Negotiating Home Plate
It is Spring, which means baseball season! Whether you are a sports fan or not, I think we can all picture the progression a batter makes as he or she is running to each base. The goal is to hit it out of the park for a home run. Lets face it, traditionally the player slowly makes their way to each base and if they don’t get fouled out, finally makes it over home plate for the run.
We love the analogy of a baseball diamond and the traditional home sale. In a traditional real estate transaction, you can think of the house getting listed as the batter being up at bat. The batter is full of enthusiasm and is focused on getting to the next base. It’s the same for the Sellers. They are excited that their home is listed and their first goal is to get an offer, to get to first base.
Depending on the market conditions, you may get one or several offers to review. Oftentimes, at this stage the Sellers are focused primarily on price and to a certain degree the closing date. Both the Broker and the Sellers are focused largely on negotiating only for first base. An offer comes in and the Sellers and Buyer agree on price and terms and have put ink to paper. The Sellers are now on first base. They feel safe and happy, for the moment.
Once you are under contract and on first base, you then have to negotiate the inspection contingency, which takes you to second base. This inspection contingency is to the Buyer’s subjective satisfaction. Once the Sellers are on first base, or have signed a contract, they have lost all negotiating power. Most likely the Buyer will ask for repairs, or a reduction in sales price. During the inspection contingency the Sellers will have three options, 1) agree to the Buyer’s requests, 2) propose an alternative, or 3) reject all proposals from the Buyer. During the inspection contingency, the Buyer is the only one in the contract who has the power to terminate the contract. If the Buyer terminates, the Sellers go back to home plate, hoping for another chance at bat with another buyer.
Most transactions involve financing. Third base is the Buyer’s loan and appraisal contingency. Depending on the market conditions and the specific home, some appraisal contingencies may be concerning. If the Buyer is getting a loan, the lender will loan based on the appraised value. If the appraisal comes in under value, we have what we call an appraisal gap. This is the short fall between the contracted price and the appraised value. In a fast moving, robust Seller’s market, it’s not uncommon for a home to not appraise. If you have a very unique home with not a lot of sold comparable homes that an appraiser can use, you will probably have an appraisal issue. Back to our Sellers who are hanging out on third base eager to move forward. Unfortunately, their home does not appraise. Yikes! Does that mean they’ve fouled out and have to go back to the beginning? Possibly, or they can agree to sell the home for the appraised value. These Sellers are ready to move on and have agreed to reduce the sales price to the appraised value and are moving on to closing and hopefully able to get safely to home plate.
That final distance to home plate, during escrow and waiting for the loan to close can be fraught with stumbling blocks or worse, land mines. If title has not been opened and a full title report obtained prior to going on the market, possible issues may come up here. The Buyer may not be quite as strong financially as the Seller and Broker assumed and may not be able to close. The point is, that there are several things during this phase in a traditional home sale that can prevent the Seller from reaching home plate safely.
Our philosophy is to start with the end in mind. Our goal for our Sellers when they are up at bat is to hit a home run! Yes, they move across the plates, but we don’t stop on them. Once a Seller is under contract, they’ve lost all leverage or power. It is our job to make sure that the contract our Sellers are signing is negotiated with the best terms possible for the current market conditions – to negotiate for home plate!