Episode 9: Keeping your emotions in check when buying a home.
Cool Quick Tip About Atlanta from Know Atlanta Magazine
A $50k salary in Atlanta, GA is equivalent to a 69k salary in Seattle, WA. $87k salary in San Francisco, CA $112k in NY, and a $59k salary in Chicago.
It is still a hot market in Atlanta real estate.
Q: You work with a lot of buyers, tell me some of the emotions they feel when they find a house they really like?
A: The buyer is ready to make an offer, just like every other couple. Everyone is jumping on the houses in the market at the same time. This is the reason we have record numbers of multiple offer situations in the Atlanta market.
There is little to no inventory and it’s a seller’s market for sure. We are starting to see more and more signs as the inventory is climbing.
Q: Is it because all the sellers are feeling that they have to raise the prices?
A: It might be piggybacking off some of the high prices.
You have seller A that has a superb property that sells for 400k and a neighbor 2 doors down, who “thinks” he has a superb property and he lists for 425k. That’s called the copy-cat listing.
This is happening a lot around here.
Q: Will the copycat get 425K for his property?
A: Only if his home is conditioned – but it is not – it is less superior.
Q: What other emotions do agents see? What things do buyers typically give into based on emotional purchase?
A: Buyers are ready to give a lot of things when someone likes the house enough to forfeit a financial contingency or do an escalation clause on the property to go above the asking price.
The ESCALATION CLAUSE
Q: What is an escalation clause?
A: It is a clause within the contract that allows a homebuyer say “I will pay X amount for this home, but if the seller receives another offer that is higher than mine, the buyer is willing to increase their offer up to Y amount.” In theory, an escalation clause is fairly simple. In practice there are a lot of details involved.
FACT: When you submit a contract and you represent the buyer, and there is an escalation clause, don’t assume the seller’s agent will look at special stipulations. Represent and speak to the agent in further detail before sending the offer. There are tons of new agents in the marketplace, most probably couldn’t define what an escalation clause is because they have never used one.
Q: Will a seller make an emotional decision choosing offers if there is 4 offers on their house?
A: If a buyer is being guided right with a realtor a buyer can include a nice letter about their family, where they’re from, how much they are going to enjoy the house and the neighborhood – that can connect with a seller good as well.
You have to be careful as an agent not to recommend they do that necessarily. The Federal Fair Housing Law could possibly frown upon someone basically saying “hey, I have two kids, their ages are 7 and 9 and they love the pink bedroom.” Granted I am not sure there has ever been any litigation or anything like that, but we have to be careful as agents as to what we advise.
Those things do work and sellers do make emotional decisions because they want somebody to buy their house that they like – sometimes. It’s easier to let go, particularly mothers. They bring their babies home, raise their children in these homes, and have deep emotional ties. Now I’m not saying all moms, but women in general though, tend to be more emotional about a house because that is their castle, right?
When you’re on the seller side with a multiple offer situation – even with the letter from your buyer, most times, more often than not it boils down to number on the bottom line and the type of financing the buyers have.
There is usually somebody in the household that is the decision maker when it comes down to a bottom line thinker. Then those conversations go on a night before bedtime or whatever. You have a pragmatic person and the emotional person and they hash it out trying to make a decision.
Q: What other things might buyer’s give up?
A: Buyer might look to waive the contingency of their current home selling?
Oh, that’s a BIG ONE!
Q: Why could that be a big mistake?
A: The buyer might waive because they’ve have been looking for a long time and they have finally found the ideal home for their family and they can afford it. It can be a mistake because even though they “think” their current home is in great condition, in a great neighborhood, priced at market value, it could still sit on the market for a long time and they could own two houses for quite awhile. You as the agent need to be prepared to have the conversation with your clients to say “yes, you can do this…it is a viable strategy however, you need a plan in place for a worst case scenario. “Are you financially prepared for your home to sit on the market for six months or more?” We always want to guide our clients in the right direction, and we certainly do not want to see hardship come to them. Therefore, when you agree to take the contingency off, you want to know their family is going to be okay.
