Putting emotions in their place

Suppose you’ve been trying for months, without success, to sell your house in a profoundly depressed real estate market. In your dreams, you find buyers who fall so blindly in love with the property that they simply must have it and eagerly offer to pay your modestly inflated asking price. You conveniently ignore the glaring reality that property values in your area have plummeted since you bought the house several years ago — a fact that ought to dash any hope of selling the property for the amount you paid for it.

Allowing such wishful thinking to seep into a negotiation can cost you dearly, but what choice do you have? Unless your heart is a lump of coal, how can you not get emotionally involved when you sell something you love that holds many dear memories (not to mention most of your hard-earned money)?

Because you can never eliminate emotions from the process of selling your house, the next best option is to understand and manage them. Your choice is simple: Either you control your emotions, or your emotions control you. People can’t upset you unless you let them. Folks who do the best job of controlling their emotions usually end up getting the best deals.

To control your emotions, try using the following time-tested tactics:

• Keep your sale in perspective. Which would you rather have fail — your house sale or your open-heart surgery? No matter how bad circumstances are with the sale, keep reminding yourself that this isn’t a life-or-death situation. Tomorrow is another day. The sun will rise again, tulips will bloom again, and children will laugh again. Life goes on. If worse comes to worst, the deal will die — but you’ll survive to find another buyer.
• Make time your ally. Even if you must sell because of some momentous life change — such as getting married or divorced, having a baby, or retiring — you probably have advance notice before the big event occurs. Don’t put yourself under needless pressure by procrastinating. Give yourself enough time to sell your house. Allocate time properly and it will be your friend, not your enemy.
• Maintain an emotional arm’s length. Be prepared to walk away from a sale if you and the buyer can’t reach a satisfactory agreement on price and terms. Mentally condition yourself to the possibility that the deal may fall through; keep other options open. Buyers are like buses — if you miss one, another one comes along in a little while.
• Get the facts. Use a comparable market analysis (CMA) to factually establish the fair market value (FMV) of your house (see Chapter 10). A good real estate agent can help in this area. If you’re like most people, having someone to buffer you from your unavoidable emotional involvement helps. Make sure you work with patient, not pushy, professionals who are committed to getting you the best deal.
• Accept the unknown. You always have more questions than answers at the beginning of a deal. Don’t worry; you’ll be fine as long as you know what you need to find out (and guess what — this book tells you) and you get answers in a timely manner during your transaction.

Gaining detachment through an agent

Unlike you and the buyers, good real estate agents don’t take things personally. For example, your agent won’t be offended if the buyers say they hate the red-flocked wallpaper that you feel adds “just the right touch” to your den. On the contrary, your agent simply points out to the prospective buyers that they can easily customize the den with new wallpaper of their choosing. The buyers’ agent, by the same token, won’t be upset if your agent says the buyers’ offer for your exquisite house is ridiculously low.

Objectivity is easier for agents. After all, they’re not the ones who spent three months looking for appropriate wallpaper to put in the den. Nor are their life’s savings on the negotiating table. Good agents listen to what the market says a house is worth. If they don’t, the property doesn’t sell, and they don’t get paid. Agents don’t allow distracting details (such as how much time and money you spent fixing up the house or how little the buyers can afford to pay for it) to confuse negotiations. As Chapter 10 explains, these need-based issues have nothing to do with a house’s FMV.

Receiving an offer to purchase

After your house goes on the market, you’re ready to begin the formal part of the negotiating process — receiving an offer to purchase. Unfortunately, no standard, universally accepted real estate purchase contract is used throughout the country. On the contrary, purchase contracts vary in length and terms from state to state and, within a state, from one locality to another. The contract you get reflects what, generally, the buyer’s agent or lawyer considers to be appropriate for your area.

In Appendix A, we include the California Association of Realtors’ Residential Purchase Agreement and Joint Escrow Instructions so you can see what a well-written, comprehensive residential real estate contract looks like. California’s contract is, legally speaking, well-tested and considered to be at the forefront of real estate purchase agreements. That fact is no surprise when you consider that, according to the California State Bar Association, one out of seven lawyers in the United States practices law in California.

