Buyers and Sellers - Why The Highest Offer Is Not Always The Best

When it comes to buying a home, the highest offer always gets the house — right?

Surprise! The answer is often “no.” Conventional wisdom might suggest that during negotiations, especially in a multiple-offer situation, the buyer who throws the most money at the seller will snag the house.

In reality, however, it doesn’t always end up that way. Sure, a hefty sum is the first thing every seller wants to see, but any good real estate agent, like me, will advise a buyer or a seller that each offer is a sum of its parts.  Here are some points every seller should consider before accepting an offer and every buyer should contemplate before making an offer.

CASH IS KING!

An all-cash offer is attractive to a seller of real estate for several reasons. There are no mortgages or lenders involved, no appraisal to worry about, and escrow can close faster. If the seller needs to quickly relocate for a job, or if they have inherited a home and need to cash out quickly, TIME can take top priority in a real estate deal.  The faster the better, and cash travels on a jet plane.  Knowing the seller's motivation can help a buyer craft an offer that best suits the seller's needs.

MORE MONEY DOWN

The question should not always be who can pay the most, but who can make it to the closing table without a fumble. Putting more money down on a home than the standard 3%-20% can give you a leg up in the eyes of the seller.  It gives you more skin in the game and assures the seller that you are a serious prospect for their beloved home. If a buyer offers a higher price but is cleaning out their savings to put the bare minimum down, chances are they may have trouble down the line as lenders take a deep dive when the buyer goes into underwriting.

FINANCING - WHAT TO EXPECT

A home is usually the largest single investment that someone makes, and most people need a mortgage to finance the purchase. The type of loan is something buyers and sellers should look at closely.

The most popular loan for a first time home buyer is an FHA loan.  FHA loans are backed by the government's Federal Housing Administration (FHA) and offered by FHA-approved lenders. Many government-backed loans mandate certain criteria involving the condition of the property. These contingencies often require sellers to correct any issues and make repairs prior to closing. This can sometimes delay closing and cost the seller more money than anticipated for repairs.  VA loans are also government-backed loans that have strict property condition requirements.

Conventional loans are not government backed and do not carry some of the stringent guild lines that a FHA or VA loan carry.  Conventional loans do have inspection requirements but they are often seen as "negotiable" and can be handled by offering the buyer a credit, saving time and possibly cutting repair costs on the seller's side.

APPRAISAL

This may be the number one reason the highest offer is not accepted.  If a buyer makes an offer over the list, and the home does not appraise for the higher price, either the buyer will need to make up the difference by bringing cash to the closing table or the seller may have to reduce the price of the home to meet the appraised value. Sometimes buyers and sellers can meet in the middle and sometimes deals fall apart over appraisal issues wasting time and money for both sides.

In summary, a seller should look beyond the offered price and closely examine all elements of a contract before accepting an offer.  Sellers may save more money in the long run by not accepting the highest offer.  On the opposite side, by knowing the seller's motivation, buyers can customize an offer that checks all the seller's boxes and come out on top, even with a lower price.