I wanted to go over the items many buyers are choosing to do when competing with multiple offers. I am not recommending you do any of them or some of them. The decision is yours. I just want to explain them all, so you have the time to understand the methods. Then you can discuss with your lender as well their opinion before we write up a purchase-sale agreement.
Offer Review Date
Many listing brokers will list a property and say they are waiting to a certain day to review offers. They do this hoping for multiple offers and to give time for potential buyers to inspect the home.
Many buyers will pre-inspect a home, so they waive the inspection contingency in their offer. In multiple offer situations, the seller is looking for the best terms in an offer, so they feel if they sign with the buyer the negotiations are over. Some sellers will provide a sewer inspection and/or a home inspection to share with potential buyers. You may still do a pre-inspection with your own inspector if you want. The sellers hope providing one will bring more offers from buyers if they do not have to invest money into pre-inspections.
Financing & Appraisal Contingency
Some waive Form 22A, the financing contingency. If a buyer waives it, they are confident they are going to close on the loan. The contingency protects a buyer if their lender can not close on a loan after a good faith effort. If that happens, the buyer will get back their earnest money.
This contingency also protects on the appraisal. If the appraisal comes in under purchase price, the buyer can go back to the seller and request the price to be dropped or walk away from the contract and get back their earnest money. Buyers either waive the entire contingency or just the appraisal protection. The risk of waiving the financing contingency is you may not close on the loan. If that happens, the buyer could lose their earnest money.
If the buyer waives the appraisal and it comes in under purchase price, the buyer will have to make up the difference between appraised value and purchased price. The difference would be added on top of the down payment money. If the buyer did not have the money to make up the difference, the buyer could lose their earnest money.
Some buyers are choosing to say in offers up front they are willing to go ahead and pay up to a certain amount on top of their down payment if the appraisal comes in under purchase price. By doing this, they are trying to put a cap on how much they are willing to contribute to making up the difference in appraisal and purchase price.
Local Lender & Full Underwriting
I recommend buyers talk with their lender before waiving financing to hear how confident the lender is on closing the loan. In picking a lender, it is good to find one that does full underwriting with their pre-approval letter. If a buyer has gone through full underwriting, the
buyer often feels more confident waiving financing because there should be no surprises coming from underwriting that could stop the loan from closing.
Always ask your lender if they do full underwriting before giving the pre-approval. If they wait till you are in a mutual contract, then there is the risk that underwriting might have issues when they start to fully
underwrite the loan after mutual acceptance.
Releasing Earnest Money
Buyers sometimes will release their earnest money deposit to the seller after mutual acceptance. They will say the money is to be released, and it is nonrefundable to the buyer. If the buyer does not close on the loan, they lose their earnest money.
The contracts say that the only earnest money ever at risk is 5% of the purchase price. It is rare a buyer gives 5% earnest money deposit when they are not in a multiple offer situation. If you don’t give up to 5%, the seller can never come back demanding 5% if you lose the earnest money. If you gave 10% earnest money, only 5% is ever at risk. With 5% being the most you can put at risk, in multiple offers many buyers are giving 5% earnest money to show the seller they are willing to risk the entire 5%.
All of these waivers are done to make an offer stronger because the buyer is giving up as many possible ways to walk away from a contract. It also is a tactic to waive all the above to be more like a cash offer if you are competing against one.
The last thing we need to discuss is the Escalation Addendum, Form 35E. This states the buyer is willing to pay up to a certain price point above the asking price, but will only escalate in certain increments up to that price. For example, the purchase offer price could be $450,000. The form 35E could say you are willing to escalate the price up in $5000 increments over the next best offer with a ceiling of $500,000. If the next best offer escalated up to $475,000, in this example, the buyer would pay a purchase price of $480,000 even though they said they would escalate up to $500,000. The seller is also required to show the offer that drove up the price, so the buyer knows it was real. To help make a decision on how high to escalate I will present to you a market analysis with a price opinion. How much you would want to escalate to would be your decision.
This is a snapshot of what many buyers are doing to be competitive in the current market. Some do all I mentioned, some do just parts. I wanted to let you read this now, so
you have time to understand and ask questions. Then you can make an informed decision of what you want your purchase sale offer to be like.