A carelessly worded, poorly thought-out offer can turn a potentially productive negotiation into an adversarial struggle. Instead of working together to solve your common problem (that is, “I want to sell; you want to buy — how can we each get what we want?”), you and the buyer get sidetracked by issues that can’t be resolved so early in the negotiating process.

Although selling a house can be a highly emotional experience, good offers defuse this potentially explosive situation by replacing emotion with facts. Buyers and sellers have feelings that can be hurt. Facts don’t. That’s why facts are the foundation of successful negotiations.

When you evaluate the offers you receive, check for the following characteristics because a good offer

• Is based on the market value of your house as established by the sale of comparable property: Smart buyers don’t pull offering prices out of thin air. Instead, they base their offering price on properties comparable to your house in age, size, condition, and location that have sold within the past six months. As Chapter 10 explains, many house sellers’ asking prices are sheer fantasy. Sale prices of comparable houses are facts.
• Has realistic loan terms: The buyers’ proposed mortgage interest rate, loan origination fee, and time allowed to obtain financing (which we explain in the upcoming section, “Dealing with contingencies — necessary uncertainty”) should be based on current lending conditions in your area. Ideally, the buyers are also preapproved for a mortgage, indicating they’re ready, willing, and financially able to purchase your house.
• Doesn’t ask for a blank check: Unless property defects are glaringly obvious or you already have inspection reports on your property, neither you nor the buyers know whether the house needs corrective work when the offer is submitted. Under these circumstances, consider using property-inspection clauses (which we explain in the next section) that allow you and the buyer to reopen negotiations for any necessary corrective work after the buyers get their inspection reports.

If you agree with the price and terms of the buyer’s offer, all you have to do to indicate your approval is sign the offer. Your John Hancock turns the offer into a ratified contract (that is, a signed or accepted offer).

However, signing an offer does not mean you’ve sold your house. Because of the various contingencies contained in most contracts, ratified offers remain highly conditional until all contingencies are removed.

Dealing with contingencies — necessary uncertainty

Any offer you receive may contain some buyer escape clauses known as contingencies. A contingency gives buyers the right to pull out of the deal if some specific future event, such as getting a mortgage, fails to happen within a certain period of time.

Contingencies create uncertainty for you as a seller. The more contingencies buyers put into a contract, the more ways they have either to get out of the deal or to reopen negotiations for better terms. The upside for sellers is that the more the buyer knows about the house before moving in, the less chance there is of a lawsuit later claiming you withheld knowledge of important defects.

Most offers contain contingencies, unless you have mobs of people falling all over themselves to buy your house. The two most common contingencies are

• Property inspection contingencies: Your house’s physical condition greatly affects its value. Smart purchasers insist on finding out exactly what shape your house is in before they buy it. If they don’t approve the inspection reports or can’t reach an agreement with you about handling corrective work for problems uncovered during the inspections, these contingencies let buyers bail out of transactions.
• Financing contingencies: The buyers can withdraw from the contract if the mortgage specified in their contract isn’t approved. That provision is usually fine. If the buyers can’t get the loan they need to buy your house, there’s no point in going any further — unless you’re willing to risk personally offering them financing, a topic we discuss in Chapter 4.

Here’s a typical loan contingency:

“Conditioned [the magic word] upon buyer getting a 30-year, fixed-rate mortgage secured by the property in the amount of 80 percent of the purchase price. Said loan’s interest rate shall not exceed 4.5 percent. Loan fees/points shall not exceed 2 percent of loan amount. If buyer can’t obtain such financing within 30 days from acceptance of this offer, buyer must notify seller in writing of buyer’s election to cancel this contract and have buyer’s deposits returned.”

If you want to see a more detailed financing contingency, read paragraph 3 of the California Association of Realtors’ (C.A.R.) Residential Purchase Agreement in Appendix A. Read paragraphs 7.A, 11, 12, and 14 of the C.A.R. agreement to see how most common kinds of property inspections are handled contractually.

