This advice is very timely for many of our clients who are selling property right now, and what I learned years ago the hard way. Even if you don’t have a property for sale, or are not flipping property at this time, you might hang on to this for future reference.
Making that first offer work is fundamental to maximizing your profit. Consider the following scenario. Your contractors finish remodeling your house and do an amazing job. It takes a little bit longer than you would have liked (but what deal doesn’t?) After 60 days, you finally have it on the market (you correctly decided to list it on the MLS to get maximum market exposure and not do something crazy like FSBO).
You list it on a Thursday afternoon to attract the most buyers for the coming weekend, and get 3 showings on Friday and 4 on Saturday. You realize with this amount of showings, you probably have it priced right (because showings are a key indicator of correct pricing). On Sunday, your agent informs you that you have 2 offers. One is a low-ball, investor offer that you reject and the other is a full price offer for $200,000 with no concessions! Sounds great, right?
Your agent verifies that the buyer is approved for financing and that the buyer is actually putting 20% down, with 1% earnest money and a $200 option fee for 7 days. You accept the offer and are now officially under contract. The option period starts and the inspection is taking place in a couple of days.
You finally get a copy of the inspection report and discover that the electrical panel is a Federal Pacific and the inspector flags it as a known fire hazard. The hot water heater doesn’t have a pan underneath it, and the roof has hail damage that was never discovered during your initial walk through with the contractor. In addition, there are multiple little things that were not part of the code requirements when the house was built. The buyer is very scared as this is their first home and they are requesting that everything be repaired/replaced!
I know what you are thinking (minus the expletives), because I have been there many times – “There is no way I am going to agree to this! I just spent $45,000 on this house and I’m not spending another dollar on it”. Well, I totally understand.
This is where you really need an experienced real estate agent to negotiate this for you, and keep you at a safe distance from the buyer. If your agent is a good negotiator, they can try to have some of these things removed from the buyer’s list. If you are dealing with the buyer’s agent directly, it may be difficult for you to maintain your composure. You don’t want to lose your temper, say the wrong thing, and blow up your deal thinking, “Who cares about this offer, there are more buyers out there and this is a hot market! I’m telling them NO to everything!” If this is your attitude, you are making a big mistake and here is why:
Statistically (and commonly known between brokers and agents), your first offer may be the best offer you are going to get. Now of course this isn’t always the case as there are no absolutes in anything. However, if you have given the property market exposure, and had a number of showings with 1 or more offers (especially a full price offer), it’s probably going to be your best one. In fact, if everything checks out with the buyer (approval letter, earnest money, and option fee), you more than likely have a solid offer. If you don’t get the sense that this buyer is solid, and something is telling you that this buyer is going to be difficult, by all means, don’t accept the offer and wait for the right one.
Another thing to mention here is just because this buyer wants all of these inspection items resolved, doesn’t necessarily mean they are being difficult. This is a normal part of the negotiating process. In fact, if the big items (bad electrical panels and/or a damaged roof) are not addressed, you are more than likely going to have to deal with this with the next buyer on their inspection. Solution: do a more thorough inspection before you buy the property.
Once your property is under contract, the status changes in MLS and there is a history with your property. If you don’t close, the status is going to change back to Active again, potentially raising questions to other agents as to what happened. Yes, they can see that the status changed and may question what happened to the first buyer. If this happens more than once, you can be certain there will be some questions as to whether there is something wrong with the property.
There is something else going on here as well and that is time is elapsing. Even though your days on market stops once you are under contract, time is elapsing and that is costing you money. Remember, once you close on the purchase, the clock starts ticking. It’s ticking on any interest you are paying, utilities you are paying, and pro-rated taxes that you have to credit to your buyer at closing for the time you owned the property. It may also be ticking on that ideal time of year you want to market the property.
The longer you take to sell the property (and the higher the days on market), the more pressure there is for you to adjust your price. If you don’t lower your price after a certain amount of time (each property and market is different), you will probably see an offer that comes in lower because that buyer sees you’ve had it listed for a while and it’s still active. When they see this it can prompt them to throw a lower offer out there. Also, they see that there was some activity but now it’s back on the market.
If you cannot come to terms with the buyer on what is going to be fixed and the buyer decides to terminate (remember the buyer is the only one that can legally terminate the contract and they must do so during the option period) it may be a while before you get another offer. Depending on market conditions, your property may look tainted and showings will come to a screeching halt. These are all reasons why you need to do your best to make that first offer work.
In the previous scenario, I would probably agree to replace the panel, install a new roof, and negotiate the other items off the list through my agent. This is very reasonable based on my experience. You are not giving in to everything, but you are focusing on the most important items that are going to come up again and impact the next buyer. If the buyer agrees to this, you are more than likely good through closing. If they do not, you may be forced to move on to another buyer.
The point in all of this is keep your emotions in check and focus on your main objective which is to get the property sold, make money, and moving on to the next deal. No two situations are the same and there is no way to document every scenario that you will encounter. If you are on your 1st deal or 51st deal, my advice is use an experienced realtor for all of you sale transactions. I am speaking from experience because it has worked well for me over time. If you have any questions about this, we are here to help you. Feel free to reach out to us by phone or email and best of luck on your deal!
Mike Hanna is a real estate investor, mentor, author, and public speaker. He has been an active real estate investor since 2002 in both single family and multi-family properties, and has been in the hard money business since 2005.