Purchase Price Is Not The Holy Grail

The winter months are often seen as the worst time to sell a home and the best time to buy. I actively help both buyers and sellers, and this the strategy I try to convey:

  1. Buyers should be aggressive and remember that competition should be lower and seller’s motivation should be higher
  2. Sellers try to hold out if possible to the hot months of the year (leading up to, during, and shorty after summer)

But, we live in the Bay Area, so all of that goes out the window. In this newsletter I want to drill-down into the offer process when looking into purchasing a home. About a month ago I was working on a short outline of the entire process, and depending on the feedback from this post, I will make it into a series of newsletters. For this first one let’s plan to focus on the first page of the offer contract.

The C.A.R. (California Association of Realtors) Residential Purchase Agreement (RPA) is the 10-page contract that most Realtors across the state use. Not all though. And, depending on where you are looking to buy, the Bay Area is one of those markets. If the listing agent is nice, they won’t care (but not all listing agents are created equally). For our purposes we will use this contract as our base contract just to ensure our broad-based audience can get use from it.

On page #1 you state what most people think is the most important part of the contract – the “Purchase Price.” Just like how everyone likes to discuss the amazingly “low” interest rate they have on their house (even if they paid for points / spent thousands refinancing each year /etc.), the purchase price is what everyone likes to focus on and talk about, but it is just one piece of the offer.

The other major takeaways from page #1, in no particular order, are:

  1. Close of Escrow
    1. This is the approximate date escrow will close (i.e. usually the day the seller gets paid and the buyer gets possession of the property). Most sellers prefer a shorter escrow. Buyers, on the other hand, may prefer more time in order to ensure they are able to perform all of their inspections/get financing on the property.
  2. Initial Deposit and Increased Deposit
    1. The initial deposit is commonly known as the “Earnest Money Deposit.” This is the amount you fund escrow with when the contract is accepted and the purchase process really begins. This is often the “what is the buyer required to give if they breach the contract” amount. From a seller’s perspective, the higher the initial deposit the better (all else being equal). The increased deposit is the amount the buyer will add once certain criteria are met (and once added to the Initial Deposit is treated the same way).
  3. Down Payment and Loan Type
    1. The down payment amount is not just a factor the buyer considers. Sellers often weigh the amount used for a down payment to gauge the “strength” of the offer. This is definitely not always the case, but someone putting 50% down may be taken more “seriously” then someone putting 3.5% down.
    2. Loan type (or All Cash Offer) is the other major factor that sellers factor in. The loan type may influence the length of the transaction. Similar to above, an All Cash Offer may be seen as a stronger offer than a financed offer (all else being equal) because the time needed to close the transaction may be shorter. All Cash Offers are also interesting because they are not necessarily dependent on an appraisal/financing. This allows properties in "TLC" conditions to be purchased if the bank will not give a loan (and it ensures that if the appraisal comes in lower than the purchase price, the transaction can still take place). 

Next week we will dive further into the inspections, contingencies and the impact of contingencies, and the fees that are going to be paid by buyers / sellers. I wanted to put this out there so that those looking to buy understand that the price is not everything.

If you ever have any questions at all, please do not hesitate to reach out. At MinnGo, we realize that real estate is not something our clients think about everyday. Lucky for you, that is what we live and breath.

Until next time.