The Craziest Real Estate Offers for Hot Denver Properties
Common questions buyers ask agents when writing offers on property in Denver
You want me to do what?
You are kidding, right?
What does that mean?
These are common questions buyers ask agents when writing offers on hot properties in Denver. Getting up to speed quickly and knowing how they can affect you can be the difference in endless offers and getting the home you want.
Contrary to popular belief, not all homes sell in a few days and have multiple crazy offers, but it happens often enough in some areas and price ranges that many buyers will include some fairly risky offers to win the home. The historic low Denver real estate inventory doesn’t look to be increasing substantially anytime soon, so if you find yourself in a bidding war, understanding what it might take (including the risks) so your is accepted is critical.
Colorado real estate contracts contain protections for buyers and sellers, and some offers are limiting or completely waive those protections. Be sure to understand and have a knowledgeable, experienced professional help you to make sure you know how and when to use them.
Here are wild components of offers in Denver you might be asked to include:
TAKE IT “AS IS” – INSPECTION PROVISION
A protection for a buyer is the ability to inspect the property before purchasing it and request repairs from the seller. This helps the buyer discover any costly repairs that may not be immediately visible and ask for repairs or cancel the contract. There are really two ways (with some variations) to take the property “as is”:
- Saying you will take it “as is” but still inspecting. This type of language added to the contract really only states intent, but does not remove your ability as a buyer to cancel the contract or ask for a large repair. Saying you will take it “as is” but will ask for large items related to health, safety, foundation or major repairs is also common. Basically, you as the buyer agree not to ask the seller to make smaller, less costly repairs. This provision is more to state intent and, as long as you are willing to make smaller repairs (common on many homes), the risk level is not too high. Sellers should understand that, in actuality, buyers can still ask for whatever they want since “major, health or safety” is subjective.
- Waiving inspection completely. This is a huge risk and should be absolutely discouraged unless you are a seasoned investor who understands the risks. Most problems or essential large repairs are not obvious on visual inspection during a home tour. By waiving this provision, eliminate their ability to cancel the contract if they find a large problem. Moreover, it becomes less likely to receive a refund of earnest money. Sellers, understand that this may sound great on the surface, but if a buyer has a problem in the future that might have been discovered during an inspection you may end up in hot water if the buyer accuses you of asking them to waive inspection because you knew there was an issue, even if you did not.
Inspections are an important protection for the buyer and any limitation or elimination of the ability to conduct an inspection should be taken seriously and you should understand the potential risks and options before you take this step.
Some agents and their sellers will not accept this clause in a contract. An escalation clause properly written offers to exceed any other offers by a specified dollar amount up to a maximum price. This can be effective in allowing you to keep the price lower and only increase enough to beat a competing offer. The key to this kind of clause is that you pick a top price you are truly comfortable paying and then include a cap. An uncapped escalation is not very believable for an experienced listing agent and may weaken your offer. Everyone has a maximum they will pay, so don’t be afraid to set yours and be ready to walk away. On the other hand, the risk with this type of provision is showing your hand to the seller by revealing the highest price you would pay.
Example: A home is listed at $450,000 and has multiple offers. You decide to offer the $450,000, but would pay as much as $460,000. The contract would offer the list price and your agent would insert a clause that offers to beat any other verified offer by $xxx up to a maximum price of $460,000. There are many ways an experienced agent can make small changes to this clause that will increase your chances of success.
THE APPRAISAL GUARANTEE
Bidding wars can push prices up substantially in some cases. If there is a loan involved, the problem is the lender will only make your loan based on the lower of the purchase price or appraisal price. So if you offered $400,000 and the appraisal comes in at $395,000, Colorado contracts give you the option to cancel the contract as the buyer, or you can ask the seller to reduce the price to the appraisal value. The seller is not required to reduce the price, but will have to refund the earnest money and let you out of the contract if a deal cannot be reached.
The appraisal guarantee clause is an addition to the contract by the buyer that agrees to pay over the appraisal by XX if it comes in below the agreed price on the contract. Some people agree to pay only a certain amount above the appraisal and increasingly, many offer to pay the full contract price no matter what the appraisal value. The risk with this type of clause is the amount of guarantee. If you cap it at 5k, you are saying that is the most you will contribute. Keep in mind, if the appraisal comes in much lower, the seller still can decide not to lower the price and just refund your money. Used properly this can give you an edge and you might even win the contract over higher price offers that do not contain the same clause. It strengthens your offer by making sure the seller will receive a minimum amount in case the appraisal does come up short.
How to be careful: Limit the amount of the guarantee to a comfortable level, and understand what the real financial impact of the different scenarios will be for you.
Keep in mind: Appraisals have guidelines and sometimes limit the amount of the appraisal even though the home is worth the price on the market. The value of a home and its features is subjective and appraisal attempts to use objective measures to set a value. In a perfect world three separate appraisers would come up with the same value, but that is not likely. Appraisers are assisted by the knowledge of the agreed price, but they are limited in values they can assign to some features of a home.
Example: You offer $450,000, and put a 20 percent payment ($90,000) down and will have a loan for 80 percent ($360,000) for a home and add an appraisal guarantee for $10,000. If the appraisal comes in at $440,000, you have agreed to pay an additional $10,000, but the lender will only lend you 80 percent of the $440,000. So you now have to bring $88,000 down payment as well as an additional $10,000 or $98,000. Now you have to come out of pocket for an additional $8,000 total. If the appraisal comes in at $445,000, you only need to make up $5,000, so $89,000 down payment plus $5,000 for a total of $94,000.
HARD EARNED MONEY
This is a situation in which the buyer says he will make the money non-refundable, which is never recommended and extremely risky. You are removing your ability to get your earnest money back, no matter what happens. You can limit that risk by making it non-refundable after certain milestones, like a survey or post inspection, which retains some protection. This type of clause should only be undertaken with a seasoned real estate buyer who can assess the risks properly.
UNDERSTAND WHAT YOU’RE OFFERING
The pressure to get the home in a low inventory market with escalating prices can be overwhelming. The real power for any buyer is the ability to walk away when things move beyond their comfort zone. Risky provisions can help you win the deal, but it is critical you completely understand the risks and ramifications of each part of your offer. A little discomfort is understandable, but do your best to maintain your ability to say enough is enough. Sellers should remember that pushing around buyers too much might backfire on you in many ways (house back on market, angry buyer, other tension), so be sure you understand what the buyer is offering and how it can impact you both negatively and positively.