by Buz Wolfe
There is an old adage that says the secret to real estate success is “location, location, location”.
I would argue that a better axiom might be “negotiation, negotiation, negotiation”.
We have a current President of the United States of America who fashions himself a great deal maker. In fact, he authored a book several years back called “The Art of the Deal”. As someone who has closed 1,000 or so real estate deals right here in the Carlisle Community over the past thirty five years, I think I know a thing or two about “The Art of the Deal” myself. So, this month I am providing some advice to Sellers, Buyers and Real Estate Practitioners.
SELLERS – Most sellers fixate on price. They believe that the be all and end all of every deal is obtaining the highest possible price for their property. While price is important, there are many other factors that are just as important. The terms and conditions of the Agreement of Sale are critical to the ultimate success of the transaction. The “cleaner the deal”, the greater the likelihood that you will actually make it to the settlement table.
The single most important thing to evaluate when receiving an offer on your property is the Buyers ability to perform. In most instances, the buyer will make their offer to purchase contingent upon their ability to obtain mortgage financing. While you should insist on receiving a pre-approval from a bonafide mortgage lender, the wide array of available mortgage loans and structures need similarly evaluated.
As a general rule, an offer which is subject to conventional financing is superior to one that involves government backed financing such as FHA, VA or USDA. While these are fine loan programs and are of great benefit to buyers with limited cash reserves, the simple fact is that they entail far more complications and underwriting bureaucracy than do conventional mortgage loans.
Also as a general rule, the greater the down payment the stronger the buyer. Mortgage lenders refer to “loan to value ratios” (LTV) when describing the amount of money that will be financed toward the purchase price. While some of the government backed loans involve anywhere from a zero down payment to 3-3.5%, most conventional loans require at least a 5% down payment. It should especially be noted that any conventional loan of 80% LTV (20% down payment) or less is more favorably treated by the lender than are higher leveraged loans.
In addition to the loan itself, buyers today often seek “seller assistance” with their offer. By this we mean that the buyer will actually ask for some amount of money back from the seller at closing to be used toward their down payment and closing costs. While this is common place, an offer that does not require seller assistance is simply a stronger and better offer. Frequently, buyers will offer full price or even in excess of full price so that the seller will be willing to provide a cash concession at closing. This, in turn, can make the appraisal portion of the loan process risky – – particularly if the home is being sold for more than asking price.
Finally, today we have a whole litany of issues that arise out of inspections. Home inspections, wood infestation inspections, radon inspections, well inspections, septic inspections, lead based paint inspections…simply put….the fewer inspections required by the buyer the greater the likelihood the deal will stay together. While it is perfectly appropriate for buyers to satisfy themselves as to the condition of the property and perfectly reasonable for the seller to repair legitimate items identified through the inspection process, many of the items identified throughout the home inspection process tend to be peciune and create friction between seller and buyer.
So, while price is an important factor in considering any offer on your property, the strength of the buyer and the minimum to which inspections are kept can actually be worth dollars. This is why we will sometimes see sellers agree to take somewhat less for the property in a cash transaction or one with no inspection contingencies. A full price or above offer that is predicated on shaky financing and every inspection known to mankind might just not be worth the risk.
BUYERS - Buyers, conversely, think that their ultimate objective is to purchase their desired property for as little money as is possible. Always strike the best deal, they think! Well, there are problems with this as well.
If you are a buyer who requires high leverage financing and a host of inspections, it may be difficult to get the seller to agree to your reduced offer.
If you are requesting significant seller assistance, for example, the seller is very unlikely to greatly negotiate the sale price. As noted above, even a full price or above offer that requires significant seller assistance creates the possibility that the subject property will not appraise for the established sale price and result in a mortgage application denial and termination of the Agreement of Sale.
Government backed and high loan to value ratio loans are typically tougher subject to standards for both the borrower and the property itself. This is primarily because that the foreclosure rates on these types of loans tend to be higher than those in which the buyers have significant down payment and equity. Lenders have learned to loathe taking back properties that are overleveraged and poorly maintained.
Finally, buyers should be reasonable with their expectations on the results of home inspections and other property inspections. Again, as pointed out above, it is reasonable to expect the seller to address legitimate deficiencies such as the existence of termites or radon or a malfunctioning furnace. Expecting the seller to turn over a completely renovated home, however, is simply not reasonable and will frequently discourage the seller from negotiating to their bottom dollar.
Buyers, then, should early on determine a strategy for getting the best deal. This may be the price itself or it may be favorable terms and conditions that permit them to secure the required financing and obtain the necessary repairs and improvements needed for their benefit.
AGENTS – As I have pointed out in prior articles, there really is no such thing as a “real estate agent”. Real Estate Pracitioners are licensed by the Commonwealth of Pennsylvania as either Salespersons, Associate Brokers or Brokers. They do act in an “Agent capacity” when representing sellers or buyers.
Listing Agents are well advised to educate their sellers as to the actual range of value that their property is worth. While it is true that Buyers tend to make offers and building a little “fat” into the list price can make sense, it has been proven time and time again that over pricing a listing by a significant amount benefits no one. Sellers always have the option of reducing or adjusting the price at a later date, but often will eventually sell the property for less than they may have received if they had put their best foot forward when entering the market.
Listing Brokers should also refrain from “bidding” on listings. An experienced and successful real estate professional will walk away from a listing that the seller is insistent upon over pricing in a significant fashion. While there will always be an agent that will be willing to list any property at any price, an experienced and successful agent will decline and avoid the many pitfalls that accompany the over-priced listing and unrealistic expectations of the seller.
Buyer’s agents also do well to educate their own clients as to the appropriate range of value for the property in question. Too often, buyer agents somehow think they are doing their buyer a favor by making a low ball offer in an effort to get their buyer client a “great deal”! The fact is that low ball offers, which insult or antagonize the seller, are rarely beneficial to anyone. Many times I have seen offended sellers refuse to make a counter proposal to the low ball buyer or make a counter proposal that is actually higher than that which they would have made to a buyer presenting a more respectable initial proposal. Personalities and relationships have a great deal to do with getting the contract from signature to closing table.
In summation, sellers need to be realistic about the value of their property and evaluate the merits of any offer based not only on the price but on the related terms and conditions. Buyers, while rightfully seeking to negotiate the best deal possible, need to come across to the seller as financially viable and realistic with their expectations of the property’s condition.
An experienced real estate broker or salesperson can be invaluable in providing wise counsel to both sellers and buyers. Provided, of course, that sellers and buyers are amenable to wise counsel!
*Ray L. “Buz” Wolfe, CRS has been Broker/Owner of his own firm since 1986. In 2016, he was again the Carlisle Area’s Top Producing Independent Broker.
**All information believed to be accurate but not guaranteed.