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Managing Risk for your Buyers in Multiple Offers

Suze Cumming | February 18, 2021

This is the third blog post in a series to help you master this strong seller’s market. You may want to read the other posts:

How to Win a Bidding War :   What Price to Offer in Multiples

While this sellers’ market rages across much of Canada and the US, buyers are being challenged to make offers unconditional to be successful in buying property. There is significant risk associated with this practice, and as agents, you want to ensure that your buyers are fully informed.  

I’m not advocating for or against unconditional offers. In many markets, it is the only option to purchase good quality properties. In other markets, it is a significant strategic advantage against other offers and might be something your buyers want to explore.

What could go wrong? A lot.  

The property appraises at less than the selling price, and your buyer needs additional funds to meet the down payment requirements. This happens frequently, and your buyer needs to have access to additional funds. Here’s the scenario; A property is listed at $699,900, and your buyer purchases the property firm for $825,000. The appraisal comes in at $750,000. The lender will lend on the appraised value, so they will give your buyer a 75% first mortgage of only $562,500, and your buyer will need a down payment of $262,500. Your buyers were hoping to finance 75% of the purchase price, which is $618,750, and their down payment would have been $206,250. They need to come up with an additional $56,250. If they can’t do that, they can’t buy the property unconditionally. What if the appraisal was even lower? Banks may alert their appraisers to be more cautious when they feel they are too exposed to risk as this market matures.

There are significant deficiencies in the property. Buying a property without a home inspection or using the home inspection prepared for the sellers could leave your buyers with some expensive deficiencies in the property. Some homes look pretty good but require many upgrades in the short term. If the property needs a roof, electrical work, plumbing updates, furnace replacement, and insulation upgrades, your buyers could be on the hook for over $100,000. While that large a number is unlikely, it’s possible. Are they in a situation to cover this cost? There is the additional complication of well water and septic systems for semi-rural and rural properties, which could add another $50,000 or more in unexpected expenses.   

I purchased my Gulf Island property without conditions, and it has the potential to have many deficiencies. It’s an older home in original condition with well water and septic. I am prepared to spend some significant money to meet these deficiencies, so I was able to take the risk of purchasing without conditions.

If your buyer cannot take on the risk of an unconditional offer, what are their options? 

If you are working in a market where most offers are unconditional, you may want to consider not taking the client on, or if you do take the client on, looking for properties that have been on the market and haven’t sold. You may be able to negotiate a successful outcome on these listings.  

In a market where some conditional offers are being accepted, work hard to make your buyer’s offer as appealing to the seller as possible. I would recommend making the conditions very short and wording them in such a way as to offer the seller as much security as possible. For wording better clauses, reach out to your broker manager or a good real estate lawyer.  

Help your buyers make the best decisions for them. Take the time to establish a strong working relationship to protect them in this important transaction. Deliver good quality information and give them the space to decide how much risk they can take. If they can’t take on risk, be respectful of that and either build a strategy to help them buy properties that don’t go into multiple offers or let the client go and focus your time on buyers that can buy.  (Or even better, finding listings) 

Next week we will discuss how to estimate Market Value in this strong sellers’ market.

 

Managing Risk for your Buyers in Multiple Offers

Suze Cumming | February 18, 2021

 

This is the third blog post in a series to help you master this strong seller’s market. You may want to read the other posts:

How to Win a Bidding War :   What Price to Offer in Multiples

While this sellers’ market rages across much of Canada and the US, buyers are being challenged to make offers unconditional to be successful in buying property. There is significant risk associated with this practice, and as agents, you want to ensure that your buyers are fully informed.  

I’m not advocating for or against unconditional offers. In many markets, it is the only option to purchase good quality properties. In other markets, it is a significant strategic advantage against other offers and might be something your buyers want to explore.

What could go wrong? A lot.  

The property appraises at less than the selling price, and your buyer needs additional funds to meet the down payment requirements. This happens frequently, and your buyer needs to have access to additional funds. Here’s the scenario; A property is listed at $699,900, and your buyer purchases the property firm for $825,000. The appraisal comes in at $750,000. The lender will lend on the appraised value, so they will give your buyer a 75% first mortgage of only $562,500, and your buyer will need a down payment of $262,500. Your buyers were hoping to finance 75% of the purchase price, which is $618,750, and their down payment would have been $206,250. They need to come up with an additional $56,250. If they can’t do that, they can’t buy the property unconditionally. What if the appraisal was even lower? Banks may alert their appraisers to be more cautious when they feel they are too exposed to risk as this market matures.

There are significant deficiencies in the property. Buying a property without a home inspection or using the home inspection prepared for the sellers could leave your buyers with some expensive deficiencies in the property. Some homes look pretty good but require many upgrades in the short term. If the property needs a roof, electrical work, plumbing updates, furnace replacement, and insulation upgrades, your buyers could be on the hook for over $100,000. While that large a number is unlikely, it’s possible. Are they in a situation to cover this cost? There is the additional complication of well water and septic systems for semi-rural and rural properties, which could add another $50,000 or more in unexpected expenses.   

I purchased my Gulf Island property without conditions, and it has the potential to have many deficiencies. It’s an older home in original condition with well water and septic. I am prepared to spend some significant money to meet these deficiencies, so I was able to take the risk of purchasing without conditions.

If your buyer cannot take on the risk of an unconditional offer, what are their options? 

If you are working in a market where most offers are unconditional, you may want to consider not taking the client on, or if you do take the client on, looking for properties that have been on the market and haven’t sold. You may be able to negotiate a successful outcome on these listings.  

In a market where some conditional offers are being accepted, work hard to make your buyer’s offer as appealing to the seller as possible. I would recommend making the conditions very short and wording them in such a way as to offer the seller as much security as possible. For wording better clauses, reach out to your broker manager or a good real estate lawyer.  

Help your buyers make the best decisions for them. Take the time to establish a strong working relationship to protect them in this important transaction. Deliver good quality information and give them the space to decide how much risk they can take. If they can’t take on risk, be respectful of that and either build a strategy to help them buy properties that don’t go into multiple offers or let the client go and focus your time on buyers that can buy.  (Or even better, finding listings) 

Next week we will discuss how to estimate Market Value in this strong sellers’ market.

 

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