The West Michigan real estate market is very restricted in inventory but rich with crafty, hungry Buyers. Many of these Buyers were shopping last year, made many offers and still did not get a home. Most listings will hit the market with an offer deadline. This means that the Listing Agent is expecting multiple offers with absolute certainty. Sometimes, listings will get launched without an offer deadline only to have a “highest and best” offer deadline added once the first offer is submitted. In multiple offer Listings Buyers need to do a number of unpleasant things to be considered and possibly win the property. This brief guide is to explain what certain terms mean that will need to be utilized. Unfortunately in a Sellers market it is very unlikely that we will be successful if we don’t use these terms. Here are some of the possibilities of options we would need to employ if we were to offer on a property that had more than one offer in on it...
Escalation clause: On page 1 of the purchase agreement you offer full price (or slightly over which I would suggest) and then in a different addendum you offer $X number of dollars above the highest said offer (with proof of said offer), price not to exceed $X number of dollars. Example: Buyer to offer $5000 (Five Thousand and 00/100 Dollars) above highest said offer, with proof of said offer, price not to exceed $250,000 (Two Hundred Fifty Thousand and 00/100 Dollars).
We will need to waive inspections for our offers. This is difficult and NO BODY likes to do it but opting for inspections will not win in multiple offer situations. The difficult thing is that by waving the inspections we lose one way to cancel the purchase agreement. Some people will inspect after they own the house, others will bank the cost of the inspection and just wait to figure out what isn’t right about the home as they live there. The other option, depending on how many days the Listing Agent is allowing for showings is to do a brief, short 1 hour inspection (pre-inspection)… if you can secure it on the showing calendar. Most Listing Agents are still only allowing individual showings, versus overlapping showings which makes it really hard to get a showing let alone a slot for an hour inspection.
Appraisal contingency - This is a condition of financing. It allows the Buyer to cancel the agreement, renegotiate the price or pay the offered price in the event the appraised value (ordered by the Lender) does not meet the purchase price. For example, we offer $250k and the appraisal comes in at $225k. The bank will only finance $225k so the buyer will have to bridge the gap with cash to pay the Seller the offered amount of $250k. In multiple offer situations offers need to either WAIVE the appraisal contingency or offer an “Appraisal gap coverage” which sounds like this: Buyer to pay $5k above appraised value if appraisal does not meet purchase price, price not to exceed $250k. By waiving the appraisal contingency you forgo one more way to cancel the contract and have to bring cash to bridge any gap between appraised value and purchase price. Appraisers don’t want to wreck a deal and most times the Listing Agents are presenting them with a spreadsheet that displays all of the offers that came in. The higher the appraisal gap coverage the more likely you are to win a multiple offer situation.
Financing – Up to date preapproval letter and the higher the down payment the better are necessary. Know this though, say your preapproved with Merchantile Bank but decide to go with LMCU after reviewing all of each of their programs. You can do that, pick a different lender in the first few days of the contract… so you’re not married to the lender that you have the preapproval letter from. Now to the down payment… the lower the down payment the more likely the Listing Agent will assume that you can’t sustain bridging an appraisal gap or waiving the appraisal contingency. Which makes sense. If you’re a 20% down payment buyer offering an appraisal waiver or appraisal gap guarantee then the Listing Agent understands that you have cash to use, unfortunately that likely will reduce your down payment however you’ll still be able to purchase the home.
Possession after close - Some homes on the market still occupied by Sellers are requesting 30 days after close for possession… which means they live in the home after the transaction closes for 30 days. A seller can choose any number of days. Buyers don’t have to agree to this, they could ask for possession at close but in multiple offer situations making that request will not result in success. In multiple offer situations Buyers are GIVING 30 days after close at NO CHARGE. This is common practice… even up to 45 days after close. Buyers can charge the seller rent for those 30 days or give them 30 DAC (days after close) at NC (no charge) and then charge them a reasonable rent for the rest of the time the Seller might need possession. The reasonable rent is usually determined by what your payment will be divided over 30 days to determine a daily rate. During the time the Seller lives in the property after close they are still responsible for all utilities until possession changeover BUT if a flood or fire happens, roof leaks, furnace fails it gets repaired by the Buyer who technically is the owner.
EMD – Earnest Money Deposit. This is a dollar amount that you offer the Seller as a “deposit” to sell you their house and take it off the market. The higher the EMD the better. The downside of high EMD is this… or any EMD for that matter. By waiving inspections and using an appraisal waiver we immediately lock up the EMD which becomes NON-REFUNDABLE as soon as the purchase agreement is fully executed. Technically a Buyer can cancel a purchase agreement at any time but if the inspection and appraisal is waived then the Seller will retain the EMD. We’ve never lost a Buyer’s EMD yet… don’t plan to either. It’s a VERY rare occasion that we cancel a purchase agreement for a Buyer… that is because we are selective and don’t have second thoughts or keep shopping after we’ve entered into a purchase agreement.
We hope this helps explain the market and what has to be done to win a multiple offer listing. We are not trying to frighten you. You need to be aware and if you’re not willing to do what is discussed above then we will not be successful in a multiple offer situation. Unfortunately we don’t expect the market to be any better next 5 years. Bottom line… there are no deals in our local market. Haven’t been for years and likely won’t be for years to come unless you’re willing to buy something undesirable in a questionable location.
Schedule a consultation with us to help you estimate and understand your home’s value.