Contingencies
Let me tell you a story. This story deals with how counter intuitive reasoning can actually make buying and selling a home easier for both parties. This story is based around the idea that contingencies are the lynch pin behind every home sale, and how the fewer contingencies you have, the better.
Naumi Haque and Laura Antanello are a couple that has done quite well for themselves. Naumi is a graduate of a prestigious business school and Laura is a successful sales person at an international pharmaceuticals firm. They have been living in a beautiful home for more than 15 years.
While they have not had their home formally appraised they believe that it is worth 500,000 dollars. The home is a large Victorian townhouse in a coveted downtown location. They have one three-year-old child and Laura is currently expecting their second child.
They know that they have enough room in their current home for both children but they are concerned that the neighborhood might be a little too busy to raise two children in. They began looking for a new home in the country where their children would be safer and have more opportunities for outdoor adventures.
Negotiating
A master negotiator, Naumi believed that they could get more than the market value of their home, if they sold it themselves. Laura, who is a little more conservative, questioned that logic, believing that they should take the quick and easy option, which would save them time and money in the short term.
They listed the home on the open market and almost immediately offers began to pour in. Both were extremely excited, and felt that their home could be sold at their whim, and they should start looking for a new home right away.
Before their house was sold they put an offer on a home in the country and that offer was immediately accepted because they both have excellent credit and their mortgage was pre-approved due to the equity they had with their existing home. They were ecstatic.
Confident that they could sell their existing home, they began looking in earnest at three different offers:
$470,000 from a couple who had retired early $500,000 from a couple in a similar situation as themselves $530,000 from a couple of upwardly mobile advertising executives
Immediately Naumi suggested they take the offer that was the highest. The couple obviously wanted the home enough to pay more than the existing price and they were employed in a well paying industry.
Laura on the other hand was suspicious of such a deal, and thought it would be better to go with the lower offer. She knew that they now had two mortgages and the family could not bear the burden of having to make two simultaneous payments.
What should they do?
Common logic would have to fall on the side of Naumi, why not make as much money as you can? Right? Well not always. When you look at the contingencies in the offer by the first couple, it is revealed that they really had little hope of ever even buying them home.
Firstly, they (as first-time home buyers) are granted the privilege of having a lower down payment. However, they had so over bid on the price of the home that it was hard to imagine them being able to cover the balance of the down payment if the home was appraised at a level that was much lower.
In fact when the house was appraised it was well below the market value. Almost 25% lower. This came as a shock to Naumi and Laura, as well as the young couple who were willing to overpay for the home.
Because they had never owned a home before and did not have the cash on hand to make up the difference of a larger down payment, they were forced to withdraw their offer. As it turns out, they were way out of their league.
The next couple, the couple that shared many of the same things in common with Laura and Naumi, was the next most plausible choice.
This couple had owned a home before, and they were easily able to come up with the extra money for the down payment. Their only major concern was the safety of their two children.
In their offer they outlined a couple contingencies. The first was that they were to be given the chance to do their own private inspections in the home when Naumi and Laura were away.
The Inspection
This inspection would answer the following questions:
Is any or all of the property located in a designated floodplain? Is any or all of the property located in a designated wetland? Is the property located in an agricultural district? Was the property ever the site of a landfill? Are there or have there ever been fuel storage tanks above or below the ground on the property? Is there asbestos in the structure? Is lead plumbing present? Has a radon test been done? Has the property been tested for the presence of motor fuel, motor oil, home heating fuel, Lubricating oil, or any other petroleum product, methane gas, or any hazardous or toxic Substance Has motor fuel, motor oil, home heating fuel, lubricating oil or any other petroleum product, methane gas, or any hazardous or toxic substance spilled, leaked or otherwise been released on the property or from the property onto any other property?
Based on this inspection they gave Naumi and Laura several contingencies. If any of these hazards were to be present they were to be fixed at the seller's expense.
Naumi and Laura thought about it, and realized that the home they were in was old. They had bought it many years ago and did not really care about these things. They did not have children at the time and they were just too excited about the deal they had gotten.
They added up the costs and guessed that if these were any of these problems it could cost them upwards of $40,000 to fix them. This would then bring the sale price down to $460,000. They decided not to take the chance and move on to the last couple.
As it turns out, the retired couple was willing to offer $250,000 up front as a down payment. Also, because they have previously owned a home for 28 years, they had paid it off and were immediately pre-approved for a new mortgage.
The retired couple also said that they would do their own inspection, but would make few contingencies in the agreement. They were planning on completely renovating the home anyway and selling it in a couple years at an even larger profit. It would be their last fixer-upper. This was the reason they had made such a low offer initially.
The choice was easy. Naumi and Laura immediately accepted the offer of the retired couple and transferred the down payment to their new mortgage. They were able to have thousands of dollars in interest this way.
This story may seem like a bit of a Goldie Locks style fairly tale, but it should serve as an example. Just because an offer is hot, doesn't mean it is just right.
