You’ve decided its time to sell your property. You’ve spent the past year doing those things necessary to prepare your property for sale and you’ve consulted with your real estate advisory team to determine your asking price. With that important decision decided you’re ready to list your property.
And let’s say that before too long an investor makes a full price offer! You’re alternately euphoric about getting a full price offer and wondering whether your asking price was too low? You’ll never really know, but the question you need to answer is, “Do I accept the offer?” It sounds like an easy answer, doesn’t it? But for several reasons it may not be. Here’s why:
What is the offer contingent upon?
In other words, what items must be satisfied in order for the sale to occur? Some contingencies are quite normal to the sales process. All buyers should request that the sale of the property be contingent upon the buyer getting clear title, that the buyer has a reasonable time period to determine the physical condition of the property and to review the property’s historical operating statements and finally that the buyer has adequate time to get financing. As long as each of these contingencies come with acceptable time frames then you should accept these contingencies as they are reasonable requests.
But what if the offer is contingent upon the buyer successfully changing the zoning of the property? Or the offer is contingent upon the buyer selling his property? Or the offer is contingent upon the seller leasing another space at the property? Then accepting their offer becomes more problematic. Doesn’t it? In fact, for all three of these examples, I would reject these offers without hesitation.
But what if an offer is made and the decision to accept isn’t so obvious? To help make a well-reasoned decision consider these issues:
What is the buyer’s motivation?
You may be thinking, “Why do I care?” You should care because it may reveal the probability of whether the buyer will actually close on the transaction. Two examples come to mind:
- Does the buyer intend to convert your property to a higher and better use? If so, the risk associated with that endeavor is much higher than a buyer who simply wants to own and manage your property in its current use and condition.
- Did the buyer give you a full price offer just to get control of your property? This is a tactic used to prevent other buyers, maybe buyers who are more serious about buying your property, the chance to put a more serious offer on the table. Once he has the property tied up, the buyer then renegotiates the price supposedly because of what was “found” during the due diligence process. In reality, he intended to low-ball his original offer regardless of what was found. This tactic can successfully keep your property off the market for 60 days or longer. By taking it off the market for a period of time, the buyer knows that the seller has to weigh the benefit of closing at a lower price than he wanted with the alternative of turning down the low-ball offer and putting the property back on the market not knowing what another buyer will seriously offer for the property.
What is the buyer’s real estate experience?
Is he well qualified? Does he have a good track record with owning and managing this property type? Or is he new to real estate investing? Has the buyer even seen the property yet? Is he local? Does he have experience in the local market providing him a better understanding of the neighborhood than an out of state investor who doesn’t know the market? Someone who knows the market has a much higher probability of providing a better offer and a higher probability of closing than an investor who does not.
What is the buyer’s financial strength?
Does he have the net worth, liquid assets, credit score and annual income that lenders would find more than acceptable? Or is his financial strength questionable?
What is the buyer’s source of funds?
Is the buyer proposing to buy the property with a sizeable down payment making it easier for him to qualify for a loan? Or is he requesting from the lender an aggressive loan-to-value ratio? Is the buyer assembling a group of investors to buy the property? If so, how far along is he in the process of finding his LLC members? Does he have experience putting together investor groups? Or is this his first attempt?
Make an informed decision whether to accept buyer’s offer
As you can see, a full price offer may not be the best offer. If you are fortunate to have multiple offers on the table take the time to understand their real estate track record, their financial strength and their ability to close. To make an informed decision about which offer to accept, uncover the buyer’s motivations for wanting to buy your property and their source of funds to do so. To do otherwise may result in a long drawn out due diligence period that ultimately ends with the buyer unable or unwilling to close on the purchase of your property.