If I offered you a job for a million dollars a year, is that a good deal or a bad deal? Obviously, it depends on what the job is. If you’re a starting quarterback in the NFL, this is a horrible deal. If it’s a job managing the local market, anyone would jump at that offer.
The point I’m trying to make is when you think about a deal, the amount of money is only one piece of information. You have to put that number into some kind of context and know all the terms before you can say if it’s a good deal or bad deal.
When you are selling your home, you get paid when the deal closes and not a minute before. The ability to close is a very valuable trait if you’re a buyer. Someone could offer you any amount for your house, it doesn’t mean they will be able to close.
The basic structure of a real estate deal is a contract where you lay out the basic terms: price, earnest money, legal address, what’s included in the sale, and closing date. Theoretically, you could write these terms on a napkin and as long as both parties sign it, you have a deal.
When you use a licensed broker, there will be addenda and contingencies attached to the basic terms.
An addendum is something you want to add to the deal that wasn’t covered under the basic terms. It can be as simple as a clause that says: “hey seller, you will get all your stuff out and leave the place clean by the closing date.” You can probably use your imagination on why that became a standard addendum. By and large, an addendum is not something you’d blow up the deal over. It’s just language in the contract to be clear about what the buyer’s expectations are.
A contingency is entirely different. A contingency can blow up the deal. When a buyer puts a contingency in a contract they are saying that if Thing A is not what is expected, then the buyer can get out of this contract without penalty and get their earnest money back.
The most obvious contingency in real estate is the Inspection Contingency. In its most basic form it says, the buyer has X number of days to do an inspection of the home. If the inspection uncovers something alarming to the buyer, they can walk away and get their earnest money back.
So back to thinking about an offer.
Let’s say you have two offers.
Offer #1 is $1,000,000 but has 4 different contingencies (outs) included: inspection, title, information verification, and financing.
Offer #2 is for $975,000 and has waived every contingency.
Which one is the better offer?
Well, it’s up to the seller to decide if jumping through those 4 hoops is worth $25,000.
The reward is $25,000. The risk is that we took the house off the market and stopped showing to anyone else. Then the deal fails, and we have to put the house back on the market.
Now the process starts all over again, but now your listing can appear tainted. Buyers start to wonder, “What happened? Why did that house not close?” The longer the house sits on the market, the more difficult it becomes to sell for top dollar.
The takeaway here is that it’s not all about price. Yes, that top end number is important. But it’s more important to close the deal.