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Whether you are newer to the real estate business or seasoned, the only contract terms you have likely known over the past couple of years were “as-is,” “no contingencies,” and an escalatory addendum or some clause about how high the buyer was willing to go over asking price. And let’s not forget, “seller to remain in possession X days or months past closing at no cost to them.”
As interest rates started to rise and the market shifted, these contract terms became irrelevant, at least for the time being. Here’s what’s hot and what’s not when negotiating offers today:
Contingencies: Offers are being made subject to financing, appraisal and inspection contingencies. Gone are the days of waiving all contingencies. With rising inventory and fewer buyers in the market, sellers don’t have the leverage to expect a buyer to make a noncontingent offer.
Home sale contingencies: Speaking of contingencies, making an offer contingent on a home sale or a home already under contract closing is becoming more commonplace. Two years ago, anyone with a contingency wouldn’t have had a chance.
Buyers who had a property to sell had to go out on a limb and find a way to sell their home before finding another one, make their sale contingent upon finding something or engage with financing programs that allowed them to make a noncontingent offer.
Concessions: Say what? Buyers are asking for sellers to provide a credit towards their closing costs and/or prepaids. As a result of higher interest rates, buyers may need to put down more money than originally planned, hence diminishing their available funds to cover closing expenses.
Buyers are asking for anything from a dollar amount to percentages ranging anywhere from the seller paying up to 3 percent to 6 percent, but in some cases, they can ask for up to 9 percent towards their closing costs to be paid if they are putting 25 percent down.
Interest rate buydowns: In case you didn’t get the memo, interest rate buydowns are all the rage. They have been explained ad nauseum since interest rates started rising. Not a day goes by when I don’t get at least 10 emails from various lenders marketing their form of a buydown or a video explaining what it is.
The buydown is a way of performing financial gymnastics to make the mortgage payment more affordable for a buyer. A seller credits the buyer a certain dollar amount to go towards buying down the interest rate.
The buydown can be temporary or permanent. Temporary buydowns are very much on trend, and the idea is that by lowering the rate for anywhere from one to three years, this will make the home more affordable until the buyer can refinance.
With a temporary buydown, the money is put into an escrow account that is used to lower the rate and the buyer will get any unused portion of those funds back when they go to refinance and they could apply those funds towards refinancing.
Assumable loans: If the seller has an FHA or VA loan that is assumable, that could be a huge selling tool for buyers getting these loans. The buyer still has to qualify, and will need to make whole on the purchase price, so this could work on a property whereby the seller hasn’t lived in it too long or significantly paid down their mortgage.
Owner financing: Some sellers are in a position to offer owner financing, which could be advantageous to a buyer. However, don’t expect them to offer rates way below market. They will want to make a competitive return on the money loaned and the timeframe in which they are willing to finance may vary.
Some prefer a shorter hold time of just a couple of years, so the buyer needs to ensure they will be in a position to refinance, no matter what rates may be.
Escalatory addendums: The days of throwing caution to the wind and overpaying for a house to be the winning bid are gone. While there may only be one offer on a property, some properties are fielding multiple offers. However, buyers are being much more cautious and are not inclined to start hedging their bets due to higher interest rates.
Offering over asking price: Coming in over asking price is just not something buyers have to do right now. After two years of madness with pricing, buyers are finally getting a break, and can actually start an offer under the asking price in most cases. Some exceptions do apply, depending on property, area and inventory levels.
Multiple offers: Speaking of prices, multiple offers are a thing of the past. On properties that are seeing more than one offer, there may only be two or three others vs. ten, twenty or more in the past.
Waiving all contingencies: This was another roll of the dice tactic that buyers were doing over the last couple of years in order to win out in highly competitive situations. Now, not so much. Buyers are retaining their rights vs. giving all of them up when making an offer, and sellers aren’t countering on these points. They may be limiting the timeframe for the contingencies, but the contingencies are staying in the contract.
Appraisal waivers or guarantees: Speaking of waiving all contingencies, buyers offered or were typically asked by sellers to waive the appraisal contingency or guarantee they would pay a certain amount should the property not appraise. With buyers offering less than asking price, this clause is in the rearview mirror for now.
Post-closing occupancy at no cost to seller: Given higher interest rates, buyers are not willing and in many cases, cannot afford to let a seller stay in their home past closing at no cost to them. They need to at least cover the buyer’s mortgage payment or equivalent per diem for the days they remain in the home. Generally speaking, given the fact that everyone has more time to figure out where to go, post-closing occupancy is not requested nearly as much in the current climate.
Buyer to pay X amount of seller’s closing costs: This was offered by some buyers as a way to help seal the deal on top of offering over asking price, no contingencies, etc. The only closing costs being asked for now are for sellers to pay all of part of them on behalf of the buyer.
Cara Ameer is a broker associate and global luxury agent with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Florida. You can follow her on Facebook or Twitter.