- Joined
- Sep 18, 2007
- Messages
- 297
Very interesting article from another Agent's blog site: http://torontorealtyblog.com/2011/05/20/do-not-accept-a-conditional-offer-when-you-have-multiple-offers/
I don't necessarily agree with this Agent's point of view, but it certainly warrants a good debate! I will post it here for you guys to read if you don't want to go to his site directly:
`Risk Versus Reward`
That was the title of my presentation in Grade Twelve economics class.
I took a stick of chalk, went up to the blackboard, and ignited a debate that lasted all class.
I told everybody in the room that they had $10,000 to invest, and I put three options up on the wall:
1) 50% chance of $20,000; 50% chance of $0
2) 10% chance of $100,000; 90% chance of $0
3) 75% chance of $12,000; 25% chance of $6,000
We took a poll, and the results were almost 1/3 for each option. We debated the options for quite some time, until finally one student spoke up and identified that both options #1 and #2 have an expected value of $10,000, and option #3 has an expected value of $10,500, thus that is the correct answer.
Despite this conclusion, people still debated! `Go big, or go home,` said one kid in reference to why he would take the 10% chance of $100,000.
Another person identified that option #1 was basically playing `Double or nothing.`
But after all the debate, we voted again, and the results were still about 1/3 for each option.
Everybody has a different risk tolerance, and it comes out in all areas of life.
Whether you`re talking finances, or deciding whether to cook up those chicken breasts that expired four days ago ` we all assess risk.
One risk in my line of work that I would never advise anybody to take is to accept a conditional offer when you are reviewing multiple offers on your property.
A firm deal comes with 100% certainty.
A conditional deal comes with 0% certainty, and only estimates, guesswork, and complete conjecture when two parties to a deal talk about what will likely happen.
The best way to explain this is by using an experience I had this week, but I will change the names, numbers, and places since this house is still on the market and I don`t want to affect the outcome for the seller.
I represented a buyer in the Yonge & Sheppard area who was looking at a house priced at $1,649,000. This house was very attractive, and well-priced, and I explained to my buyers right away that this house would end up with multiple offers.
I told them that we would be looking at a price of around $1,760,000, just based on my own assessment of value and `gut feeling,` if you will.
Offer night came along, and there were two offers, plus ours.
My clients told me that they wanted to make the offer conditional on home inspection, even though a pre-inspection had been completed, and I told them that they had a zero percent chance of being successful with that offer.
It`s true. I don`t care what the outcome says (math is not my strong suit), but ask any agent and they`d agree with my calculation.
We made our offer for $1,760,000, and I prepared to tell my clients, `I`m sorry, but we didn`t get the property.` And then an odd thing happened: the listing agent called me and said that we had `the most attractive offer,` and that he wanted to know `how serious` our condition was.
>
What?
They weren`t seriously thinking about accepting a conditional offer, were they?
I told the listing agent that my clients had some question about the electrical work in the house and that they wanted to conduct an inspection of their own. I added that I had never had a deal fall through before, and I didn`t plan on it now.
They were sold.
The sellers accepted our conditional offer, even though they had two other offers on the property.
From what I`ve heard, via the third-hand real-estate grapevine, the other two offers weren`t that far behind ours.
My buyers conducted the home inspection, and it revealed a few major issues.
In fact, these issues were so major that it meant my buyers wouldn`t be able to get home insurance for the house in its current condition.
We consulted a few experts, talked to a lot of insurance brokers, and in the end my clients decided to walk away from the deal.
They were 100% within their right to do so.
Now, where does that leave the sellers?
Well that`s the unfortunate part of this story.
Don`t get me wrong ` I feel bad for the sellers, but I work for my buyers, and only my buyers. If my buyers felt uneasy about completing this transaction, then I have to advise them to pull out of the deal ` a deal that I was shocked we ever made in the first place!
The sellers have two options:
1) Get in touch with the agent who had the second highest offer and see if the buyer is still interested.
2) Re-list the property.
Both options are going to cost the seller dearly, and that is why you NEVER accept a conditional offer. There are simply no guarantees.
Let`s assume for argument`s sake that behind my offer of $1,760,000 was an offer of $1,745,000, and an offer of $1,685,000. Recall that the list price was $1,649,000.
Best case scenario ` the potential buyer who offered $1,745,000 comes back with the same offer.
Worst case scenario ` the house is re-listed and the sellers get $1,649,000.
So here is the (rhetorical) question: why would you, as a seller, risk $96,000 to gain an extra $15,000?
