As any experienced rehabber will tell you, your work doesn’t end when the property is finished. Without quickly finding a buyer you will be stuck in real estate limbo. As much as you want to sell for the highest price, the goal is to pick the offer with the best chance of closing. It is incredibly frustrating, time consuming and expensive working with a seller who ultimately doesn’t close. They may have trouble getting their loan approved, find issues with the inspection or pick apart the contract until you have had enough and end up walking away. This puts you right back at square one, looking for a buyer. Squeezing every penny from the sale is great, but you also need to weigh that with the likelihood of closing. Here are five tips to help choose the right buyer for your property.
- Down payment. There are two main items you and your real estate agent should notice on the contract. The first is the down payment amount. Mortgage approvals have gotten a bit easier in recent years but are still far from a slam dunk. There are numerous potential hurdles and snags that stand in the way of closing. As a rule of thumb the higher the down payment, the stronger the loan application. Approvals are based on three main pillars: down payment, credit score and debt to income. If the down payment is 20% or greater you know you will not have to worry about that aspect of the application. This also eliminates the aspect of private mortgage insurance (PMI), which can be another hurdle to close. A strong down payment doesn’t guarantee the approval, but you can feel confident they do not need to scrape to find the funds to close.
- Increased EMD. The second item that should pop of the page on the contract is the amount of earnest money deposit (EMD). This is the amount a buyer puts down with their offer. The money is typically held in escrow by their attorney, but it signals they are willing to put some skin in the game. With most contracts the buyer stands to lose this money if they back out of the deal. Of course, there are exceptions to this based on the inspection and appraisal but the higher the EMD the more they stand to lose. On the flip side, an offer with just $500 or $1000 deposit is an indicator a buyer may be simply kicking the tires with the property and is trying to get a deal. Even if they make a fair offer, they may not be willing to go the extra mile to close. They will nitpick the inspection, contract and appraisal in an attempt to squeeze every dollar they can from you. Conversely, with a buyer who puts a sizeable amount down, you can tell they want the property and will respond quickly to whatever hurdles are in the way.
- Reasonable closing. In a perfect world you would get a strong cash offer with a quick closing on every property you sell. Unfortunately, this is the exception rather than the rule. One of the most underrated aspects of an offer is the closing date. Every seller would like to close and get their profits asap. Not only are quick closings important for your business, but they offer you protection. A purchase that drags out for weeks past the closing date could be a sign of potential problems. A buyer may need to sell their current property before buying yours or they could have trouble scraping together the funds to close. If a closing is extended and doesn’t end up closing it puts you in the terrible spot of putting the house back on the market and starting the process over. Quicker closing dates don’t ensure you will close, but it does mean the buyer wants to get in the property just as badly as you want it sold.
- Mortgage type. The mortgage business has changed dramatically over the past decade. It wasn’t that long when there were dozens of loan products for every credit score and income type. Most of those products are long gone, replaced by more conservative ones. While there are a small number of new products for first time homebuyers most of the programs fall either under conventional or FHA guidelines. FHA loans work great for the right buyer and the right property, but also come with some red flags that can be difficult to deal with. There are guidelines on property type, property condition, debt to income levels and credit scores. Most of these are easy to deal with and can be worked around, however issues with the property can be annoying and time consuming. If everything else is equal, you may want to consider a conventional loan without all the FHA red tape.
- Contingencies. A buyer that really wants the property doesn’t have an arm’s length of contingencies on the contract. This doesn’t mean they can’t ask for a credit based on something off the inspection, but they don’t have a list of items on the initial contract. A buyer that is constantly asking for something to be changed or removed will add days, and headache, to the process. Even if their offer price is fair, they are going to beat you up for everything along the way. Once the inspection comes back they will ask for everything to be updated or for a credit to be issued at closing. The more contingencies on the contract the more potential for problems.
Picking the right offer can make all the difference between a successful transaction and one filled with problems. Use these five tips to help pick the right offer on your next property sale.