Before listing your home, you’ll decide on what terms, in the form of a buyer’s offer, you are willing to accept in order to sell. The terms you set should be a reflection of what matters most to you when selling – your final sales price or ease of sale. While these two aren’t always mutually exclusive, we will find out below that the terms you set can push price and the ease of attaining that price in opposite directions.
Earnest Money
Earnest money is the good faith deposit given to the seller by the buyer after the buyer’s offer is accepted as a way of showing the seller that the buyer is serious about carrying the purchase all the way through closing. Earnest money is usually between 1% and 3% of the sale price and is held in escrow until the purchase is either completed or the buyer backs out. If the purchase is completed, the earnest money is applied to the buyer’s down payment. If the buyer backs out for a reason not covered by a contingency, then the earnest money is forfeited to the seller.
When deciding on how much earnest money to accept, it is important to take into account your homes location and current market trends. In areas that are in high demand and in markets that are seller driven, earnest money is generally higher, 2-3%. In areas that are in less demand and in markets that are buyer driven, earnest money is generally lower, 1-2%.
Cash or Financed Offers – Pros and Cons
Cash offers are generally more attractive to sellers than financed offers. They remove the risk of a buyers financing falling through and can dramatically speed up the closing process. Cash offers eliminate the mortgage process and the need for an appraisal (appraisals are typically lender-mandated).
The downside of cash offers is that they can sometimes be lower than financed offers. Cash buyers know how attractive their offers are, shorter closing and ease of sale, so they will often offer less.
When deciding on which types of offers to accept, it is important to take into account what matters most to you when selling. If it’s speed and ease of close, cash is probably the way to go. If it is maximizing potential sale price, it’s probably worth entertaining financed as well as cash offers.
Which Contingencies and Why?
First, what is a contingency? Contingencies are clauses that protect the buyer’s interests during closing. They make the the sale dependent on whether the conditions in the buyers offer are met. If their conditions are not met, then they allow the buyer to cancel the contract and walk away with their earnest money.
The contingencies you choose to accept and the ones you ask buyers to waive, will have an effect on the number of viable offers that you receive. For example, most buyers will want to inspect the home, (inspection contingency) and review the title report (title contingency) before purchase. If you are unwilling to accept offers with these contingencies, you could be missing out on buyer who are willing to purchase at a higher.
It’s important to note that a buyers willingness to waive any or all contingencies is generally a reflection of the level of demand in the market. In a sellers market, where there is more demand than supply, buyers are more likely to waive contingencies than in a buyers market, where supply outpaces demand.
Below are four of the most common types of contingencies.
- Financing Contingency: allows the financed buyer time to obtain financing or cancel the contract if they cannot secure a loan. If you are willing to accept financed offers, it’s a good idea to accept this contingency.
- Appraisal Contingency: allows the buyer to cancel the contract if the home appraisal is less than the offer amount. If you are willing to accept financed offers, the bank is going to require you to accept this contingency.
- Inspection Contingency: allows the buyer to ask for a discount, repairs, repair credits, or to cancel the contract if there are any problems uncovered during the home inspection.
Tip: A good strategy is to have a pre-inspection done before listing. A pre-inspection can increase buyer confidence, generate more offers and shorten the closing period. - Title Contingency: allows the buyer to review the title report, object to any title issues, and cancel the contract if the property does not have a clean title.
When deciding on which contingencies you are willing to accept, it is important to take into account what type of market you are in, buyer or seller, and what the potential impact of accepting or not accepting those contingencies could be on your final sales price.
Closing Date
You will also need to decide on the closing date. This is the day that possession of the home is turned over to the buyer. The timeframes for closing are typically set within 30, 45, or 60 days of offer acceptance.
When choosing a closing date, it is important to consider what needs to be completed during the closing process (this is partially dictated by the contingencies you are willing to accept) and the time needed for you to move out of the home.
What Items Should I Include?
One way to entice buyers into making higher offers is to include items found in the home with the sale of the home. These are items such as appliances, almost always included, and furniture, almost never included. If your future home already has appliances in place or you’re planning on buying new furniture, including these existing items may help you receive more and potentially higher offers.
Do I Need to Contribute to Closing Costs?
For closing costs, there are buyers costs paid by buyers, sellers costs paid by sellers, and general costs, like closing fee’s, that are split between both the buyer and seller. However, in order to entice buyers, seller’s can offer to pay for all or part of the buyer’s closing costs. This generally only happens during a buyers market.
But How Do I Price My Home?
Pricing your home is easier than you think. Most sellers worry about setting their list price too low and leaving money on the table. However, and especially in a sellers market, this fear may be unfounded. If your home is priced low the likely result will be multiple offers over list price followed by a bidding war which may in fact yield you a higher final price than if you priced at market value.
Tip: Pricing low is actually a strategy used by experienced listing brokers to fetch a higher sales price. A strategy you can easily replicate intentionally or unintentionally.
The trick is not to price your home too high. When a home is priced too high, it will generally receive offers under list price or no offers at all. In order not to price too high or too low do the following:
- Check comps – recently sold homes in your neighborhood that match the size and condition of yours. Make sure to consider home age, square footage, lot size, beds, baths, upgrades, and amenities. Try to pull homes within a ½ mile radius of yours that have sold within the last 3 months ( appraisers only use comps within 3 months ).
- Look at active listings – the list price isn’t necessarily representative of the future sale price but it will give you a sense of the starting price for homes like yours.
You can also use an Automated Valuation Model (AVM). AVM’s have gotten a lot of bad press lately because of the Zillow Zestimate implosion but there are several that provide home value estimates that are incredibly accurate. Our favorite, because they have the largest data set, and the one we use internally is CoreLogic’s.
Tip: If you go to realtor.com, enter your address and then scroll down to the Home Value section, you can use Corelogic, Quantarium, and Collateral Analytics concurrently for comparison.
If you do decide to use an AVM, make sure it’s only as a starting point and that you still go through steps 1 + 2 above.
Sound Like a Lot, It’s Not
Deciding on what terms to accept isn’t hard. Some are going to be dictated by market conditions and others are going to be guided by your preference for what matters most – price or ease. For price, set terms that give potential buyers the confidence they need to make higher offers. For ease, take a harder line on financed vs cash, contingencies, and close date.
