Part two of two — from the seller's perspective

Sellers often do not know what they are looking for in an agent before they list. Even experienced sellers may not consider an agent's expertise in handling offers. As is true with buyers (see part one on my Web site), not understanding one of the most crucial functions of your real estate representative could be costly.

Unbeknownst to most sellers, how offers are handled is one of the weakest links in the chain of a residential real estate transaction. As a seller, you need someone representing you who will treat every dollar gained or lost as though it was his own. This takes knowledge derived from experience and a caring attitude about what is best for you. It also requires incisive, analytical thinking to compare, contrast and anticipate the differences between potential buyers.

As an example, suppose seven offers were received on a home listed at $575,000. Three were clearly superior.

Their prices were relatively close: $630,000, $635,000 and $650,000. The $630,000 bid was 50% down, a $5000.00 initial deposit and no contingencies. He plans to live in the home.

The $635,000 offer had 25% down, a $25,000 initial deposit, an inspection contingency of seven days and a 17-day loan contingency. He will live in the property.

The $650,000 contract was 10% down, a $10,000 initial deposit, no inspection contingency and a seven day loan contingency. This will be a second, part-time home for him. All had pre-approval letters and a 30 day close of escrow.

Given the above scenario, which is the strongest buyer? Professionals recognize that more information is needed about each offer before any determination can be made. It is a mistake to assume too much and analyze too little. Buyers' motivations and source of funds need to be queried. A sharp agent asks enough questions to elicit the salient facts.

Where is the cash coming from for the $630,000 offer? In this instance, it is from the sale of the buyer's property that just went into escrow. This was not apparent because it was undisclosed in the purchase contract. The pre-approval letter said the buyer's funds had been verified, but did not explain they were coming from a sale.

The buyer's agent does substantial business, but has been known to be less than forthright in his dealings. These variables make the bid tenuous, and I believe this is the weakest of the three contenders.

The $635,000 offer has cash in a money market account that can be quickly transferred to the escrow. He is working with a respected, local agent and a mortgage broker well known in the area. This offer sounds good except the price is not the highest.

The $650,000 buyer is using a Realtor and mortgage broker from Carmel. He will occupy the house when he has business in the Bay Area. Although it has the top price, the buyer may not have the same emotional investment as those who will use the home as a principal residence. Also, it could be risky to deal with an out-of-area agent and lender.

What to do? There are numerous options and only the most qualified agents consistently perform well during “crunch time.”

One alternative is to accept the highest offer and dismiss the other two. This could work out, but it would not be my first choice for the reasons above.

Another possibility is to give all three a “multiple counter offer.” The $635,000 and $630,000 buyers would be countered at a price of $650,000. Each would have “terms” tightened. The $650,000 buyer would be asked to increase his initial deposit.

This method is frequently used and it is disliked by both buyers and their agents. First, buyers who offer over asking generally find it greedy and overreaching for a seller to ask even more. Second, even if a buyer agrees to all the seller's conditions and signs the counter, he is not guaranteed a ratified contract. With multiple counters, it is the seller's choice which one to select.

The approach I recommend is to concentrate on the buyer whose overall “story” makes the most sense, even if his price is not the highest. In this instance, that is the $635,000 buyer. If his agent was called and the buyer was given the opportunity to change his offer if he chose to do so (the other offers would not be disclosed), he might go higher. If his adjusted bid was equal or close to the $650,000 one, that would, in my opinion, make him the most sensible selection.

In practice, however, the $635,000 offer would most likely not be handled in this way and the seller would risk losing the one with the greatest chance of closing.

Some agents feel that an offer with no contingencies is automatically the best. This is not necessarily true. The two common contingencies are inspections and financing. If a buyer waives inspections and has not had any of his own, this potentially sets up you, the seller, for future legal hassles. Should the buyer later discover problems he did not know about, he could claim he was “pressured” into waiving his contingencies and might seek compensation.

The omission of a financing contingency does not mean the buyer does not need a loan. Pre-approval letters are far from “bullet-proof.” Many agents are not clear on this concept and do not counsel their sellers appropriately.

When you interview people to list your home, ask this question: "If you were my agent, how would you handle offers on my behalf?" Although there are numerous other, important tasks a listing agent needs to do for you, handling offers effectively is at the very top of the list. Hire the one who provides a detailed explanation, with examples, that gives you confidence in his or her abilities. Doing less could cost you.

Related Articles: Handling Offers: You Need an Expert, Part 1 - From the Buyer's Perspective, Determining the Strongest Offer and Unwritten Contingencies