The Strategy For Accepting The Highest Offer On Your Home
You’re selling your home and you’ve got three offers, with each being higher than the one before it. Should you take the highest offer? Let talk about that.
I know that agents will tell you that you should take into consideration various things such as whether it’s a cash sale, how quickly you need to close, whether the buyer has a pre-approval letter, or what type of contingencies there are in the contract.
In addition to those very good points, I’m also going to throw in the appraisal factor. Most people tend to overlook the appraisal and take it for granted that it will appraise, but that is not always the case.
In today’s environment of limited inventory and increasing demand home prices have been driven up to such an extent that some people are even using the “B” word: bubble. We’ll leave bubble talk for another day but it’s important to keep in mind the dynamics of the type of market we are in right now.
Is Making The Highest Offer A Good Strategy?
I’m not sure how common it is in your market but I have heard that some buyers are being encouraged to make high offers on the house they want to ensure that their offer is taken. While this tactic may get the sellers attention, is it realistic and will it help you be successful in getting the house of your dreams?
There’s a couple of scenarios that we’ll discuss here in the hopes that you will consider all possible outcomes. If you go into this situation considering all the possibilities I think you will be more successful with the way things turn out.
Market Value Definition
Some people say that market value is what a buyer and seller are willing to sell and pay for a home. While this is true in some situations we have to look at this from multiple angles. Before we go any further let’s take a look at what the formal definition of market value is. The Appraisal Of Real Estate provides the following definition of market value:
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeable, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions
whereby:• Buyer and seller are typically motivated;
• Both parties are well informed or well advised, and acting in what they consider their best interests;
• A reasonable time is allowed for exposure in the open market;
• Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• The price represents the normal consideration for the property sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
Now that we have an understanding of what market value is let’s discuss the various scenarios that can occur during the transaction. The first one we’ll look at is when the buyer is paying cash.
Cash Sale
If the buyer is paying cash and does not want or care to have an appraisal then our discussion is a moot point. Many times buyers will not care what the market value of the home is because they have the cash to buy it and they don’t care what the price is. This type of buyer is what appraiser Ryan Lundquist refers to as a Unicorn Buyer.
On the other hand, there are some cash buyers that do want an appraisal because they want to make
sure they are not overpaying. Accepting an offer from this type of cash buyer is of course totally different from the type I described above.
The cash buyer who wants an appraisal because they are concerned about value is similar to buyers using traditional financing. It’s important to make sure that their offer does not exceed the comps.
Buyers Using Financing
The next scenario is buyers that will be using financing from either a bank or mortgage company. The bank will typically require an appraisal that supports or surpasses the contract amount.
In case you aren’t aware an appraisal is meant to provide a professional appraiser’s opinion of what the market value of the property is. It takes into consideration recent sales and active listings as well as the economic climate and supply and demand characteristics of the area.
The opinion of value is based on what the majority of buyers will pay and not the unicorn buyer mentioned above. When appraisers analyze market data they are studying buyer behavior and measuring the value that buyers find in the property as a whole as well as the value they place on individual features of a house, which is reflected in the adjustments made to the comparables.
Making Your Decision
So now that you know what the definition of market value is and what an appraisal measures it is easier to make a decision as to whether you should accept the highest offer that has been made on the home you are selling.
If the highest offer is from a cash buyer who will not be getting an appraisal then this is the best case scenario for you. You will get the highest offer and not have to worry about any potential appraisal problems.
Since the buyer is not getting an appraisal then they will need to accept the consequences in the future for not making an informed buying decision if it turns out that they paid too much.
Of course, if they used a buyer’s agent then there may be some possible repercussions from that if they believe the agent did not act in their best interests by allowing them to buy a home that was overpriced.
If the buyer is using financing you know the lender will most likely order an appraisal. The offer you accept will need to be as close to market value as possible or the appraisal may come up short.
This is where the homework the agent did prior to the listing will pay off. If the agent performed a CMA to price the home then the chances of the appraisal and contract lining up are good. If they did not price the home based on market data then the appraisal may be lower than the contract and the price will then need to be negotiated down.
As you can see there are some situations where accepting the highest offer may be beneficial to you, however, on the flip side, there are other times that you may want to accept a lower offer because the chances of it appraising are better. This situation probably occurs more because not as many people have enough money to pay cash for a home.
Conclusion
Do you have any other questions about the best situation in which you should accept the highest offer? If so, leave a comment below and I’ll do my best to answer it for you. As always, thanks for reading.
Thanks Tom. And very cool for the unicorn mention. 🙂 If there is financing involved, sellers really do have to consider where a realistic value is at. I recall when my market was extremely aggressive in 2013 that sellers would often throw out the very highest offer. You might have offers at $350-390K, and a seller would look at the $390K and say, “There’s no way it can appraise that high.” It’s likely not easy to do that, but this is where being objective is going to pay off and save heartache during an escrow.
Thanks, Ryan for your thoughts. You are right, it is difficult to sometimes be objective especially when you have so much to gain but on the other hand, you have to be realistic too.
Great thoughts Tom! This is so true. I do believe that many of the higher offers are made only to secure their position in a multiple bid situation. I appreciate the point you made that there is a good chance that the home will not appraise at that price. I’ve always felt that if the home’s market value is less than a person is willing to pay, and they spend their own cash to make up the difference, that is great. However, most buyers are not willing to use their own cash to pay a price above market value though, which is wise. Thanks for your great blog, as always!
Thanks for your take on the topic, Jamie. You bring up some very good points. I agree most people will not put in their own money for something that is selling for above market value.