Real Estate Best Practices for Buyers and Sellers
If you are thinking of buying or selling a home anytime soon, here’s a quick guide to what you should or should not do in order to get the best results.
LIST PRICES
The gold standard for listing agents in the current seller’s market is to price homes below the target selling price. Often homes are priced below the most recent comps and may see overbids. In many markets the median days on market is less than 10 and almost 100% of those sales close escrow over the list price. You can expect the over bids go 3-10% higher or $50L-$100K (or more) over the asking price.
Here’s what you need to know.
Buyers
Don’t assume you can buy a new listing, after the first weekend on the market, for the list price or less. The data and odds are against you that it will happen.
Avoid this line of thinking:
“The list price is $1,350,000 and if we can get it for that........”
If a property has been on the market in a hot neighborhood for over 30 days, and in most instances over 15 days, all bets are off and chances are you can get it for the list price or lower. But there are nuances to that analysis such as if the property was in escrow previously and how that affected the days on market counter or if it did.
It is best to think of list prices as the opening bid in an auction. List prices on houses are not the same as let’s say the manufacturer’s list price on the last phone or TV you bought.
Sellers
Yes, almost every listing gets bid up except those that are clearly over priced. And, these days, because buyers totally expect new listings to get over bids, if you start out too high you are actually hurting yourself and the final price you may get. Here’s why.
If the initial list price is too high in an environment where buyers expect prices to get bid up, you don’t want to turn off buyers who would have otherwise looked at the property.
“Let’s test the market”
AUTOMATED VALUATION MODELS
AVMs such as Zillow’s Zestimate are at best indications of what a property might sell for and not based in any factual insight. The AVMs do not know the current condition of the property, what updates have been done, if there is a view or other amenities, whether comparable sales that the value is based on were “arm’s length” or not, if someone died in the property, if it is on a busy street, etc. AVMs just crunch the numbers as in age, square feet, lot size if applicable and other information available through public records. Here’s what you want to avoid:
“But Zillow says it is worth......”
CONTINGENCIES
In California purchase contracts there are 3 contingencies that are standard:
Inspection
Appraisal
Loan
There can also be others such as the sale of the buyer’s property or even the purchase of the seller’s next home. Those aren’t part of these discussions.
It is very common in multiple offer negotiations these days for sellers to ask buyers to waive certain of those contingencies. In fact it is also common for offers to come in with certain contingencies waived before the seller even asks.
Let’s look at how this affects each party.
Buyers
It is not recommended that you ever waive a contingency before a seller asks no matter what your agent may say. The only exception would be if the listing states that no offers with a loan contingency will be considered or something to that effect.
As for waiving the loan contingency, if your file is fully underwritten by a reliable lender, this is something you might be able to consider. By “fully underwritten” I am referring to the underwriter has already reviewed all of your information and signed off on everything. That doesn’t mean you can quit your job, lease a Porsche or stop making your payments. You have to maintain your credit.
A full underwrite is different than a pre-approval or a pre-qual and not every lender will do it because it ties up an underwriter. Unless your file has been fully underwritten and you are buying a Single Family Residence (ie a house), you should never waive the loan contingency. Your lender can best advise you if you are fully underwritten.
Post of the pre-approval letters lenders generate have not gone through underwriting. Pre-qualification letters are not worth the digital paper they are not written on.
As for your appraisal contingency, if you have the funds to supplement an appraisal shortfall, which does happen, this might be something you consider doing. And if you are putting down substantially more than 20%, covering a shortfall is already built into your financing because for most people in most instances your lender will only require 80% Loan to Value.
In no circumstances would I ever recommend a buyer waive an inspection contingency. What you might find from time to time is that sellers ask that you buy their home “as-is”. In CA the wording of the contract already is “as-is”. What they are really saying is that they will not fix anything or give you any credits to do repairs in the future.
Sellers
If you have multiple offers and a hot listing to sell, you can demand pretty much any terms that you want. But that doesn’t mean that you should. Here’s why.
If you ask a buyer to buy your home “as-is” you might scare away what would otherwise be a great buyer. They may wonder, what you are trying to hide. If you do want to sell your home “as-is” and not do any repairs or give any credits, the best practice would be to have inspections done at your expense before the house goes on the market. You can then determine to make certain repairs or provide the inspections to the buyers and ask them to make their offers based on what is disclosed in the inspections. Of course that strategy may backfire because of what is in the reports and again, the end result might be that you scare off good buyers.
Regarding the appraisal contingency, if the buyer has enough of a down payment or enough cash on hand, you can certainly negotiate no appraisal contingency. But if they are tight on cash, you might be setting yourself up for a failed escrow.
Waiving the loan contingency is more problematic. Unless the lender has done a full underwrite, you may be opening escrow with a buyer who won’t be able to close on the negotiated terms. And if the property you are selling is a condo / townhome with a HOA, that also comes into play.
INSPECTIONS
Many deals fall apart because of what is discovered during a home inspection. All kinds of issues can come up including water intrusion, mold, termites, rodents, leaky roofs, damaged foundations, dangerous chimneys, bad sewer lines and the list goes on.