Other common contingencies give buyers the right to review and approve your property’s title report and, if you’re selling a condominium, the condo’s master deed, bylaws, and budget. Buyers can make their contracts contingent on other reasonable events, such as having their lawyers review and approve the contracts or having their parents inspect the house.

What good, you may wonder, is a ratified offer riddled with escape clauses so big you can drive a truck through them? We’re glad you asked.

• From the buyers’ viewpoint, a contingency-filled ratified offer still shows your intention to sell them the property. The buyers don’t have to worry that you’ll sell the house to someone else while they’re spending time and money inspecting it.
• From your perspective, a contingency-filled ratified offer ties up the buyers. If the buyers deposit earnest money (money given by a buyer to a seller to bind a contract) into escrow to prove that they aren’t toying with your affections and then spend hundreds of dollars more for inspections, they’re serious buyers. (By the way, there isn’t a standard earnest money deposit. The actual dollar amount varies from area to area, depending on local custom and practice.)

Making a counteroffer

Counteroffer forms are far less complicated than purchase offer forms. Take a look at the California Association of Realtors’ Seller Counter Offer in Figure 14-1, for example; it’s only a one-page form.

Counteroffers are short because you use them to fine-tune the terms and conditions of offers that you get from prospective buyers. If an offer contains unreasonable contingencies, use a counteroffer to propose that the buyer remove or modify them.

For example, paragraph 1.C of your counteroffer may say, “Buyers hereby agree to delete paragraph 40 of their purchase contract regarding Aunt Jane, the astronaut, inspecting the house when she returns from her trip to the moon.” After all, who knows how long her mission may be delayed in space? What if Aunt Jane falls in love with the man in the moon and never returns? That contingency is too spacey.

Or suppose that the buyers offer $275,000 for your house and want you to close escrow 30 days after accepting their offer. Because you’re asking $289,500, you think their offering price is a smidge low. Furthermore, you need six weeks to relocate.

If everything else in the buyers’ offer is fine with you, don’t rewrite the entire offer. Instead, give the buyers a counteroffer stating that you’ll accept all the terms and conditions except that you want $285,000 for your house and you need six weeks after the offer is accepted to close escrow.

Wham. The ball’s back in the buyers’ court. They review your counteroffer and decide a six-week close of escrow is okay, but they won’t pay more than $282,500. They zap you a counter counteroffer to that effect. You sign it to ratify the offer.

Handling multiple offers

In quiet markets or when a house is overpriced, offers slowly dribble in one-by-one, and agents or buyers present them to sellers as soon as possible. That’s the customary way to handle offers throughout this great land.

Buyers and their agents are naturally paranoid. They suspect sneaky, dishonest behavior if sellers do anything that’s the least little bit out of the ordinary. Postponing the presentation of an offer is generally considered unusual.

Suppose you need 24 hours to respond to any offer you get because you must have your lawyer review it. Unless you explain the reason for your delay to the buyers, they’ll think you want to shop their offer. Shopping an offer means showing the offer to every other prospective buyer you and your agent can find in an attempt to get someone to make a higher offer.

Shopping an offer isn’t illegal, but it is considered unethical. Buyers have every right to expect their negotiations will be handled discretely. They don’t want the terms and conditions of their confidential offer blabbed to the world anymore than you want everyone to know all your innermost financial secrets. Reputable sellers like you never shop offers.

Smart buyers try to prevent you from shopping their offers by putting short fuses on them. In such cases, shades of Mission Impossible, their offers may contain a clause saying the offer expires if you don’t either accept or counter it immediately upon presentation.

In multiple-offer situations, presentations often are delayed. If you anticipate receiving multiple offers, develop a strategy for handling them before putting your house on the market. If you don’t, you’ll probably end up trying to calm down an angry mob of buyers and their agents waving offers with short fuses. Events can move quickly after you set in motion the marketing process we describe in Chapters 12 and 13.

Delaying presentation of offers

Why make buyers or their agents wait to submit offers? You want to be sure your property gets sufficient exposure to prospective buyers so you can generate multiple offers. Nothing is illegal or unethical about this technique. The key to success is alerting buyers and agents well in advance about the precise time you’ll start accepting offers and the way you’ll handle those offers when they come in.

