Many think the price is king, but terms often win over price
The Real Deal
If you’re not currently buying or selling in this Middle Tennessee real estate market, you may find some of this information quite unbelievable. If you are currently active in the market, you’re experiencing some outlying narratives as you navigate this marketplace. The biggest looming idea out there is that buyers are paying way too much, and they’ll regret that; so, let’s talk about it.
As a Realtor, one of my most important jobs is to be an information resource for buyers. As I give information, it’s also my job to provide the risks that accompany each decision the buyer may make.
It’s normal now to look at the notes inside our Realtor listing system and see, ‘Showings start Friday at 9 a.m. Offers due on Sunday by 6 p.m. with a response by the seller no later than Monday at noon.’ By decision time, a seller usually ends up with 50 or more showings over two days, 20 or more offers, and only one winner.
This process is called ‘highest and best.’ There’s a big difference between the highest and best. Many think the price is king, but terms often win over price.
What are buyers doing to win? Escalation clauses are one of the most common and popular strategies we see now. While not as common here, they are standard practice in many cities buyers are relocating from. When buyers say that they will pay a certain amount over the highest offer received, not to exceed a certain amount.
For example, the highest offer a seller received on a $400,000 home is $425,000. Another buyer has offered $410,000 with an escalation clause of $3,000 over the highest offer not to exceed $435,000. Based on the clause, the buyer would potentially get the home for $428,000. This creates a storm of potential issues for the buyer and seller.
First, what happens when the home does not appraise? Our job as Realtors is to give a seller an accurate picture of what the home may sell for on the market; however, an appraiser helps establish value for the bank. I always explain to my buyers that the bank leans on an appraiser to help them decide their financial risk if they default on the loan. If the Realtor believes the home could sell for $400,000, the contract finalizes at $428,000, and the home appraises for $400,000, we have a problem.
Suppose the buyer has an appraisal contingency in the contract. In that case, it allows them to either accept the higher price and bring the difference in cash to closing or terminate the agreement and have their earnest money returned. If you’re going by textbook, this seems easy enough. In this marketplace, however, buyers waive the appraisal contingency and send proof of cash in their account to make up the difference between the appraised price and contract price.
Simply stated, escalation clauses can be dangerous, especially when you don’t fully understand how they work. In this odd market, the best thing you can do as a buyer is always to make your best offer, and be at peace with what you offer, knowing that all markets change.
Article written by Brian Copeland, President of Greater Nashville Realtors. A Realtor is a member of the National Association of Realtors who subscribes to its strict code of ethics.