In spite of the astronomical prices that are destined to rise even more in a low-supply housing market, single digit mortgage interest rates continue to attract buyers who compete against each other for available homes in Northern Virginia.
This shortage of homes is a direct result of the inequity realized by sellers who would surrender the profits on the sale of their homes to sellers of their new homes, unless those new homes were purchased in a more buyer-friendly housing market. Understandably, this no-win reality forces many owners, who want to remain in Northern Virginia, not to sell, with the result that buyers are left to compete for estate sales, moving sales, sales by real estate investors who are relocating their portfolios out of the area, and of course new construction that is moving further south and west of Northern Virginia because of space limitations.
In this competitive environment, therefore, buyers must resort to radical techniques, often at incredible risks to themselves, in order to attract the attention of sellers who are deluged with multiple offers on their homes.
These techniques are divided into sales contract and non-sales contract techniques as follows.
+ Sales Contract techniques
+ Large Earnest Money Deposit
+ Price escalation clauses
+ No Sales Contract Contingencies
+ Mortgage Contingency
+ Home Inspection Contingency
+ Appraisal Contingency
+ Seller Rent-back Offer
+ Non-Sales Contract techniques
+ Free stay in home for extended period of time
+ Payment for sellers’ moving expenses
+ Cruises and Vacations
LARGE EARNEST MONEY DEPOSIT
Regardless of the many specific terms and conditions that are negotiated between the buyer and the seller, it is the “Offered Price” for the house that initially catches the seller’s eye. In a balanced market, a high price could suffice to have the offer accepted. Not so in this heavily skewed sellers’ market where sellers are looking to differentiate the many offers that are submitted to them. One contract provision that may eliminate other like-offers is the “Earnest Money Deposit provision.” This money, which is technically part of the buyer’s “Cash Down Payment” is offered to be held in an escrow account until settlement. The idea is to show the buyer’s seriousness of wanting to purchase the house by “showing” a cash amount that will go towards the purchase of the house.
Further, the Northern Virginia real estate sales contract provides for the seller to collect that Earnest Money Deposit in the event of “buyer’s remorse” and subsequent buyer default.
To sweeten the offer even more, the buyer may suggest that the Earnest Money Deposit be held in escrow with the seller’s real estate company rather than with the buyer’s real estate company. This, in and of itself, does not change anything for the buyer or for the seller, but it does send a clear signal that the buyer is willing to “park” his Earnest Money Deposit on the seller’s side of the transaction.
The disadvantage of having a higher amount of Earnest Money Deposit sitting in escrow is the depletion of immediate cash for the buyer.
PRICE ESCALATION CLAUSES
A determined buyer may have offered a price, higher than that asked for by the seller, only to learn that another buyer won the contest with a yet higher offer.
Frustrated at losing one bid after another the buyer may want to employ an escalation clause in the contract. Although not part of the regular contract, the buyer’s real estate agent or attorney can incorporate a contract addendum to structure such a clause.
The proper use of an escalation clause can be illustrated by the following example. A buyer, determined to win the bid on a home listed for $400,000 makes an initial offer for that amount, but then prepares for the possibility of multiple contract submissions by offering to increase that offer with the accompanying Escalation Clause. That clause could offer to pay $1,000 more than any other qualifying offer up to and including, say, $450,000. Had another buyer submitted an offer for $420,000, then the buyer with the escalation clause would have won the bid with a final offer for $421,000.
Risks of using an Escalation Clause
+ A buyer will purchase the home at a potentially much greater price than originally anticipated.
+ With other buyers also using escalation clauses, the winning bidder will be the buyer with the highest escalation ceiling, thereby continuing to push prices up.
+ A higher price may cause the house not to appraise, thereby forcing the buyer to make up the difference in the escalated price and the appraised value in cash, or to negate the contract.
ELIMINATION OF THE MORTGAGE CONTINGENCY
A mortgage contingency is a provision in the Sales Contract that allows the buyer an agreed-upon amount of time to seek financing for the purchase of the house. In today’s sellers’ market, few, if any sellers are willing to wait for a buyer to arrange for financing when there are plenty of pre-approved buyers standing in line to buy their houses. For this reason, a buyer should arrange for financing before submitting an offer and then be able to include a lender’s letter of loan approval.
Risk of deleting the Mortgage Contingency
There are no risks to the buyer when financing has been pre-arranged. Nevertheless, there are some negotiating guidelines that should be adhered for.
In the event that a buyer is considering purchasing a house for, say $400,000 with an escalation clause up to and including a final offer of $450,000, and that buyer has been pre-approved by a lender to, say $500,000, then the buyer should ask the Lender to prepare a letter with the pre-approved amount of $450,000 and not $500,000. Indicating to the seller that the buyer has been approved for a higher amount of money may lead to additional counter-offering by the seller to push the price up higher than the $450,000 escalation ceiling.
ELIMINATION OF THE HOME INSPECTION CONTINGENCY
The Sales Contract provides an opportunity, if agreed to by the seller, for the buyer to purchase the services of a home inspector whose job it will be to perform a non-invasive inspection of the property, and to then report those findings in writing to the buyer. By allowing the buyer to have such a home inspection performed, the seller is potentially endangering the sales contract by opening the possibility of renegotiations that could demand expensive work to be performed at the cost of the seller, or failing to agree to such new demands, may provide an opportunity for the buyer to cancel the contract without incurring a financial penalty.
