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A year ago, Cara Ameer said her homebuyer clients were having to take on an uncomfortable amount of risk, waiving all contingency clauses in a desperate attempt to make an offer with any shot of winning.
It was far from ideal, Ameer said, broker associate at Coldwell Banker Vanguard. These clauses help protect the buyer from being pressured to go through with a bad purchase.
Cara Ameer
“I always tell a buyer, don’t give up your rights unnecessarily,” Ameer said in a phone call with Inman.
But in some parts of the country, giving up some of your rights may still be necessary — at least if the buyer wants to have any chance of winning a home.
In other regions, the market has come down a bit off of its spring and summer overdrive. Many buyers can still make a strong offer without jettisoning their protective clauses.
Helping clients navigate this complex equation is one of an agent’s trickiest but most important tasks.
Here are some tips and tricks for knowing how to advise a client to make a standout offer, without going overboard.
Know your market’s terms — and your client’s
Especially in today’s ever-shifting market, it’s crucial for an agent to stay on top of what a winning offer looks like in their area and at their client’s price point.
If a client who needs financing is offering on homes in a price range where all-cash offers are commonplace, for example, it may take them a while to break through regardless of offer structure.
If agents work in an area where contingencies are still common, they should also be clear when they believe their clients are likely to run into aggressive terms in other offers.
In the San Francisco Bay Area, Carl Medford first informs his clients of the risks involved with waiving their contingency clauses — such as inspection, appraisal or financing.
But then he makes sure they’re aware of the hard reality of buying in one of California’s hottest markets.
Carl Medford
“Any offer that’s coming in is fully non-contingent, or it’s not a player. End of discussion,” said Medford, CEO of The Medford Real Estate Team. “That really kind of sets the stage right upfront. At that point, then, there’s not a whole lot more you can do to sweeten the deal.”
But knowing the market — and what other buyers are likely to bring to the table — is just the first step. The seller’s opinions are just as important. Reaching out to the listing agent for a property to get a clear idea of the terms their client wants can give the buyer valuable information.
Finally, the agent should know what the buyer is truly comfortable bringing to the table. Sometimes the client can get caught up in the fever of needing to strengthen their offer when they might be better off playing the long game, Ameer said.
Contingencies: to waive or not?
Fortunately for buyers, in most parts of the country they are able to get by without waiving their contingencies.
The best approach for most of Ameer’s clients has been to shorten their contingency periods where it makes sense, rather than waiving them altogether. This maintains key protections for the buyer while showing the seller that they’re making a serious offer.
“Sellers want certainty, so I think you, as a buyer, have to be prepared to go in with a shortened contingency timeframe that shows you’re serious, you’re going to keep things moving forward,” Ameer said.
But buyers should be well aware of the ways a shortened timeframe can backfire. The appraisal process in particular is largely outside the buyer’s control, author and real estate coach Bernice Ross told Inman.
“There are not enough appraisers out there,” Ross said. “They’re not getting back to the agents. They’re not getting back to the lenders.”
Bernice Ross
If an appraisal takes longer than expected due to reasons beyond the buyer’s control, Ameer reminds clients they can try to negotiate an extension with the seller. Once they’re under contract, sellers often have a strong incentive to grant this request, she said.
In areas where contingencies are the norm, a buyer’s unique circumstances may allow them to go even further to get a leg up.
For buyers in a strong financial position, waiving an unnecessary contingency clause may be enough to place their offer near the front of the list.
If a buyer is able to secure fully underwritten approval before making an offer, it may give them more options and peace of mind with regard to the financing contingency.
When the buyer has extra cash saved for the transaction, they may be able to cover a gap between the appraised value and the offer price. In these cases, they might be able to waive or amend the appraisal contingency.
In the worst-case scenario where an inspection turns up concerning information or the appraisal comes in low, the buyer should have confidence they can live with the terms of the contract.
