How to Vet a Purchase Offer

If you’re thinking about buying or selling real estate in Los Angeles, it’s important to understand the psychology behind how offers are vetted by listing agents and sellers.

If you’re buying, it’s important to understand what the seller will examine and negotiate.

If you’re selling, it’s intelligent to know how to assess potential buyers so you pick the best one.

 

Below are a few of the top terms we evaluate.

  1. Price and Credits.  What is the buyer’s offer amount and are they requesting any credits for recurring and nonrecurring closing costs?  If the buyer is requesting credits, then this will decrease the offer price.  For example, John Doe offers 1M for 123 Main St but is asking the seller to credit him $10,000 for recurring and non-recurring closing costs, this can be viewed as a net offer of $990,000.
  2. Length of Escrow.  This number will vary depending on what the seller needs and market demand.
  3. Loan Terms.  We look to see how much the buyer is putting down vs how much they are financing.  Sometimes, the seller will view offers with higher down payments as more favorable as they can sometimes signal a more financially able purchaser with the means to cover potential appraisal issues or repair items during the due diligence phase of the transaction.
  4. Initial Deposit.  In the state of California, listing agents and sellers prefer to that the earnest money deposit be 3% of the sales price.  3% happens to be the maximum the seller can keep in liquidated damages if the buyer fails to close the transaction after removing all of their contingencies.  The deposit amount is negotiable.
  5. Deposit Releases.  The buyer can write into the contract that they are willing to release a portion of their deposit to the seller before the close of escrow.  Any funds released to the seller before the close by the buyer are usually non-refundable.  Deposit releases can help make an offer stand out in a multiple offer scenario.  They are not common, and extreme due diligence must be completed before discussing this strategy.
  6. Length of Inspection Contingency.  How much time is the buyer asking for to complete their inspections?  If you’re a seller, you prefer a shorter time frame because you want to know if the buyer will be moving forward or backing out due to their findings.
  7. Appraisal Contingency.  Depending on the demand for the property, this may be countered out of the agreement.  If there is no appraisal contingency, the buyer will be responsible for any gap between the appraised price and sales price.  If there is an appraisal contingency in the agreement, the seller will usually prefer a shorter time frame.
  8. Loan Contingency.  If the buyer is paying cash, there is no loan contingency in the agreement.  If the offer is contingent on the buyer obtaining financing, then the shorter the loan contingency the better for the seller because they will know in a fairly fast amount of time if the buyer is approved for their loan.  The length of the loan contingency written into the agreement will mainly depend on how fast the lender thinks they can get the loan approval.  The better and more service-oriented the lender, the faster they can get the approval.  Who you work with matters a lot when it comes to financing.
  9. Home Warranty. Is the buyer requesting the seller pay a home warranty?  If they are, how much is?
  10. Termite.  Is the buyer requesting the seller pay for any termite damage upfront?  Or is this an item they plan to negotiate during their investigation process?
  11. Inclusions/Exclusions.  Is the buyer requesting any of the appliances, electronics, or furniture?
  12. Pre-Approval vs Pre-qualification vs Coming Soon.  Does the offer include a pre-approval letter or pre-qualification letter?  Pre-approval or conditional approvals are usually given to buyers whose credit has been run and income documents verified.  These are the strongest letters you can have with your offer.  Pre-qualification letters are usually based on verbal information or credit scores only.
  13. Proof of Funds.  How much does the buyer have in liquid assets?  In my opinion, the more a buyer can show the better.  It shows to the seller how financially sound they are.
  14. Choice of service providers for title insurance and escrow.  Usually, in California, the seller will choose the title and escrow companies.  The buyer can request to pick.
  15. Is the buyer willing to sign the liquidated damages and arbitration paragraphs in the residential purchase agreement?  I am not licensed to provide legal advice.  However, it’s been my experience that it’s sometimes better and more cost-effective that everyone agree to go to mediation in case there is a dispute.
  16. Does the seller need a leaseback after the sale?  Is the buyer open to one?
  17. Allocation of Costs.  These costs are negotiable:
    1. Natural Hazard Disclosure Report  (usually paid by the seller)
    2. Retrofit Certificate of Compliance  (usually paid by the seller)
    3. Owner’s Title Insurance  (usually paid by the seller)
    4. Transfer Taxes  (usually paid by the seller)
    5. Escrow Fees (usually split between buyer and seller)
    6. HOA Transfer Fees  (usually paid by the seller)
  18. Other terms or addenda.
  19. The agent representing the buyer.  How many recent sales has the other agent closed successfully? Do they have a good or bad reputation?  There are agents that have great reputations and are known for closing their deals while masterfully solving most transactional problems.  If all things are weighted equally, the offer the seller chooses could be determined by the reputation of the agent representing the buyer.
  20. Buyer Motivation.  Has the buyer sold their current home?  Are they relocating from out of state? Did the buyer just have another baby?  Motivation is key.  If writing an offer, always include a buyer letter to the seller.

 

Need more in-depth advice? Text me anytime 818.395.5517.

Please keep in mind that this blog post delineates some of the terms we examine, and each sale is different.  How we advise sellers to counter and buyers to write always depends on the needs of both the buyer and seller along with the market dynamics.  This post and information is broad on purpose.   

Do you have questions? We have answers.

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Robert Rodriguez

Robert Rodriguez

Compass

Written by me, for you.

About Me: Father, husband, hockey player and fluent in real estate.

Goal: Providing my clients, friends, and colleagues with timely, intelligent and actionable advice.  I am always available to answer your questions.  Text, call or email 818-395-5517 | Robert@WestLALiving.com

Professionally Speaking: In my 8 years as a licensed sales agent, I have climbed the ranks of the LA residential sales industry, distinguishing myself both locally and nationally. I am closing in on sales upwards of 200 properties throughout the LA area and in a variety of neighborhoods with a wide range of property types. I have successfully sold complex Estates, land, income property, single family, luxury leases and condos. I have widely been recognized by both colleagues and clients as a respected professional whose reliability, dedication, and expertise is second to none.