Ask McEnearney: Why wouldn’t the highest price offer win, in a competitive situation?

This week’s Q&A column is sponsored and written by Hope Peele of The Peele Group and McEnearney Associates Realtors®, the leading real estate firm in Alexandria. To learn more about this article and relevant Alexandria market news, contact The Peele Group at 703-244-6115 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.

Question: Why wouldn’t the highest price offer win, in a competitive situation?

Answer: Although the local market has cooled somewhat since the height of 2020, it is still a fairly competitive market for buyers right now. One question that I’ve been asked a lot lately is, shouldn’t the highest price offer get the home? It seems so, but it’s not actually quite that simple.

First of all, it’s important to remember that sometimes offers can be made with a somewhat flexible offer price. This comes in an escalation clause which is an addendum to the basic offer contract stating that the purchase price will go higher in the case of a competing offer. This document includes both an increment by which the buyer will increase their bid over the competition and a top end, which is the absolute max the buyer is willing to pay.

For example, the image below shows a part of the Virginia escalation clause that is basically stating this buyer will beat any other offer by $1,000, up to $550,000.

The number one reason that an offer would not be accepted, regardless of price, is too many contingencies. A contingency is basically an “exit” for the buyer, and naturally the seller wants as few of those as possible. The seller’s main goal is to sell their home. Point blank. Of course, the highest price is a very close second, but if the contract doesn’t get to settlement, then the price is irrelevant. So, the seller will weigh the price against any contingencies, such as a home inspection, an appraisal, and more.

A home inspection contingency is one of the shortest contingencies. It usually expires a few days after the contract is accepted. During these first few days, the buyer has the opportunity to have a licensed inspector look at the home and write up a report of defects, etc. They can then void the contract for any reason. This also allows the buyer to void the contract, even if they just don’t like something very minor, which can be a big risk for the seller. A great option for buyers, if the seller will allow, is to conduct a pre-offer inspection and then waive the home inspection contingency when they make the offer.

Another important contingency to be familiar with is the appraisal contingency. When a buyer is taking out a loan for a mortgage, the lender wants to ensure that the loan can be repaid in the case of a foreclosure. So, they send an appraiser to evaluate the home and determine their own value. If the value the appraiser finds is the same or higher than the contract price, there are no issues, and the deal continues smoothly.

However, if they find the value to be below the contract price, this means that the buyer’s loan is not going to be as much as they wanted originally, and they have to put more cash in to meet the offer price. In this case, if there is an appraisal contingency in place, there may be another negotiation between both parties to either lower the offer price or negotiate somewhere in the middle. If the appraisal contingency was waived, the buyer is basically agreeing to make up the difference, regardless of what the appraised value is.

Sometimes the buyer will make the offer with an appraisal contingency but promise in the contract to make up any gap up to a certain amount. For instance, if the offer price was $800K, the buyer could say they would cover up to $20K on a low appraisal.

All of this is kind of a long way to say, an offer with an appraisal contingency is much riskier to a seller than one without. Here’s another example: Let’s say a home is listed for $500,000. Offer A is for $550,000 without an appraisal contingency, and Offer B is for $575,000 with an appraisal contingency. Of course, $75k over list price seems like an obvious choice for the seller. However, if the appraised value ends up coming in at $530k, Offer A would still close at $550k. Offer B might drop all the way to $530k if the buyer doesn’t have enough cash to make up the difference. Or even worse, the deal might fall through.

With so many contingencies and options in the Virginia sales contract, it is so important to have a Realtor you trust, who will explain these terms and contingencies to you so that you understand clearly. Whether buying or selling a home, it is important to have the right Realtor by your side to help you navigate the process and to understand these concepts well before you need to make these decisions.

For a complimentary consultation and overview of the buying and selling process, don’t hesitate to reach out!

Hope Peele is a licensed real estate agent with McEnearney Associates, Inc. in Alexandria, Virginia. She grew up in Old Town and currently lives in Del Ray. As a partner with The Peele Group, Hope is dedicated to guiding her clients successfully through the many-faceted process of buying or selling a home. Contact Hope at 703-244-6115.

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McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria