Every real estate transaction revolves around the contract, the agreement between the buyer and the seller for the purchase of a home.
The contract happens when a buyer makes an offer and the two parties come to agreement on the terms. Not only does it state what the buyer is willing to pay for the house, it spells out contingencies such as whether they have a house to sell first, how long they have to complete a home inspection, whether the appliances stay with the house, when they intend to close and how they will pay, usually by cash or mortgage. The contract also specifies a date and time by which the sellers must reply back to the buyers via their agent.
A great contract reflects the agents’ negotiation skills, the current market and agreement on the needs of both parties.
Impact of the Market
The market plays a big role in what makes for a good offer.
For example, prior to the recent recovery, many sellers felt lucky to have an offer at all and buyers could take their time, write an offer for less than the asking price and be demanding about terms. Today we have inventory shortages, rising prices, and multiple offers on some homes.
This means buyers must decide quickly if they want to be in the running for homes in popular neighborhoods and may need to view a home and make an offer the day it comes on the market. If multiple offers are in play, a good offer can be one in which the sales price exceeds the list price with minimal contingencies and a quick turnaround time on the inspection.
Even in a hot market, not every home sells for more than list price. CAAR’s most recent Market Report showed that in the third quarter of 2016 the average ratio of what homes sold for compared to what they listed for in most of our area was 95 percent.
While not over 100 percent, this figure—plus the nearly 21 percent year-over-year increase in sales—reflects a market that is very active with not a lot of inventory. If you are a buyer and find a home you like, work with your agent to craft an offer that reflects these market conditions and the neighborhood where the house is located. This advice will become even more imperative as we move into the spring, usually the most active time of the year with lots more competition.
A current example of a particularly hot area is downtown. The popularity of this market is seen in a recent open house held by Inessa Telefus with Loring Woodriff Real Estate Associates who saw 40 different parties walk through a home in Belmont in one afternoon. In a very short time Telefus and her seller had multiple offers in hand and the seller ultimately accepted one that was for significantly more than the list price.
A few months earlier another downtown area listing, this one near the old Martha Jefferson Hospital, sold as soon as Telefus put the sign in the yard. All of this means, if you see a house you like, take out your phone and call your agent immediately. If you don’t you can lose out, no matter how good your offer.
Crafting an Offer Takes Experience
Two parties to a real estate contract don’t communicate directly while negotiating the home sale, that’s what agents are for, and they can often get helpful info.
One way is to direct questions to the sellers’ agent. You may not get an answer but sometimes you can learn why the owners are selling or how quickly they want to move. Sometimes sellers allow their agents to say that they are highly motivated if they need to move quickly or if they are negotiable about the refrigerator or the drapes. This kind of information can help buyers and their agents write an offer that meets the sellers’ needs and increases the chances of acceptance.
When buyers don’t ask these kinds of questions, a contract may be rejected for unexpected reasons. Phyllis Novotny with Roy Wheeler Realty Co. described a time when her seller received an all cash contract (usually a positive since there is no mortgage contingency) that also required the house to close in three weeks, a very quick turnaround time. The seller said “no” because her situation did not permit such a quick move. A good offer in this situation would have allowed the seller more time. A different seller, one that had already moved, for example, would have been thrilled.
Buyers can increase their chances of getting a contract accepted by providing a pre-approval letter showing a lender has evaluated their financial situation including their credit rating. While this is not final loan approval it is good evidence the buyer is good for it. Buyers can also demonstrate strength by financing the home with a loan requiring a larger down payment. A buyer choosing a conventional loan with 20 percent down demonstrates more financial power than one using a minimum down FHA loan, and most sellers will prefer the former.
Sellers may also consider factors other than price. Karen Kehoe with RE/MAX Regency had a seller who wanted to sell to buyers who would care about her home as much as she did. When she received two contracts, one from an investor and one from buyers who included a letter explaining how much they loved the house, she turned down the investor contract even though it was worth $3,000 more.
A Great Contract
Ultimately a great contract is one that works for both parties, and when you have one in hand the whole transaction, from start to finish, is smoother for everyone. Consult your agent for advice.
Celeste Smucker is a writer and blogger who lives near Charlottesville.