As a Seller, receiving word of an offer from a potential Buyer is a great feeling. Multiple offers can be even better news, but will require the Seller to evaluate each offer, and after any bidding, to choose one. Whether you receive one or many, there are various factors that signal the strength of an offer.
All other things equal, the strongest kind of offer is a cash purchase. This eliminates the need for mortgage financing, and the underwriting that goes with it. It also can make for a more rapid transaction, because there are fewer steps for the parties to get to closing.
Purchase price is clearly an important factor as well. There can be a tension between competing offers – one for a higher purchase price with a mortgage, and the other for a lesser amount of cash.
For offers involving mortgage financing, Sellers may want to require a potential Buyer to submit a pre-qualification for financing. Such a pre-qualification indicates that the Buyer has talked with a lender and apparently is fit for a certain level of financing. Although such a pre-approval is not binding, it can lessen the risk of accepting an offer from a Buyer who can not afford the property and who ultimately can not close.
Other indications of the relative strength of an offer include the amount of the down payment, the amount of Earnest Money tendered, and any other contingencies required by the Buyer. The down payment is evident from the amount of the mortgage required by the Buyer. A higher down payment means a lower loan-to-value ratio, or LTV, which corresponds to less risk for the lender. The total Earnest Money, after the attorney and inspection periods are completed, also communicates the level of seriousness of the Buyer. Although there is not a single correct formula, the Seller should be cautious if the amount offered by the Buyer is too low to make sense in light of the other parameters of the transaction.
Other contingencies that a Buyer requires can diminish the strength of an offer, in that they pose an additional layer of uncertainty for the Seller. This does not mean that they should always be refused. They very well may work out and the transaction may close – but they may fall apart later, leaving the Seller to re-list after time has passed.
Timing and market conditions also should be considered. Reasonable offers received quickly after listing the property, or in a down market, may have some extra intrinsic value for some Sellers.
The sales process can require a lot of choices, sometimes with limited information. Call us if you are going to sell a property in Chicago and want to develop a strategy to get to a smooth closing.
Windy City Legal assists clients in Chicago with real estate, business law, and asset protection matters.