The Columbus Dispatch just ran a cover story entitled “Central Ohio Buyers encounter Bidding Wars”.
We are all too familiar with this situation. The inventory of homes for sale is low. Listings in desirable neighborhoods go in contract within days. Many listings even receive multiple offers.
The Dispatch article explains how buyers and their agents resort to aggressive tactics to win the bidding war. Most of these tactics will put the Buyer at a disadvantage.
Sellers should be cautious, too. Some of these strategies may limit the exposure of your home for sale and the number of potential Buyers who can see your house.
Here are 4 contract clauses mentioned in the article that some buyers insert in their purchase offer to win the bid. Find out what you give up and how they will increase your risk.
Waiving the Appraisal Contingency
You agree to go through with the purchase, even if the property does not appraise. You may have to bring extra cash to closing, because your lender will base the loan amount on the appraised value, not the contract price.
As a Seller you want to make sure that the Buyer has the extra cash. There is a risk that the buyer will not be able to close, if the property does not appraise. In the case of VA loans, future VA buyers will have to use this appraisal.
Escalation Clause
You tell the seller that you will match other offers up to a certain amount. With this tactic you put your cards on the table. You tell the seller how high you are willing to go.
You should only employ this strategy, if you are serious about paying the extra amount. Most likely the Seller will somehow generate “higher” offers, knowing that you will match it.
No-Remedy Inspection
Essentially, you buy the house “as-is”. You can still do a home inspection and cancel the contract, if it is not satisfactory. However, the Seller will not remedy any deficiencies.
Occasionally, Buyers waive the inspection altogether. I do NOT recommend this strategy, except if you are an experienced Buyer (e.g. real estate investor, rehabber) who had a contractor through the house before writing the offer.
Curb Offers
You make an offer without seeing the inside of the house. Your offer is subject to an inspection. This is a common practice with tenant occupied homes, or when buyers relocate to our area and want to secure a home before they come to town.
Curb offers are actually favoring the Buyer, as they are always contingent on an inspection or at least a satisfactory walk-through.
Disadvantages for Sellers
On the surface it appears that these tactics all favor the Seller, as the Buyer gives up certain rights to get out of the contract. However, this is not the case. Sellers should be very cautious accepting contracts that include some of these clauses.
When Buyers take out contingencies from their offers, they try to lock up a contract quickly. That’s why homes go in contract within hours.
I believe this is not in the best interest of a Seller. The listing does not get maximum exposure to the largest number of Buyers. If you accept the first offer coming in the door an hour after the listing hits the market you may miss out on an even better offer the next day.
The biggest concern for any Seller is a cancelled contract.
Buyers rushing into a purchase decision may regret it. Some just write offers to secure a house, but still keep looking. If they find a better one, they will find a reason to cancel the contract and get the earnest money back.
A contract cancellation puts a stigma on the house. Future Buyers will question why the contract was cancelled and if there are any hidden defects.
The biggest problem for the Seller is lost time. While a listing is “in contract”, the house is not available for other Buyers to see and make offers. It’s usually off the market for 2 to 4 weeks, which means extra costs and no exposure for the Seller.
There’s a good chance the next offer on the house will be lower than the first one.
Call me at (614) 975-9650, if you have questions about any of these clauses.
Whether you are a Buyer or Seller, I can help you design the best strategy for buying or selling your home.