How do you notify buyers and agents that you’re requiring a waiting period before considering offers? Simple. In the Comments section of the multiple-listing write-up and on your property’s listing statement, your agent can note the time when you’ll allow offers to be presented. Just to be safe, also instruct your agent to tell everyone who calls about the property that you’re delaying the presentation of offers.

Timing is critical. If your property’s market exposure is too short, you may accept an offer before a reasonable number of prospective buyers find out your house is on the market. Conversely, if you make people wait too long while you try to expose the property to every possible purchaser in the universe, some motivated buyers may show their displeasure by withdrawing their offers or never making one in the first place.

No time frame is perfect — long enough to expose the house to every potential purchaser, yet short enough to avoid losing even one buyer. Some buyers won’t get the word because they’re out of town on vacations or business trips when your house hits the market. Others won’t make an offer if they can’t present it immediately. Some people may refuse to get into a multiple-offer situation because they fear they’ll overpay for your house if they get into a bidding war.

To establish the waiting period before allowing presentation of multiple offers, try one of these two methods:

• Ask your agent or lawyer whether your area has a commonly accepted protocol for handling multiple offers. You can’t go wrong doing business the same way most everyone else does. Don’t go against local custom and practice unless you delight in provoking suspicion.
• If no standard protocol exists for your area, complete the initial marketing sequence we describe in Chapters 12 and 13 before starting the presentation process. As you expose the property to agents, they then schedule showings for their clients who may be interested in your house. To reach buyers who aren’t working with agents, delay presentations until your classified ad appears once in the local paper and you’ve had one Sunday open house.

Setting guidelines for an orderly presentation process

Unless you set firm ground rules early on, the presentation of offers may resemble the Oklahoma land rush. To ensure presentations are handled fairly for each and every prospective buyer (and productively for you), you or your agent (if you’re using one) should tell interested parties that the following guidelines are in effect:

• Offers will be presented in the order in which you or your agent was notified that offers were pending. As buyers or their agents announce they have an offer to present, put their names on a list. What could be fairer than first come, first served? No one can accuse you of playing favorites.
• Neither you nor your agent will accept offers before the designated formal presentation period. No one can accuse you of shopping offers if you don’t have any offers to shop!

• Buyers or their agents can personally present offers directly to you and your agent. This rule reassures buyers and agents that offers will be presented in the best possible way without any filtering or shading. This approach is good for you because you can question buyers or their agents directly while evaluating the pros and cons of each offer you receive.

  Some sellers review multiple offers without permitting agent presentations. This approach speeds up the process because it keeps sellers from having to listen to endless twaddle about how wonderful buyers are, how much they love the house, how long they’ve been looking, and so on. Unfortunately, this practice enrages the losers because they all know they’d have won if only their offer had been presented properly. Upsetting potential buyers isn’t wise. You may need them later if the offer you initially accept falls through.

• Tell prospective buyers in advance that you’ll either accept or counter the best offer you receive. Getting multiple offers doesn’t guarantee that any of the offers will be more than full asking price. However, if you announce in advance you won’t counter every offer, smart buyers make the best offer they can right off the bat. They know you don’t intend to give them a second chance if they submit a tire-kicking, “let’s leave room to negotiate” type of offer.

Selecting the best offer

By applying the astute marketing techniques and crafty pricing strategy we describe elsewhere in this book, you earn the right to dictate favorable terms and conditions of sale for yourself if you have multiple offers on your hands. Buyers know you have a hot property. The pressure is on them to please you. No reasonable request you make will be refused. Your wish is their command.

Whether you have three offers or 33 lying on the kitchen table, you face the same dilemma: selecting the best one. Price isn’t the sole criteria. The highest offer is far from best if it’s riddled with dubious escape clauses, totally out of sync with your time frames, or made by someone who’s a week or two away from declaring bankruptcy. What good is a high offer from a buyer who can’t or won’t perform?

Pitting buyers against each other is a double-edged sword. On the plus side, a bidding war can catapult the ultimate sale price above your asking price. You may, however, make a major mess of things if you’re not careful. You may scare off all the buyers by making absurdly high counteroffers. Worse yet, you may convert multiple offers into multiple lawsuits by inadvertently ratifying more than one offer.