Why would you take a conditional offer for $1,760,000, when you have a firm offer of $1,745,000, knowing that the worst case is a re-list and sale of the asking price?
It makes no sense to me, and I would never advise (or allow) my clients to accept a conditional offer if they had a firm offer close behind.
In this case, what if the buyer with offer #2 has already bought elsewhere? Or cooled off?
What if buyer #3 isn`t interested either?
Then the house goes back on the market, and people wonder why?
Was there something wrong with the house?
Did the sale fall through because there`s something we should be worried about?
The buyer pool will take notice, and you could end up with less than the original asking price! It`s not likely, but it could happen.
If you`re a risk-taker, then maybe you`d be the one to say, `What are the odds of the deal falling through? Why would we leave money on the table? Let`s take the highest offer!` But I believe you take the sure thing, and avoid a real estate atrocity.
I`ve seen this situation before in an extreme case of a bidding war gone bad.
My colleague had twenty-seven offers on his Hayden Street condo last year, listed at $299,000, and the highest offer was for $375,000 ` an utterly stupid price for this condo. The second highest offer was for $345,000, and then there were 25 offers in between $299,000 and $345,000.
The $375,000 offer was conditional on Financing and Appraisal, and my colleague did the right thing: he told his client to take the $345,000 offer, which was unconditional.
Why?
Well what if the bank didn`t appraise the property at $375,000? Then the buyer wouldn`t get financing, and the deal would fall apart.
Sure, a property is `worth what somebody is willing to pay for it,` but we all laughed at the $375,000 price. It was a joke, and there`s no way a bank would come in and uphold the value.
My colleague knew that this $375,000 offer was worthless, and he tossed it aside.
They took the unconditional offer of $345,000, and never looked back.
That $375,000 price looked mighty tasty to the buyer, and those with less common sense might say, `You left $30,000 on the table!` But that money was never there to begin with. What if you had an offer for $1,000,000,000 conditional on the moon crashing into the sun? Would you take that offer?
When our conditional offer was accepted earlier this week, I told my clients very bluntly, `I want you to know that if the tables were turned, and we go to sell your Leslieville house in two weeks after this deal goes through, there is no way I`m going to let you accept a conditional offer!`
They understood.
I guess they got lucky that their conditional offer was accepted, and in the end, they were granted extreme flexibility in a market that doesn`t usually allow any.
As I said at the onset ` everybody`s risk tolerance is different.
But combine risk-tolerance with emotions, and you never know what you`re going to get`
I don't necessarily agree with this Agent's point of view, but it certainly warrants a good debate! I will post it here for you guys to read if you don't want to go to his site directly:
`Risk Versus Reward`
That was the title of my presentation in Grade Twelve economics class.
I took a stick of chalk, went up to the blackboard, and ignited a debate that lasted all class.
I told everybody in the room that they had $10,000 to invest, and I put three options up on the wall:
1) 50% chance of $20,000; 50% chance of $0
2) 10% chance of $100,000; 90% chance of $0
3) 75% chance of $12,000; 25% chance of $6,000
We took a poll, and the results were almost 1/3 for each option. We debated the options for quite some time, until finally one student spoke up and identified that both options #1 and #2 have an expected value of $10,000, and option #3 has an expected value of $10,500, thus that is the correct answer.
Despite this conclusion, people still debated! `Go big, or go home,` said one kid in reference to why he would take the 10% chance of $100,000.
Another person identified that option #1 was basically playing `Double or nothing.`
But after all the debate, we voted again, and the results were still about 1/3 for each option.
Everybody has a different risk tolerance, and it comes out in all areas of life.
Whether you`re talking finances, or deciding whether to cook up those chicken breasts that expired four days ago ` we all assess risk.
One risk in my line of work that I would never advise anybody to take is to accept a conditional offer when you are reviewing multiple offers on your property.
A firm deal comes with 100% certainty.
A conditional deal comes with 0% certainty, and only estimates, guesswork, and complete conjecture when two parties to a deal talk about what will likely happen.
The best way to explain this is by using an experience I had this week, but I will change the names, numbers, and places since this house is still on the market and I don`t want to affect the outcome for the seller.
I represented a buyer in the Yonge & Sheppard area who was looking at a house priced at $1,649,000. This house was very attractive, and well-priced, and I explained to my buyers right away that this house would end up with multiple offers.
I told them that we would be looking at a price of around $1,760,000, just based on my own assessment of value and `gut feeling,` if you will.
