Let’s face it, price is the number one concern for homebuyers while negotiating. However, there
are many different contingencies involved in a real estate transaction that can be negotiated to strengthen your offer and provide a financial benefit without raising the sales price. Keep in mind that most of these contingencies are designed to protect the buyer, so it’s often these additional terms that mean the difference between “winning” and “losing” the deal with the seller. Below are some of these contingencies and how you can use them in your favor as a buyer:
Home Inspection Contingency:
A home inspection is a common part of real estate transactions in Virginia and DC. Inspections are completed by a licensed home inspector and produce a report detailing the overall condition of the property’s structure, foundation, plumbing, electrical, appliances and more. A home inspection contingency gives buyers a way to void the contract and walk away from a transaction while retaining their earnest money deposit. This term is great for buyers but not so beneficial for sellers.
The best way to strengthen an offer in the eyes of the seller while still protecting yourself is with a pre-offer home inspection. A pre-offer inspection allows you to learn the condition of the property before you make an offer so that when you submit, you can do so non-contingent on a home inspection. The only downside to this is that you’re paying for the inspection before knowing that you’re going to be under contract. While this strategy used to be practiced only by aggressive real estate agents, today’s market has made pre-offer home inspections a common occurrence.
An escalation addendum, sometimes called an “escalator”, is a way for a buyer to say “I will pay “X” price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to “Y” price.” This strategy can be a good way to win a property at the lowest sales price possible, however it can also backfire on you and cause you to lose the deal. For example: buyer “A” offers $500,000 on a property with escalation increments of $5,000 up to a maximum sales price of $550,000. If another buyer offered $510,000, the offer from buyer “A” would automatically increase to $515,000 and net the seller $5,000 more. Seems like a no-brainer for the buyer, right?
Now, let’s say the second offer that came in at $510,000 was a cash offer without a financing or appraisal contingency (a common occurrence with cash offers). Buyer “A’s” offer would still escalate up to $515,000 and net the seller $5,000 more. But is your additional $5,000 enough to overcome the level of protection the seller felt with the cash offer? Maybe, maybe not. But had buyer “A” submitted the $550,000 all-in best offer from the start, they’re probably winning the deal.
The appraisal is paid for by the buyer but is really in place to protect the lender. The property must appraise at or above the contract sales price in order for the purchaser to secure the mortgage. If the property doesn’t appraise at or above the contract sales price (purchase price), one of four things must happen:
- The seller reduces the contract sales price to the appraised value
- The buyer and seller meet in the middle
- The buyer makes up the difference between the appraised value and the contract sales
price in cash
- The buyer sends notice to void the contract and retains their earnest money deposit
Having this contingency in place isn’t a concern if the seller believes the property will appraise for the contract sales price. However, in a hot market, home prices often escalate well above the value that the property will appraise for. As a result, structuring an appraisal contingency to where the property doesn’t have to appraise for the full offer price or waiving the contingency all together can be very beneficial.
Bottom line, there are a number of negotiation options that you have within a real estate sales contract. It’s up to your realtor to know these options and to be creative in finding ways to make the deal happen in your favor.
Check out some of our past articles and look forward to some Coming Soon articles:
- Coronavirus: Should I Buy or Sell Now?
- Virtual Showings: Is Matrix the way to go?
- Does staging make a difference?
- Settlement During COVID-19
- Does a higher down payment help with negotiations?
If you have specific questions or would like to set up an in-person meeting to discuss your scenario, please call or email me directly at 703-915-2244 / [email protected]. If you enjoyed this post and would like access to more of my articles/videos, visit the video/blog section of my website at: https://jcurrygroup.com/videos/.
Licensed Realtor: VA & DC
J Curry Group at KW Metro Center
2101 Wilson Blvd #100
Arlington, VA 22201