As a seller in a sellers’ market, avoid snatching defeat from the jaws of victory by following these tips:

• Think like a lender. In a strong sellers’ market, spirited buyer competition often pushes prices to new heights. Lenders usually support higher prices when they reflect an overall market trend and when the mortgage isn’t an excessively high percentage of the purchase price. You determine that percentage, called the loan-to-value ratio, by dividing the loan amount by the purchase price.

  From a lender’s perspective, the higher the loan-to-value ratio, the greater the risk that a buyer will default on the loan. So, as a rule, the lower the loan-to-value ratio, the better the chances of getting loan approval.

  Suppose you get two offers: One offer is $300,000 with a $225,000 (75 percent loan-to-value) loan contingency. The other is $310,000 with a $279,000 loan (90 percent loan-to-value). If the highest previous comparable sale in your area is $290,000, you’re smart to either accept or counter the $300,000 offer, as long as other terms and conditions of the two offers are about the same.

• Don’t issue more than one counteroffer at a time. When faced with multiple offers, you have four options — accept one, counter one, counter more than one, or reject all offers. If you counter several offers, you may inadvertently end up in contract to sell your house to more than one buyer. This dreadful situation is known as double ratification. The resulting debacle can devastate you financially and emotionally. The one sure way to avoid this dreadful scenario is to follow this rule.

  Some states have Multiple Counter Offer forms designed to take the danger out of this option. Ask your agent if your state has such a form. Countering more than one offer at a time should never be done without the guidance of a real estate attorney.

• Qualify buyers carefully. Commit the last section of this chapter (the one about real versus fake buyers) to memory. If you have a poor memory, put a bookmark in that section and keep this book by your side while evaluating prospective buyers. When you question agents about their buyers, scrutinize each purchaser’s creditworthiness, motivation to purchase, and deadline for when the transaction must be complete

  If you have any doubts about buyers’ financial qualifications, get their permission to contact the lenders directly to resolve your questions before accepting or countering their offers. A buyer who’s been preapproved for a loan by a reputable lender has a Good Borrower Seal of Approval — as long as the mortgage that buyer needs to buy your house doesn’t exceed the preapproved loan amount.

• Pay as much attention to terms and conditions as you do to the price. Sometimes, a lower price beats a higher one. For example, when you evaluate offers, seek terms that fatten your bottom line. If you need a quick sale, the best buyer is the one who can close fastest. Then again, the best buyer may be the one who’ll let you rent your house back after the sale if you need a place to stay until the close of escrow on your new home.

  Price isn’t everything if you have other, more compelling needs.

• Avoid conflicts of interest resulting from dual agency. Dual agency occurs when the same agent or real estate broker represents buyer and seller. If your listing agent also represents one of the people making an offer to buy your house, that agent has a conflict of interest, plain and simple. How can “your” agent get you the highest possible price and simultaneously help a buyer get the lowest possible price? Can “your” agent give you unbiased advice as you evaluate the other offers you receive? Read Chapter 7 for more information.

  Most real estate firms have procedures to handle dual agency. If your listing agent also develops a buyer, the agent’s sales manager or broker usually steps in to represent you during the presentation and evaluation of offers. This approach frees your agent to work with the buyer during this phase of the deal. However, if your listing agent is a sole practitioner, you may be wise to get a real estate lawyer or another outside expert to assist you.

Rejecting lowball offers

A lowball offer is one that’s far below a property’s true FMV. For example, if someone offers you $150,000 for your house when recent comparable sales data show it’s worth every penny of $300,000, that’s a lowball offer.

Lowball offers are typically made by unmotivated buyers trying to get a deal, by sharks who hope that you’re desperate and willing to negotiate, or by buyers who think that your property is overpriced. Serious, informed buyers know the difference between well-priced properties and overpriced turkeys. (See Chapter 10 for a brush-up on methods to determine your house’s FMV.)