Here’s what you need to know depending on which side of the transaction you are on.
Buyers
No house is perfect and you will find things “wrong” during the inspection. Some might be deal killers and others you can ask the seller to fix or for compensation to get it fixed yourself.
Home inspectors are not going to homes to tell you everything is ok. Similar to when you go for your annual physical. You can have just finished a marathon and the Doctor will tell you to lower your blood pressure and cholesterol.
Much of what will come up in typical home inspections is readily addressable and can be fixed. But if certain problems will persist after they are fixed, you might want to walk. An example would be a house that sits on a lot where the rain water flows down towards the house leading to moisture and dampness. Or a house with substantial un-permitted additions that may have not been done to code. Or an unworkable floor plan (functional obsolescence) that can’t be fixed by moving some walls in a cost effective way.
At a minimum you should get the following inspections:
General Home Inspection
Termite and Wood Damage
Sewer Line
Other than the termite inspection, best to get the other two from vendors who do not do any work they call out. While most inspectors are honest and fair, there are some who are just trying to generate work for themselves.
If there are repairs to be done, it is best to get a credit for the repairs rather than have the Seller do them. If you get the work done after close of escrow you are more likely to have things fixed to your satisfaction.
Sellers
In the history of Real Estate sales, there has probably never been a seller who thought the request for repair was fair or justified. Think of it as the cost of doing business. So some of the over asking price money you were offered is going to be given back.
Other than things required by statute in CA such as smoke detectors, CO2, water heating strapping, low flow toilets and water faucets, you don’t “have to” do anything including termite work for standard sales. Some VA and FHA loans may require certain repairs. The one other situation is if the appraiser calls something out but that is rare.
Selling “as-is” was discussed previously. Assuming you will be getting a “Request for Repair” consider the following:
It is a Request for Repairs not improvements. A roof nearing the end of life? Well if it is isn’t leaking, that would be an improvement.
The best practice is to consider anything that any Buyer is likely to ask for. Examples would be an actively leaking roof, a furnace (or A/C unit) that is not working, or a a backed up sewer line. Unless you are selling to a developer who is going to knock the house down, those are most likely issues you will have to address.
Most important - don’t get down in the weeds on a line item basis trying to negotiate what something costs. Sellers will always think repairs can be done for less and Buyers for more. Just look at any financial give back at a cost of doing business.
“I want to sell as-is”
REGRETS & REMORSE
Buyer’s remorse is really a thing and has been for as long as people have been buying houses. These days, Sellers have regrets too, consider it Seller’s remorse.
Buyers
Everyone goes through Buyer’s Remorse at some point during the escrow period. Many Buyers go from the absolute heights of elation at having their offer accepted to despairing lows within a matter of days, if not hours.
Here’s why.
Where we live, whether it be our castle or cave, is wired to the most primitive parts of our brains. On top of that, buying a home is the largest financial investment most of us will ever make.
So your emotions and sub conscious mind will totally be on overdrive.
Beyond “can we afford it?”, “will a better one come along”, “what if prices go down?” and other doubtful thoughts that will go through your head, it is common to focus on something in the disclosures, inspection reports, or appraisal and blow it totally out of proportion. So while there are legitimate things to be concerned about, don’t create issues where non exist.
Short version, you may feel like you are on an emotional roller coaster. That’s normal. Don’t let your mind play tricks on you.
Sellers
You should be happy that your home just sold for a lot higher price than your neighbor’s, which had more upgrades, did just a few months ago. But you regret the sale now.
That’s sometimes because you thought that you would get more - even though you just got a record high price or it could be because you aren’t exactly sure where you will be moving yet.
Once you sign the purchase contract, though, you are obligated to sell the house at the price and on the terms you agreed to if the Buyer performs (and most do).
The best practice is to just focus on whatever it was that first motivated you to declutter and list your home. Chances are that you thought about that for quite a while and made the right decision.
So start your packing, relax and figure out what you’ll be doing with that large bundle of cash that will be wired to your account.
LEASEBACK AFTER CLOSE OF ESCROW
Whether it is considered Seller in Possession (SIP) after the close of escrow or a Residential Lease After Sale (RLAS), not giving possession the day escrow closes is fairly standard these days. The CA SIP form is used for 29 days or less and the RLAS for over 30 days.
Here’s the best practices for Buyers and Sellers.
Buyers
If getting the keys and moving in the day after escrow closes is important to you, best to look at vacant homes. For homes the Sellers are still living in, have your agent check before you write an offer as to when the Seller will be moving out and you can get the keys.
In super competitive situations, you might also be asked to allow the Seller to stay after COE free of charge.
Please note - your lender may require that you take possession within 59 days of COE.
Sellers
If you negotiate possession after the close of escrow, remember that you are living in someone else’s house and are obligated to maintain it in the same condition as the day of the final walk through. If there is any damage, whether it is your fault or not, you have to notify the Buyer (who is now your landlord) immediately.