The Offer Review Process: An Insider’s View

A couple weeks ago, I had a listing for a condo in Cambridge that received ten offers. The same week, two of my colleagues had eight offers each on their listings. Another had 28. This was not an anomaly, nor is it likely to change anytime soon. So what’s a hopeful homebuyer to do?

Well, I’m a big believer in the whole knowledge-is-power thing, so thought it would be helpful for those of you throwing your hats in the ring to understand a bit more about how your offers are being evaluated against the competition. So in the interest of leveling the playing field a bit, let’s take an inside look at the offer review process, at least how it works when I am representing sellers…

Offer Deadline

As a list agent, I generally have my offer deadlines on Tuesdays, allowing buyers who came through at weekend open houses a couple days to get their ducks in a row – discuss with their agents, ask any follow up questions, update their pre-approvals, etc. Most of the time, I set the deadline at 4, which gives me a couple valuable hours to get organized before I will be meeting with my clients later that evening.

Getting organized includes printing out offers, calling buyers’ agents if I have questions, and putting together a spreadsheet to facilitate the evaluation process. Key dates, dollar amounts, contingencies and financing info are included, and I generally rank the offers from strongest on down. Nota bene: The strongest offer will be the one that makes my clients the most money WHILE ALSO – and this is key – being as certain to close as is ever possible, and as unlikely to be riddled with problems and delays along the way. More on this below.

Meeting My Sellers

When I sit down with my sellers, I first give them a little overview – how many offers we have, my opinion of the pool overall, and whether there is an obvious winner. Then I let them know their options – they can accept one offer as is, we can go back to one buyer and negotiate that particular offer, or, if several or all of the offers are fairly comparable, we can go back to all or just some of the buyers and request their “best and final” offer by the next day at noon, or whatever deadline makes sense.

If any of the offers we’ve received came with letters, I ask my sellers if they would like to read them. Some want to; some don’t. I often suggest that we look at the objective strength of the offers first, and then go back to the letters later, to keep everyone focused.

Then it’s time for the spreadsheet. As I walk my clients through the list of offers, I explain the strengths and weaknesses of each in terms of the following criteria:

Evaluation Criteria

Offer price – This is the big one for sellers, whose eyes naturally go straight to the largest number on the spreadsheet. And while I also want my sellers to get the highest price for their property, it’s my job to be sure they are evaluating offers on the whole package, and not solely focusing on the price. All other things being equal, obviously, the highest offer would win a bidding war. But the “other things” are rarely equal and must be given their due consideration.

Financing – There are a couple important aspects to financing that I am looking at during the offer review. Number one is the size of the downpayment and the amount the buyers plan to finance. I’m often asked why this matters. Here’s why:

The larger a downpayment a buyer is bringing to the table, the less we have to worry about problems with the appraisal. And in a market like ours, where prices seem to be rising by the week, this is very important, since the appraisal will be based on past sales, which may not be up-to-date with current market value. Also, our housing stock is very diverse in Cambridge and Somerville, and some particularly unique properties simply do not have good recent sales to be compared to.

If an appraiser can’t find comps to support the price buyers are offering to pay, the loan is in jeopardy. But the less buyers are financing, the more likely it is that they can still get their mortgage, if the amount to be borrowed falls within the bank’s loan-to-value ratios.

The other important consideration in evaluating financing is the lender buyers will be working with.

Most of the larger institutions are notoriously problematic, and every agent has had at least one horrific dealing with a *Big Bank.* Some have been so burnt they actually advise their seller clients not to accept pre-approvals from Bank of America, Chase, and the like. I personally am not that extreme, but all other things being equal, I am going to look more favorably on an offer that comes with a pre-approval from a good local bank or mortgage broker. And if a pre-approval comes from one of the larger institutions, I want to at least be confident that the buyer’s agent is someone who will stay on top of the process in the likely event that we run into complications or delays.

In other words:

bad lender + good agent = not ideal, but probably workable
bad lender + bad agent = not looking good

Inspection contingency – Once upon a time, almost all offers had home inspection contingencies. But in 2012, as the market began getting competitive, one particular brokerage began encouraging its buyer clients to skip the inspection in order to make the offer more attractive. And then agents from other brokerages jumped on the bandwagon and it became more and more common for at least a couple offers in any given multiple-offer scenario to waive the inspection.

From the buyer-side perspective, I think this is a really bad turn of events, and I personally never advise my buyers to waive the inspection. However, when I am wearing my list agent hat, an offer without an inspection contingency is very appealing. After all, it has one less potential pitfall to complicate or kill the transaction.

That said, if I have a good sense that the buyers are reasonable people who are comfortable with the condition of the property and any disclosures I’ve made, AND the buyers are working with a good agent who has done her due diligence on age of systems, the roof, etc., and does not have a history of coming back from an inspection with ten pages of requested repairs, an inspection contingency is not the end of the world.

In other words:

inspection contingency + reasonable buyers + good agent = fine
inspection contingency + difficult buyers OR bad agent = not looking good

Dates – dates for P&S, closing, and various contingencies are usually not deal killers, as most buyers in this market are willing to work with sellers’ preferences. That being the case, if we get an offer that is otherwise good but allows too much time for the contingencies or doesn’t give the sellers the closing date they prefer, I always go back to the agent and request the dates be tightened up or changed to reflect sellers’ wishes. As I said, generally not a big deal, but still part of the review process.

Selecting the Winning Offer

Let’s say that we have looked at all the price, financing, contingencies and dates of all the offers, and one clearly stands out as best. Great – happy day!

This really is the best case scenario because in this market, most buyers understand they will be competing against other offers and therefore are putting their best foot forward from the start. Going back for best-and-final probably won’t change things too much, and if anything only adds more stress to an already stressful situation. Sometimes, too, when buyers do increase their offer price and/or drop contingencies, they don’t feel good about it and may get cold feet later. Many deals have died this way.

But alas… sometimes there really is no obvious winner in a given offer pool, so calling for “best-and-final” is the only logical thing to do.

And then we go back to the drawing board…

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