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Todd Beardsley, of MenloAtherton Realty's advice:
HOW TO CREATE AN EFFECTIVE
OFFER PACKAGE
by Todd Beardsley
Most of my business is in the Palo Alto/Menlo Park/Atherton areas. These areas are very competitive marketplaces with many properties receiving multiple offers. Skillfully navigating these situations to a successful conclusion can be a very difficult task. Agents without these skills often find themselves getting a call from the listing agent telling them “thank you for your time but we have decided to go with another offer”. These are the last words a buyer wants to hear after just having gone through all of the effort to find, fall in love with and ultimately make an offer on a home.
It does not matter how inexpensively an agent is willing to work if he cannot land you the deal. Price alone is not enough to ensure an accepted offer. Whether it is a multiple offer situation or a “dead” listing which has been on the market for many months. Ancillary documentation, terms and conditions are extremely important. This is why I place so much emphasis on presenting a clean and comprehensive offer package. Below I will discuss the various aspects of what I consider to be a “clean and comprehensive” offer package.
Agent & Buyer Preparation
Listing agents prefer to work with other agents & buyers who come prepared and have all of their offer documentation in order. If an agent is well prepared then it is relatively safe to assume the entire escrow process will go fairly smoothly. Listing agents can often play a big role in determining which offer gets accepted. It stands to reason they would prefer to work with an agent who appears to be skilled and well prepared thus reducing the likelihood of problems during the escrow process. Below I will discuss many of the things which constitute a “well prepared” buyer & agent.
Lender Preapproval Documentation - As you know, this is a very difficult time for mortgage financing. As such, listing agents are becoming increasingly scrutinous of lenders, buyers and their documentation. I really try and go the extra mile when it comes to this documentation by encouraging buyers to get a preapproval letter from the listing agent’s preferred lender. Every listing agent has a preferred lender but VERY few buyer’s agents ever suggest this to their buyers. Having two preapproval letters gives the listing agent additional confidence in your ability to get financing. This duplication of preapproval letters can be even more important if your primary approval is from a small, no name lender from Seattle or even Sunnyvale for that matter. Some listing agents are even losing faith in the big firms. Whatever your current preapproval situation, you can only benefit from seeking a secondary or backup preapproval letter from the listing agent’s preferred lender. It never costs anything to get preapproved and you are never obligated to use the listing agent’s lender once approved.
Bank or Brokerage Statements - It is always good practice to provide the listing agent with copies of statements showing funds sufficient to close escrow. Printouts of online statements are fine and you are welcome to white out any account numbers or stock symbols you would like to keep private. The more assets you can show the more confident the listing agent will be that you can close the deal.
Personal Letter to the Seller - On the other side of every transaction is a seller. They are people with feelings and emotions just like you and I. If there is something we can do to bring out some of these positive feelings and emotions we should do it. What I recommend is for buyers to write up a letter to the seller discussing why they love the home and the neighborhood. Perhaps you or a relative grew up close by or the home has the same floor plan as the home you grew up in and it brings back memories of…… (something good). Another approach is to find out where the seller and the sellers children or siblings went to school. Perhaps one of your siblings or friends went to the same school as the seller or seller’s siblings, children or grandchildren. Nowadays much of this information is readily available on the web. The goal is to make some connection with the seller. Even if it is a remote connection it is better than no connection at all. This same connection can be made with the listing agent as well. You will never lose a deal because you wrote up a letter and made a connection with the listing agent or the seller.
Photocopy of the Deposit check - A standard part of every offer is a copy of a check for the initial deposit. The initial deposit is also known as the “good faith” deposit. The proper amount for the initial deposit varies from deal to deal. Below I will discuss three different types of situations. Each situation calls for a different minimum deposit strategy. This deposit check can be a personal check or cashier check and is made out to the title company. Since we are only submitting a copy, there is no possibility of this check getting cashed. Once the offer has been accepted, you will have three business days to deposit the check with the title company. It does not have to be the same actual check, only the same amount. This offers you the flexibility to draw the check on a different account should you choose to do so.
