just as it is. But you better not be sending any pictures of your cute kids or talking about your family status.

4. Flying Without Contingencies

A typical offer has three standard contingencies. First is an inspection contingency that allows the buyer to review seller disclosures, have a general inspector in, followed by any indicated specialty inspectors, and review HOA documents, among other things. 

Most buyers can walk for any reason within this contingency period and not lose their deposit. Not that many years ago, 17 days was standard for an inspection contingency. Now, 10 days is pretty much expected. Do you know how hard it is to line up a good general inspector on short notice, let alone the follow on specialty inspectors? And then repairs have to be negotiated within the same period because a buyer loses the ultimate leverage of walking, if the inspection contingency expires.

The second typical contingency is a loan contingency. This contingency matters for buyers buying with a loan. You do not want to be in a position of finding out in escrow that you can’t qualify for your intended loan or the terms are too expensive or worse, your lender decides at the last minute that you need a pile of cash reserves that you simply don’t have. If your loan contingency has expired when you get the unhappy news, you are at risk of losing your deposit.

There are ways to work with the loan contingency. You can get pre-underwritten, which means you are assured of the loan on the terms you expect before opening escrow. This strategy works best with a trusted lender, and preferably one your buyer agent has a relationship with.

The other option is the bridge cash strategy discussed above under Strategy #1. Pre-underwriting and/or using a bridge facility for an all cash offer both allow you to skip the loan contingency altogether or to dramatically shorten the period. Talk with your lender.

The third typical contingency is an appraisal contingency. Lenders won’t lend without an appraisal verifying the collateral for the loan covers their risk. One of my favorite lenders has a program to ensure their appraiser is out within 10 days. With a pre-underwritten loan and a short appraisal contingency, along with a short inspection contingency, your loan scenario can be competitive with a cash offer. 

But what if shortened contingencies aren’t enough? Can you waive everything? 

Waiving everything is tricky and not generally advisable. In fact, most buyer brokers will ask you to sign off that you’re proceeding against their advice if you proceed without contingencies. Waiving contingencies takes all the risk off the seller and will be appealing, but it’s a ton of risk on you, and you will need to make up the shortfall in cash if the appraisal doesn’t support the contract price and there is a loan involved.

When it comes to contingencies, it’s best to start with as conservative approach as you think will get you a seat at the negotiating table. You can shorten or give up additional contingencies at counter offer time, if it makes sense.

5. Your Agent Matters

Nothing stalls an escrow faster than a high drama agent or one too inexperienced to keep their buyer(s) on track. You can bet money that a good listing agent is advising a seller on whether the buyer’s agent is going to be beneficial or detrimental in getting escrow closed, as multiple offers are considered.

You want an agent who not only has the personality to build a good working relationship with the listing agent, but you want one who doesn’t suck the wind out of a room. Getting “stuff” done efficiently matters in escrow. Being an on the fly problem solver is a bonus.

Pick your buyer’s agent with an eye toward personality, efficiency and ability to respond quickly to simple requests. And get that agent under contract with a Buyer Broker Agreement so that you know that agent has your interests front and center. If you have unlimited cash and you’re willing to offer significantly over list, you might get away with a less user-friendly agent, but why risk that? You want to close successfully, too, right?

Which Strategy Matters Most?

So how do you know which of these strategies will win the day for you? You need an agent who will ask!

Many agents are just waking up to this radical idea out of necessity as their buyers continue to lose out on bidding wars.

I’ve always done this for my clients. In my lawyer brain, it’s just logical that a winning offer is a package of little offers, and that the seller isn’t ruled by a single motivation. 

And as much as I’d prefer to just text over the question, I’ve learned that constantly innovating wins the day. Our current practice is to try calling the listing agent (novel, right??), and if that doesn’t work, we send a video text. Relationships are everything. It isn’t called “warm fuzzies” for nothing.

Who Knew It Could Be So Complicated?

Did you realize how complicated making an offer can be? Lots of brokers pair up buyers with their most inexperienced agents. I’ve never understood that approach. It is not a recipe for success for buyers, in my humble opinion.

On the flip side, these strategic considerations are why I so enjoy working with buyers. Buyers have options and strategy matters.

On the flip of the flip side, I do get frustrated with buyers who resist strategizing ahead of seeing houses and making offers. We can start making offers cold, but without me and my team understanding your motivations,  abilities and financial nuances, it’s hard for us to move the chess pieces in ways that benefit you. We truly want to help set you up for success ahead of writing that first offer.

Go Get 'Em Tiger!

Armed with your new knowledge, I hope you’re a little more confident you can prevail with your next offer without offering more money than you have or are comfortable spending. 

So who’s ready to strategize?? Grab time on our calendar or drop in at our virtual office hours. And by all means, let’s sign a Buyer Broker Agreement. No good agent will give you 100% of their attention and talents without one. 😊