Clearly, everything else being equal, the seller would chose an offer that did not ask for a home inspection. A buyer would thus increase the chances of winning the bid by not asking for a home inspection.
Risk of deleting the Home Inspection Contingency
The greatest risk to the buyer, by the elimination of the Home Inspection Contingency, is the possibility of purchasing a home with many, potentially grave and expensive structural and other house-related difficulties. Few home inspectors claim to be able to identify all problems associated with a home, although the better ones will be able to spot foundation problems, leaks in basements and roofs, heating and air conditioning problems and a slew of other difficulties that overly-stimulated and excited buyers would not be able to identify.
Nevertheless, buyers who have successfully won their bids for their new homes argue that it is better to have a home with manageable problems than not to have a home at all.
ELIMINATION OF APPRAISAL CONTINGENCY
One of the safeguards for a buyer is the Appraisal Contingency which stipulates that regardless of the amount of money that has been agreed upon by the buyer and the seller for the purchase of the property, the buyer may opt out of the contract if the house fails to appraise.
Appraisal is a valuation process that is performed by licensed appraisers who often represent the interests of home-loan lenders. They use a systematic approach towards deciding what a particular property would sell for in the present housing economy between a buyer and a seller who have an “arm’s length real estate transaction” between them. The idea is for the lender to be assured that only the amount of money that represents the marketable value of the home is lent to the buyer. Lending more than that value would endanger the lender by causing a potential loss of money in the event that the house would have to be foreclosed and sold on the market to recoup lost revenue from a loan that had gone bad.
The Appraisal Contingency, in essence, would say that in spite of the best intentions to move forward with the sale, the lender would only lend the amount of money that had been established to be the fair market value of the house, and that if the house failed to appraise, the buyer would have an opportunity to renegotiate the sales price, or lacking a consensus with the seller, could negate the sales contract.
Everything else being equal, therefore, a seller would much rather accept an offer from a buyer with pockets deep enough to make up any difference between the appraised value and the agreed-upon sales price, and thus not attempt to renegotiate the sales price or worse, walk away from the contract without incurring a financial penalty.
Risk of deleting the Appraisal Contingency
The risk is quite apparent. Should the house fail to appraise and the Appraisal Contingency had been deleted, the buyer would be legally bound to pay the extra amount of money in cash at settlement. Failure to do so would incur a suit for performance and possibly a suit for damages by the seller along with the loss of the Earnest Money Deposit.
SELLER RENT-BACK OFFER
Moving a household is not a pleasant experience. Many sellers, even those who reap astronomical profits from the sale of their homes, dread the inevitable rush of moving one’s entire household to a new home.
Savvy buyers, recognizing this agony, sweeten their offer by including a provision whereby the seller may continue to live in the house for an extended period of time with a rent-back provision whereby the seller pays all or part of the new owner’s monthly mortgage payment.
Risk of offering rent-back contingency
The buyer will have to seek alternate housing for the time that the seller remains in the house.
Non Contract Techniques
FREE, EXTENDED STAY IN THE SOLD HOUSE
Everyone loves to receive a gift. Home sellers are not immune to the joy of receiving a gift, especially if it’s part of a sales offer for their home. Like a rent-back provision that allows the seller to stay in the house for an agreed-upon amount of time at a monthly rent, the latest twist to this scheme is to let the seller to continue to reside in the house, rent free, for up to a year, and possibly longer. The idea is to provide an opportunity for the seller to sell the house at the peak of the sellers’ market but to continue to live in that house after settlement until the market has cooled enough to buy a new house when prices have dropped in a buyers’ market.
Risk of offering extended, rent-free domicile in purchased home
The risk is obvious. The seller reaps all the benefits while the buyer pays for them. Also, the buyer cannot take delivery of the house for an extended period of time. Nevertheless, buyers are eager to offer these plums to insure winning the bid for the house.
PAYMENT FOR SELLER’S MOVING EXPENSES
This is another sought-after gift by sellers who welcome top dollar offers on their houses that are boosted by the offer to pay for the sellers’ moving expenses.
GIFTS OF CRUISES AND VACATIONS
These gifts have been popular with retired sellers who welcome the idea of selling their home and then going on an extended vacation, paid for by the buyers.
Often, desperate buyers who have been disappointed again and again by better offers from competing bidders structure their deals to be all-encompassing offers. They may include top dollar offers with fat escalation clauses in contracts that do not have mortgage or home inspection contingencies. These offers are then augmented by free, extended stays in the home by the sellers, only to be crowned by the imminent buyer-paid-for cruise around the world.
Who wouldn’t accept such an offer?
The ultimate risks with all of these techniques is the potential loss of equity in a future depressed housing market. Many of the offers suggested above continue to be made by buyers who anticipate a recapturing of their expenses at a later time when they sell their homes.
Although the Northern Virginia area has long been considered to be relatively recession proof because of its proximity to Washington, DC, there are no guarantees that the housing market will continue to demand the prices that have been the norm for the last three-and-a-half years. The risks to buyers are high and any potential losses in a future slumbering market are depressingly high.
Nevertheless, the desire or the need to live in Northern Virginia propels real estate prices to newer heights wherein buyers will resort to any and all “tricks of the trade” to secure their domicile.
The author, Ray Anderson, is a real estate broker with nine years of real estate experience in the Northern Virginia area.