Best and Highest

Often when listing agents are asked what their sellers are looking for our response is "best and highest", meaning the highest price and best terms. Sometimes a seller may need some extra time in the house after close, or may be looking for an extra quick close, but most often the bottom line is "best and highest".

What does that mean, exactly? On occasion it's really "best or highest". When there is no single offer which shines as best and highest it's time to compare to find which offer strikes the most advantageous balance between price and terms.

Why not just accept the highest price and be done with it? Well, there are terms in every contract that make a deal more or less secure, more or less likely to close, more or less likely to risk that high price and if you don't know all of the aspects of a purchase contract, you could watch that high offer price tick away dollar by dollar until you end up with a price you're "stuck" with, instead of one you're happy with.

There are many nuanced components to an offer which must be considered and analyzed as parts of the whole. For now, let's quickly review the big three contingencies: Financing, Appraisal, and Inspection. I've already written in more detail about what each of those mean from a buyer's protection perspective here, so here I'll focus on what a seller stands to lose due to contingencies.

Financing: if a buyer has been fully pre-approved, they are saying that it's possible they will have to back out of a contract if they are unable to secure financing. Having a property fall out of contract and come back on the market tends to hurt a property's sale since the first two weeks of a property's marketing plan are the most impactful.

Appraisal: if a property does not appraise for the offer price and the buyer has an appraisal contingency you can bet the sales price will drop. It may not drop the full difference to the appraised value, sometimes a buyer will split the difference. But if an offer price is higher than the comparable sales, you need to ask your agent how to address this potential pitfall (there are ways to assess this one in more depth, feel free to ask me how).

Inspection: this one tends to be familiar with most buyers and sellers. If a buyer discovers any faults in the property that were unknown when they submitted their offer they have grounds to ask the seller to give them a credit, or reduce the price. There is an almost surefire way to work around this, even if a buyer wants to retain their right to inspect to their satisfaction. Want to know more? Just ask.

Just the other day my buyers' offer won in the midst of 14 other offers. The listing agent confided that they were in second place in price, but the rest of their offer was so strong they are now in contract to purchase their first home, a totally remodeled bungalow with a great yard in their perfect neighborhood. Price is important, but so are many other factors when writing or accepting an offer, be sure you're addressing all the moving parts when putting your best foot forward.

Contingencies & Liquidated Damages

A contingency is something that protects a buyer (or seller) from having to proceed with a transaction beyond their capabilities. There are many forms of contingencies, but for now we'll start with the three most common, which are found in an offer a buyer makes to a seller of real property.

The San Francisco Bay Area is a highly competitive market where multiple offers are the norm. To give you a better shot at getting your offer accepted you want as few contingencies as possible so the seller sees your offer as close to a "done deal" as possible. Read on to learn when you can waive which contingencies, and when you need their protection.

Financing Contingency 

This contingency, which defaults in the purchase contract to 21 days, protects a buyer in the event that they cannot secure financing to purchase the property. 

When is it appropriate? When the buyer has not been pre-approved.

When can it be waived? 1) When the buyer has been fully pre-approved (not just prequalified!) by a reputable lender. This means the buyer has submitted all the necessary documentation to the lender and the lender has verified the buyer's downpayment funds, and analyzed the buyer's portfolio, and assured the buyer that a loan can be secured, 2) If the offer is all cash, 3) When the buyer is comfortable with, and willing to accept the associated risk.

What happens if you don't have this contingency & can't get financing? 1) You find another way to fund the purchase, or 2) You back out of the contract and lose your deposit.

What happens if you do have this contingency & can't get financing? You are able to cancel the contract and walk away, taking your deposit with you.

Appraisal Contingency

This contingency, which defaults in the purchase contract to 17 days, protects the buyer in the event that the appraisal comes in for less than the agreed upon purchase price.

When is it appropriate? 1) When the purchase price exceeds comparable sales in the area and isn't supported by the current market. 2) When the buyer's downpayment is less than 20%, 3) When the buyer doesn't have the funds to make up the difference in value out of their own pocket.

When can it be waived? 1) When multiple recent comparable sales clearly support the purchase price, 2) When the buyer has enough additional funds to pay the difference in value, should the property appraise for less than the purchase price, 3) When the buyer is comfortable with, and willing to accept the associated risks.

What happens if you don't have this contingency & the property appraises for less than the purchase price? 1) You must come up with additional money to make up the difference between the appraisal amount and purchase price, or 2) You back out of the contract and lose your deposit.

What happens if you do have this contingency & the property appraises for less than the purchase price? 1) You are able to cancel the contract and do not lose your deposit, or 2) You can try to renegotiate the purchase price with the sellers to the appraised value and proceed with your purchase.

Inspections & Investigation Contingency

This contingency, which defaults in the purchase contract to 17 days, allows the buyer a period of time to investigate the property to their satisfaction. This is the time period a buyer would have any and all inspections performed, bids/estimates provided, and gain as much knowledge about the property as they want/need to feel comfortable with the property's condition.

When is it appropriate? Whenever the buyer would like to have more information on the condition of the property than was provided by the seller. 

When can it be waived? 1) When the seller has provided recent inspection reports performed by qualified professionals, demonstrating the property is in a condition acceptable to the buyer, 2) When the buyer willing to accept any unknown conditions of the property, 3) When the buyer is comfortable with, and willing to accept the associated risks.

What happens if you don't have this contingency and you later discover defects to the property? You deal with the defects out of your pocket (there are caveats regarding defects which were known to the seller and not disclosed, but that's an other post entirely).

What happens if you do have this contingency and you discover defects to the property during your contingency period? You can negotiate with the seller for a credit, or a reduction in the purchase price for property defects (but you cannot renegotiate for "upgrades"), if the seller is unwilling to negotiate to a number that is agreeable to you, you can decide if you're willing to accept the property in its known condition ("as-is"), or you can cancel the contract and walk away with your deposit.

Liquidated Damages

There is a section of the purchase contract which both the buyer & seller initial to agree to specifically regarding liquidated damages. This paragraph states that if the buyer backs out of the contract for any non-contractual reason, the seller has the right to keep the buyer's deposit, up to 3% of the purchase price, as liquidated damages. It's important to note that this is actually a protection to the buyer, as this paragraph limits the amount the seller can claim in damages to 3% of the purchase price. This is not meant to be a punitive action toward a buyer; sellers must prove that they were damaged by the buyers backing out of a contract. This is accomplished through mediation, and subsequently binding arbitration, if necessary.

As I mentioned at the beginning, there are many other ways a buyer (or seller) can build in contingencies specific to their situation. If you have a question about anything in this post, or the best way to protect yourself (and get your offer accepted), post it in the comments, or email me directly.