Thursday, December 13, 2007
Is High Offer Always the Best Offer?
Dear Sue
Yesterday I received two offers on my home. One was for $247,000 and the other was $235,000.
I thought picking the right offer was a no brainer. Duh, the higher one, right? My agent insisted on going over each offer with me before I made any decisions. She explained that it’s not only the offering price I should be interested in, but also the bottom line, or net proceeds to me.
I am still a little confused by all this. Could you please explain a little more?
Confused Calvin
Dear Calvin
A buyer’s agent will often write an offer at a high price in order to give a good initial impression and then request credits for the buyer. Those credits could include title and escrow fees, loan fees, home warranties and homeowner’s insurance. The agent can also request credits in lieu of repairs. It is not uncommon to ask for carpet and roof allowances for example.
The only way that a seller can decide which offer to take is by calculating all of the closing costs and deducting that amount from the offering price. This will reveal the bottom line.
In addition to the buyer’s requested credits, the seller needs to consider other closing costs like brokerage fees, title and escrow fees, transfer taxes, pest reports and repairs if required, septic and well inspections and tests, prorated taxes, prorated interest on existing loans, and any other outstanding liens.
In the example you provided, Offer A, for $247,000, could have included a request from the seller to pay $10,000 in buyer’s closing costs and 100% of the title and escrow fees.
Let’s assume that the property is listed with a 6% brokerage fee. Subtract $14,820 for brokerage fee. Subtract $10,000 for buyer closing costs. Subtract $2600 for title and escrow and home warranty. Subtract $1000 for miscellaneous including pest repairs. Subtract $272 for transfer tax. The total cost of the sale is approximately $28,692. This does not take into consideration the existing loans or any other property tax and interest perorations. Assuming the property is free and clear, the bottom line of Offer A is $218,308.
Offer B is $235,000. This offer requests that title and escrow and home warranty is to be split 50/50 between buyer and seller. Subtract $14,100 for brokerage fee. Subtract $1300 for title escrow and home warranty. Subtract $1000 for miscellaneous including pest repairs if required. Subtract $259 for transfer tax. The total costs are $16,659. The bottom line of Offer B is $218,341.
While Offer A appears at first to be substantially better than Offer B, after subtracting all the closing costs both offers are essentially the same.
I always say, “The offer giveth and the addendum taketh away. But in this case, the offer giveth and the terms taketh away.”
However, the bottom line is not the only thing to consider.
One consideration would be the financial strength of each buyer. Is either one paying all cash, putting a substantial amount down or doing 100% financing? Did the offer include a buyer pre-approval letter? The scales should tip towards the most financially fit buyer.
Another consideration would be contingencies. While inspection contingencies are standard even with an “as-is” sale, a contingency giving the buyer time to sell a property in order to come up with the money for a down payment can be dicey at best.
Does the escrow period and other time frames such as inspection periods meet the needs of the seller? All of these factors must be taken into consideration.
Choosing the best offer involves many factors. Calculating the bottom line, evaluating the financial strength of the buyer and considering contract terms and contingencies are matters of good Home $$’s and Sense.
Yesterday I received two offers on my home. One was for $247,000 and the other was $235,000.
I thought picking the right offer was a no brainer. Duh, the higher one, right? My agent insisted on going over each offer with me before I made any decisions. She explained that it’s not only the offering price I should be interested in, but also the bottom line, or net proceeds to me.
I am still a little confused by all this. Could you please explain a little more?
Confused Calvin
Dear Calvin
A buyer’s agent will often write an offer at a high price in order to give a good initial impression and then request credits for the buyer. Those credits could include title and escrow fees, loan fees, home warranties and homeowner’s insurance. The agent can also request credits in lieu of repairs. It is not uncommon to ask for carpet and roof allowances for example.
The only way that a seller can decide which offer to take is by calculating all of the closing costs and deducting that amount from the offering price. This will reveal the bottom line.
In addition to the buyer’s requested credits, the seller needs to consider other closing costs like brokerage fees, title and escrow fees, transfer taxes, pest reports and repairs if required, septic and well inspections and tests, prorated taxes, prorated interest on existing loans, and any other outstanding liens.
In the example you provided, Offer A, for $247,000, could have included a request from the seller to pay $10,000 in buyer’s closing costs and 100% of the title and escrow fees.
Let’s assume that the property is listed with a 6% brokerage fee. Subtract $14,820 for brokerage fee. Subtract $10,000 for buyer closing costs. Subtract $2600 for title and escrow and home warranty. Subtract $1000 for miscellaneous including pest repairs. Subtract $272 for transfer tax. The total cost of the sale is approximately $28,692. This does not take into consideration the existing loans or any other property tax and interest perorations. Assuming the property is free and clear, the bottom line of Offer A is $218,308.
Offer B is $235,000. This offer requests that title and escrow and home warranty is to be split 50/50 between buyer and seller. Subtract $14,100 for brokerage fee. Subtract $1300 for title escrow and home warranty. Subtract $1000 for miscellaneous including pest repairs if required. Subtract $259 for transfer tax. The total costs are $16,659. The bottom line of Offer B is $218,341.
While Offer A appears at first to be substantially better than Offer B, after subtracting all the closing costs both offers are essentially the same.
I always say, “The offer giveth and the addendum taketh away. But in this case, the offer giveth and the terms taketh away.”
However, the bottom line is not the only thing to consider.
One consideration would be the financial strength of each buyer. Is either one paying all cash, putting a substantial amount down or doing 100% financing? Did the offer include a buyer pre-approval letter? The scales should tip towards the most financially fit buyer.
Another consideration would be contingencies. While inspection contingencies are standard even with an “as-is” sale, a contingency giving the buyer time to sell a property in order to come up with the money for a down payment can be dicey at best.
Does the escrow period and other time frames such as inspection periods meet the needs of the seller? All of these factors must be taken into consideration.
Choosing the best offer involves many factors. Calculating the bottom line, evaluating the financial strength of the buyer and considering contract terms and contingencies are matters of good Home $$’s and Sense.
Labels: bottom line, credits, high offer
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