Why are Buyers Losing in Multiple Offer Situations?
In an extreme sellers market, like we are currently experiencing, buyers need to bring their “A-game” when submitting an offer. If they don’t chances are they’re going to lose out in a multiple offer situation. When this happens many buyers are left scratching their heads wondering why they lost out. Well, as a listing agent who has been contending with multiple offers on every listing I can tell you exactly why buyers are losing in multiple offer situations. Below are the 12 most common reasons a seller rejects an offer.
Low Purchase Price
In so many real estate markets right now a full-price offer is oftentimes considered a low offer or a starting point. So it’s no surprise buyers submitting full-price offers or even slightly above are losing out to buyers offering much more.
Low Escrow Deposit
In addition to a strong offer price sellers are also looking for a big escrow deposit. A buyer putting little to no money in escrow will almost always lose in a multiple offer situation.
Even if the buyer is obtaining an FHA or VA loan that requires little to no money down they will still have closing costs. It’s highly recommended they put that amount of money into escrow, which shows the seller they have the funds to close. It can also be beneficial to put more in escrow if they have the funds to do so. I have seen buyers put more than 20% of the purchase price into escrow and if escrow exceeds the money needed to close the buyer will receive the remaining funds back at closing.
The more contingencies a buyer has the more likely their offer is going to be rejected especially when so many markets are flooded with cash buyers. Two of the most common contingencies these days are an inspection contingency and mortgage contingency.
However, there are a lot of buyers waiving their mortgage contingency in an effort to compete with cash buyers. Some are even waiving the home inspection, which is never recommended, but some buyers are doing it.
So buyers adding additional contingencies like attorney review contingency or home sale contingency are oftentimes the first offers ruled out in a multiple offer situation regardless of the other terms they’re offering.
Lengthy Contingency Periods
Until contingencies are cleared a buyer can potentially get out of the contract. Therefore, sellers are looking for the shortest contingency periods or no contingencies at all.
While a 5-7 day inspection period and a 21-30 day mortgage contingency period may have been considered short that is no longer the case. Buyers are lining up their home inspector ahead of time and offering a 2-3 day inspection period along with a 7-14 day mortgage contingency period.
When a seller is deciding between offers it can easily come down to contingency periods, I’ve seen buyers lose over one day. So it’s important for buyers to put the shortest contingency periods possible.
Unrealistic Closing Date
An unrealistic closing date ultimately depends on the seller and when they’d like to move. If they want to move quickly a 90-day closing will be unrealistic. If they need at least 60 days to move a 21-day closing will be unrealistic. This is one term a buyer should try to find out prior to writing an offer, making it one less reason for the seller to reject their offer.
No Appraisal Gap
Every seller wants to sell their home for top dollar, which is why some financed buyers offer an absurd amount of money over the list price in an attempt to have their offer accepted. The reality is a financed buyer has nothing to lose because if the home doesn’t appraise and they are denied financing they can cancel the contract and most likely get their entire escrow deposit back. In fact, some buyers count on it and assume the seller will just lower the price.
This is one of the many reasons why the offer price doesn’t always matter in a multiple offer situation if there are contingencies.
Queue appraisal gap! If you’re not familiar with an appraisal gap, it’s a clause buyers can add to their offer stating if the home doesn’t appraise for the contracted price the buyer will pay “X” amount of money above the appraised value not to exceed the purchase price. This right here shows the seller who stands behind their offer and who might try to wiggle out of the contract or renegotiate if the home doesn’t appraise.
Now, many financed buyers would like to stand by their offer but are limited on funds, unfortunately, it doesn’t change the fact if the buyer can’t get financing the seller would have to start the process all over again. So a seller is going to move forward with the buyer they feel will get to the closing table and fund.
If a buyer is obtaining a mortgage the lender can play a BIG role in whether their client’s offer is accepted or rejected. After all, they are the ones involved in funding the purchase. If the lender is unresponsive or isn’t knowledgeable about the buyer’s file their offer could be ruled out. The same holds true if the lender isn’t local. Some sellers feel more comfortable going with a buyer who is using a local lender.
Lenders who are top of their game, pro-actively call the listing agent to introduce themselves and the buyer’s qualifications can put the buyer’s offer on the shortlist. Selling real estate is a team effort and the lender absolutely matters.
Haven’t Seen the Property
There are a million reasons why a buyer may submit an offer on a property sight unseen. Maybe they’re not local and can’t jump on a plane every time a new listing hits the market. Maybe they’re a nurse stuck at the hospital working or maybe they are sick in the hospital. Maybe they’re just tired of looking at homes, submitting offers, and losing, so they decide they don’t want to look at another home until their offer is accepted.
Whatever the reason is for a buyer not seeing a home in person could be the reason a seller rejects their offer. Sellers know there is a chance once a buyer views the property for the first time they may cancel the contract. Also, buyers/ investors who’ve never seen the home and don’t plan to may easily cancel when issues arise because they don’t need to buy and/or have no emotional attachment.
So if it comes down to a buyer who has seen the home and loves it vs someone who hasn’t the seller will most likely move forward with the buyer who has viewed their home.
No Proof of Funds or Pre-Approval Letter
Submitting proof of funds or a mortgage pre-approval letter with an offer is customary. In fact, a majority of real estate agents won’t work with a buyer unless they receive this information upfront. Yet there are still buyers submitting offers without this pertinent information. If a buyer can’t prove they have the ability to purchase a home it is unlikely a seller will even consider their offer.
Sometimes negative remarks about a property from the buyer or buyer’s agent don’t need to be said to the listing agent or seller especially if it’s an attempt to justify the terms of an offer.
If two buyers submit the exact same offer and buyer one raves about how much they love the home while buyer two says the house needs a lot of work, they aren’t fond of the yard, and the house really smells. Most sellers are going to ask why buyer two even submitted an offer, it doesn’t sound like the home for them and accept offer number one. Sometimes flattery will get you everywhere in this market.
Adding Special Clauses
Adding a standard addendum to an offer is one thing. Creating additional clauses giving the buyer the power to cancel the contract is an entirely different story.
A quick example, adding an addendum stating if the buyer cannot rent the home immediately after closing they can cancel the contract. So if the community rules change while the buyer is under contract and the property can no longer be rented out the buyer can cancel the contract and get their escrow back.
Another example, adding an addendum stating if the inspector is unable to access the home during the inspection period it will automatically extend 5 days. So if the inspector is only available on Tuesday at 6:00am, which is unrealistic and it doesn’t work for the seller the inspection period will automatically be extended. So a 5 day inspection period is suddenly 10 days.
These are additional contingencies, which once again sellers want little to no contingencies.
This market can be exhausting, frustrating, and heartbreaking, especially for buyers and agents who continue losing in multiple offer situations. The reality is some buyers will never be able to compete while others just need to change a few things. Buyers and their agents who keep plugging away will ultimately win. It’s just going to take a lot of determination.