Liquidated Damages and How This Clause Effects Your Deposit - Real estate contracts have a section titled “liquidated damages”. This section accomplishes a few things but for this discussion we are most concerned about the initial deposit. This section (only if initialed by all parties to the contract) places a cap (3% of the sales price) on the amount of your initial deposit the seller can keep in the event the buyer terminates the contract without just cause. Let’s say you are making an offer on a home which is clearly a multiple offer situation. Here are the details:
List price = $900,000
Your offer price = $1,000,000
Your down payment = $400,000
5 day loan contingency
Zero days property inspection contingency
Let’s say I have convinced you to give the full down payment up front ($400k) as your initial deposit. The seller accepts your offer and two weeks later you lose your job and terminate the contract. Since you no longer have any contingencies you are not entitled to terminate the contract. The seller is then entitled to keep 3% of the total sales price ($1,000,000 x .03 = $30,000) until the home is resold. The remaining $370k must be immediately returned to the buyer. The seller is obligated to once again sell the property. If the property is subsequently sold for the same amount as you were contracted to pay then the seller must return the remaining 3%. If the property is sold for less than the amount you had contracted to pay for the home then the seller is entitled to permanently retain the difference between the actual sale price and your contract price up to a maximum of 3% of the purchase price (assuming both parties initialed the liquidated damages clause). In the event the liquidated damages clause is not initialed by both parties the seller would have the right to come after a defaulting buyer for 100% of the difference between the eventual sale price and the contracted price.
Suggested Minimum Deposit for Short Sale or Bank Owned Properties - In short sales or any other type of bank-involved sales it usually takes two or more weeks to get a response to your offer. During this time it is quite common for a buyer to lose interest for one reason or another. Additionally, once these types of deals are in escrow they can still fail to close for a variety of reasons. Suffice it to say the closure rate for bank-involved properties is much lower than deals which do not involve a bank. For these reasons, it is wiser and very acceptable to give an initial deposit of $5k or $10k.
Suggested Minimum Deposit for Multiple Offer Situations - In many cities we are still experiencing multiple offers for quality properties priced correctly. These multiple offer situations are tricky competitions. The initial deposit is one of the ways a buyer can stand out among the other offers. This is when a buyer needs to really step up and offer the biggest deposit they can. There are two big reasons not to fear offering a large initial deposit: 1) The check will not be cashed unless the contract is ratified 2) No matter how large the deposit, the seller is only entitled to retain 3% of the purchase price in the event of a buyer default.
Suggested Minimum Deposit for Normal Situations – “Normal situations” are homes which have been on the market longer than 14 days and are no longer likely to have multiple offers at the same time. Listing agents in normal situations like to see initial deposits be a minimum of 3% due to the fact sellers are only entitled to retain 3% of the purchase price in the event of a buyer default. However, due to the lack of risk associated with larger deposits, I encourage buyers to offer the largest deposit they can. It is always wise to give the listing agent confidence in your financial capabilities and your desire to purchase the home. Sometimes listing agents associate small initial deposits with a lack of true desire to purchase the home or perhaps a lack of funds.
Contract Terms – Usually the terms of the contract can be more important than the offer price.
Down Payment – The down payment is a very critical aspect of every deal, particularly in this difficult mortgage financing era. The size of the down payment sends a signal to the seller and listing agent. Most lenders are now requiring a 20% down payment. Anything less than 20% is looked at unfavorably by listing agents. The bigger the down payment the bigger the message you send to the seller and listing agent that you are serious about the home and you will not have any problems getting financing and closing escrow.
Financing Contingency Period – A financing contingency period is the number of days you have to line up and feel comfortable with your ability to get a loan. During this period, if you determine you are unable to get a loan, you can terminate the contract and get 100% of your money back. Most buyers require a financing contingency period but I encourage my clients to always offer sellers a zero day financing contingency. Here is why. These days financing is increasingly difficult to obtain and listing agents want to be assured that the buyer will not have difficulty obtaining financing. To give them this assurance, I always encourage my buyers to request a zero day financing contingency and then request a property inspection contingency equal in length to the financing contingency they feel they need. This maneuver effectively removes any question marks from your ability to get financing and places those question marks squarely on the condition of the property. Property inspection contingency periods are really wide open. You can find or create any minor flaw you want and use this as your path of escape even though your true reason for wanting to terminate the contract is your inability to get financing. In my opinion there is no good reason to ever request a financing contingency period.
Seller Specific Terms - Usually sellers have some specific terms they would like to see in the contract. Maybe it is a long or short escrow or perhaps a free rent back period. You stand a much better chance of getting your offer accepted if you can find a way to accommodate the seller’s desires. I always ask listing agents what their sellers would like to see in the contract then I will discuss it with you to see if there is any way we can accommodate the seller.
This advice is original. It was created by established Real Estate Agent Todd Beardsley.