The agent is the logic behind the contract. We do this every day. We see people get emotional. We see people over react and it is our job to level the playing field.
Let’s talk about earnest money…sometimes people can put down tons of earnest money. The industry standard is one percent, the best practice and what most realtors suggest.
Earnest money is a good strategy.
You have a due diligence period and you really want this house. Couple A is bringing in an offer of 200k with 2k earnest and Couple B are brings in an offer of 207k (forgetting the escalation clause for a minute) with 2k earnest and Couple C brings in an offer of 203k with 10k earnest. Depending on what kind of seller you have, they might take that 203k with more earnest money than Couple B with less earnest.
Why? A) The chance of them not closing for that particular seller to keep all their earnest money. They feel there is more skin in the game from the buyer who is willing to put up serious cash. However, that is an emotional decision the seller is making. It is NOT the best financial decision.
Here is the other piece of that…
They have the okay to accept the lower offer with 10k earnest during the due diligence. Can the buyer get every cent on that 10k back? YES, every penny.
That is a really good strategy because you are not risking any more money, as long as you decide during your due diligence period. If you get past your due diligence period and you have 10k out there – you better close on that house or you will be losing some serious cash. You have to be confident in knowing that you can put down 10k, confident in knowing it is a good strategy when you hit the end of your due diligence, and you should be confident you’re going to buy!
WAIVING THE APPRAISAL CONTINGENCY
Q: When would this be a good idea?
Brad says “If you have done your homework and you know it’s priced right and at market value, you are pretty safe to waive that. You do stand a chance if the home appraises low that you will be paying the difference between the appraisal price and the sale price.”
Oleg only recommends waiving the appraisal contingency when the buyer loves the house and is paying with cash. Otherwise he does not recommend, unless it is a critical situation.
In today’s market there is trend of appraisals coming in below selling price. You have to be careful.
Terry says “Personally, if I found a house I really loved and I knew I was going to spend ten years in it and I knew it was priced correctly (the key is knowing it has good solid comps all around the neighborhood and you know it’s right) I would have no problem waiving the appraisal contingency. If I wasn’t happy with the appraisal I would switch lenders and get another appraisal. It is a useful strategy.”
Take care of your client – make sure they care financially prepared to pay the difference if the appraisal does come in low, without it being a hardship.
HOME INSPECTIONS – Glossing items over
Q: What do you advise your client to do? What repairs should buyers ask for?
Oleg says “Inspections are 50-60 pre-printed pages. Inspectors fill in the blanks and they are all different. What might be an issue to my team may not be an issue to your team. This is the reason why it is difficult to answer and discuss it. We will definitely discuss it and sit down and help point out things and recommend but essentially you (the buyer) are going to buy this house and live in it and should be comfortable making that decision.”
Brad says “My client is relying on me from the beginning to the end of the home buying process. When my client gets a home inspection report we sit down and take a look at it. I might say something like, “in my experience these are the major areas you may want to address.” I ask my client to take a look at the inspection, read over it and highlight, make notes, but ultimately if my buyers don’t bring it up then…. What can you do?”
The team agrees that the goal is to FOCUS ON THE MAJOR THINGS! Major repairs.
Terry says “As a buyer – I would ask for everything, but that is not realistic. It is not going to happen.”
Decisions made during emotional times and put into a contract do not fade away when those emotions fade so when you move into the house and something breaks down within two days and you’re calling your agent saying you home inspector missed it – it’s a house – things a going to break.
You can have a 50 year old house that has no issues for two months or a brand new construction that has a water leak or other issues after two days.
ALWAYS HAVE AN INSPECTION DONE ON NEW CONSTRUCTION!!! ALWAYS!!!
NEW CONSTRUCTION INSPECTIONS
– Framing Inspection: an inspector comes in before drywall goes up. Inspects exterior barriers, roof, stairs, hold-downs and hardware, wall studs, floor joists, installation of plumbing, electrical, mechanical etc..
– Final Inspection: exterior, decks, stairs, walkways, interior, attic, crawl space, windows, smoke alarms, weather stripping etc…
Make sure to get an inspection on every single transaction.
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And THAT’S A WRAP!
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