“I always get nervous for them,” Ameer said of clients who may be too risk-inclined. “I am just as involved in the transaction as they are, so what they do affects me too, and I don’t want to create any unnecessary risk or stress.”
Power Buyers as contingency-alternatives
For buyers in certain parts of the country who don’t feel comfortable waiving their contingencies, it may feel like they don’t have a shot.
But new options are emerging that allow buyers to skip the contingencies, maintain most of their protections, and make an all-cash offer they wouldn’t otherwise have the savings to afford. Although still early, these so-called “Power Buyers” are in the business of helping buyers make all-cash offers on homes or buy a new home before they sell the old one.
The use of Power Buyers appears to be growing rapidly, but it still has a long way to go before these companies become a major market-changer.
Companies offering Power Buyer services include Knock, Homeward, Orchard, Ribbon, Reali and Flyhomes for Agents, among others.
These companies are able to make money, in part, because of their success attaching their own mortgages to their services. Last summer, real estate tech expert Mike DelPrete said Power Buyers had mortgage attachment rates around 70 percent — nearly as high as those of homebuilders and dwarfing those of the major iBuyers such as Opendoor.
Despite their promise, some agents have found buyers wary of these new services. Ameer said she’s yet to work with a client who has asked about them. And buyers would do well to research their specific Power Buyer for fees and mortgage rates before doing business with one, she said.
“I don’t think there’s a lot of buyer awareness yet about those programs,” she said.
Closing credits
At the end of the day, sellers tend to care most about contingencies and the certainty they offer when waived.
But in California markets where waived contingencies are nearly universal, buyers are having some success with other offer-sweeteners, Medford said.
“We’re not seeing a lot of gimmicky stuff,” Medford said. “We’re seeing some offers where buyers will offer to pay for things that the seller might normally pay for, like some of the closing costs.”
Depending on the state, a seller might normally be responsible for title fees and other costs, which buyers can offer to cover instead.
Although a seller is usually far more interested in the purchase price than a closing credit, it can be one additional nudge that can push an otherwise similar offer over the top, Medford said.
Escalation clauses
Sometimes, a buyer loses out on a home simply because the bidding goes outside their budget range.
Other times, buyers end up frustrated because they misjudged the amount the home would go for. Enticed by the prospect of a good deal, their initial offer is below what they’d actually be willing to pay.
For that second group of buyers, their plight could sometimes be avoided with a tried-and-true escalation clause.
These clauses set an initial offer price, and also tell the seller how high the buyer is willing to go to beat other bids.
Escalation clauses can offer peace of mind for buyers who are afraid they might get beaten out within a certain price range. But they also provide sellers information that can be used against the buyer — namely, how much they’re ultimately willing to pay for the house.
For this reason, escalation clauses are not widely used in many parts of the country. In Medford’s Bay Area market, these clauses are not very common, he said.
When writing an escalation clause, the agent should also be certain they are using the correct language that protects their client. These clauses should be written with the assistance of lawyers, when possible.
“If you’re not using an attorney and you have a non-professional draft the language, you may put yourself into a contractual obligation that you may not really want to be in,” Edward Mermelstein of One&Only Holdings told Inman last year.
Lease-backs and their pitfalls
Lease-back agreements are also somewhat common where Medford’s team sells. Some buyers will offer to let the seller stay in the home for 29 days, free of charge. But longer lease-back agreements are rare in California, Medford said.
“After day 29, it becomes a legal tenancy, and all the rules change,” Medford said. “The seller now has tenant rights and can choose not to leave if they want to … make life difficult. So banks don’t really like that.”
Even so, these types of offer-sweeteners aren’t always enough to move the needle. Sometimes the right answer for a buyer is to simply keep all the protections that are important to them and be willing to swing and miss a few times before finding the right home, Ameer said.
“It’s easy to get caught up in the hype, but you know what? Even if we’re in low inventory, there will always be other properties,” Ameer said. “Tomorrow is a new day.”