Considering other offers usually made in weak markets

When mortgage money is cheap and plentiful, deals are straightforward and simple. Buyers make cash down payments and get loans for the balance of the purchase price. Sellers use the proceeds from their sales to buy new homes.

However, when mortgage interest rates soared to more than 18 percent in the early 1980s, house sales activity plummeted. Buyers and sellers did some pretty unconventional maneuvering to transfer properties. Desperate times produce desperate measures.

When times get tough, unconventional purchasing techniques breed like bunnies. These next two offers don’t come from The Godfather. If you need to sell your house pronto, you can (and should) refuse them. But, under certain circumstances, the offers in the next two sections may make sense for you.

Negotiating credits in escrow

In a really rotten market, even putting a “let’s sell it” price on your house may not be enough incentive to get the property sold. You may have to sweeten the deal by offering a buyer money in the form of seller-paid financial concessions. The two most common financial concessions are for nonrecurring closing costs and corrective work.

Are the buyers creditworthy?

Real buyers are ready, willing, and financially able to purchase. Having two out of three of these attributes isn’t good enough. When so-called buyers don’t satisfy all three criteria, they’re phonies, regardless of whether they realize it. Genuine buyers want you to know they’re creditworthy. That’s why they’re willing to share important aspects of their financial situation at the time they present their offers, and perhaps even get preapproved or prequalified for a loan. In a strong local real estate market, smart, serious buyers seek preapproval or prequalification before making an offer.

People who make the offer to purchase your house subject to selling their present homes (which they haven’t yet put on the market) are fakes — don’t dignify their pseudo-offer with a written response.

Are the buyers realistic?

Real buyers familiarize themselves with property values and market conditions before making an offer to purchase. They, and their agents, use sale prices of houses comparable to yours in price, age, size, condition, and location to establish the FMV of your house. They know the difference between fairly priced properties and overpriced turkeys.

Real buyers may offer less than your asking price because they expect to negotiate prices and terms of sale. However, legitimate buyers who are willing to pay you the amount your house is worth don’t make a ludicrously low offer on your house if it’s priced to sell. Genuine buyers understand the concept of FMV.

Are the buyers motivated?

People don’t buy houses to generate commissions for real estate agents. Buyers often are motivated by a life change, such as wedding bells, a job transfer, family expansion, retirement, or a death in the family.

Lack of motivation almost always is a red flag. Establish the buyers’ motivation when you receive an offer. When buyers tell you they’re just testing the market, run as fast as you can in the opposite direction.

Do the buyers have a time frame?

Buyer deadlines are established by such factors as when they have to begin new jobs in another city, when the twins are due, when school starts, when the escrow is due to close on the house they’re selling, and so on. Bona fide buyers almost always have a time frame within which they must act.

Time is a powerful negotiating tool. If you’re under pressure to sell because you just got a promotion that forces you to move to another state next month and the buyer doesn’t have a deadline to purchase, time is your enemy and the buyer’s pal. Conversely, if the buyer sold a house in June and desperately needs to settle into a new home before school starts in September, the watch is on the other wrist. Ideally, you know the buyer’s deadline, but the buyer doesn’t know yours. Most real negotiation occurs near the very end of a deadline.

If the buyer doesn’t have a deadline but discovers you have one, the buyer can use your deadline to beat you to a pulp. Watch out for buyer procrastination. Don’t let time bully you — and keep your deadlines to yourself.

Are the buyers cooperative?

Real buyers look for ways to make deals go smoothly. They work with you to solve problems instead of creating problems and finding excuses to make the transaction more difficult. Genuine buyers have a let’s-make-it-happen attitude. They’re deal makers, not deal breakers.

Inconsistent behavior is a red flag. When buyers suddenly start missing contract deadlines or become strangely uncooperative, they may have lost their motivation. Perhaps the blushing bride-to-be decided to call off the wedding, or the “sure-thing” promotion wasn’t so certain, or they may have found another house they’d rather buy. Whatever. People can and do switch from being real buyers to fakes in mid-transaction. Find out why buyers are acting strangely as soon as you notice changes, and you may be able to head off the problem. If you ignore danger signs, you’ll never know what hit you if the sale blows up in your face.