Offer night came along, and there were two offers, plus ours.
My clients told me that they wanted to make the offer conditional on home inspection, even though a pre-inspection had been completed, and I told them that they had a zero percent chance of being successful with that offer.
It`s true. I don`t care what the outcome says (math is not my strong suit), but ask any agent and they`d agree with my calculation.
We made our offer for $1,760,000, and I prepared to tell my clients, `I`m sorry, but we didn`t get the property.` And then an odd thing happened: the listing agent called me and said that we had `the most attractive offer,` and that he wanted to know `how serious` our condition was.
>
What?
They weren`t seriously thinking about accepting a conditional offer, were they?
I told the listing agent that my clients had some question about the electrical work in the house and that they wanted to conduct an inspection of their own. I added that I had never had a deal fall through before, and I didn`t plan on it now.
They were sold.
The sellers accepted our conditional offer, even though they had two other offers on the property.
From what I`ve heard, via the third-hand real-estate grapevine, the other two offers weren`t that far behind ours.
My buyers conducted the home inspection, and it revealed a few major issues.
In fact, these issues were so major that it meant my buyers wouldn`t be able to get home insurance for the house in its current condition.
We consulted a few experts, talked to a lot of insurance brokers, and in the end my clients decided to walk away from the deal.
They were 100% within their right to do so.
Now, where does that leave the sellers?
Well that`s the unfortunate part of this story.
Don`t get me wrong ` I feel bad for the sellers, but I work for my buyers, and only my buyers. If my buyers felt uneasy about completing this transaction, then I have to advise them to pull out of the deal ` a deal that I was shocked we ever made in the first place!
The sellers have two options:
1) Get in touch with the agent who had the second highest offer and see if the buyer is still interested.
2) Re-list the property.
Both options are going to cost the seller dearly, and that is why you NEVER accept a conditional offer. There are simply no guarantees.
Let`s assume for argument`s sake that behind my offer of $1,760,000 was an offer of $1,745,000, and an offer of $1,685,000. Recall that the list price was $1,649,000.
Best case scenario ` the potential buyer who offered $1,745,000 comes back with the same offer.
Worst case scenario ` the house is re-listed and the sellers get $1,649,000.
So here is the (rhetorical) question: why would you, as a seller, risk $96,000 to gain an extra $15,000?
Why would you take a conditional offer for $1,760,000, when you have a firm offer of $1,745,000, knowing that the worst case is a re-list and sale of the asking price?
It makes no sense to me, and I would never advise (or allow) my clients to accept a conditional offer if they had a firm offer close behind.
In this case, what if the buyer with offer #2 has already bought elsewhere? Or cooled off?
What if buyer #3 isn`t interested either?
Then the house goes back on the market, and people wonder why?
Was there something wrong with the house?
Did the sale fall through because there`s something we should be worried about?
The buyer pool will take notice, and you could end up with less than the original asking price! It`s not likely, but it could happen.
If you`re a risk-taker, then maybe you`d be the one to say, `What are the odds of the deal falling through? Why would we leave money on the table? Let`s take the highest offer!` But I believe you take the sure thing, and avoid a real estate atrocity.
I`ve seen this situation before in an extreme case of a bidding war gone bad.
My colleague had twenty-seven offers on his Hayden Street condo last year, listed at $299,000, and the highest offer was for $375,000 ` an utterly stupid price for this condo. The second highest offer was for $345,000, and then there were 25 offers in between $299,000 and $345,000.
The $375,000 offer was conditional on Financing and Appraisal, and my colleague did the right thing: he told his client to take the $345,000 offer, which was unconditional.
Why?
Well what if the bank didn`t appraise the property at $375,000? Then the buyer wouldn`t get financing, and the deal would fall apart.
Sure, a property is `worth what somebody is willing to pay for it,` but we all laughed at the $375,000 price. It was a joke, and there`s no way a bank would come in and uphold the value.
My colleague knew that this $375,000 offer was worthless, and he tossed it aside.
They took the unconditional offer of $345,000, and never looked back.
That $375,000 price looked mighty tasty to the buyer, and those with less common sense might say, `You left $30,000 on the table!` But that money was never there to begin with. What if you had an offer for $1,000,000,000 conditional on the moon crashing into the sun? Would you take that offer?
When our conditional offer was accepted earlier this week, I told my clients very bluntly, `I want you to know that if the tables were turned, and we go to sell your Leslieville house in two weeks after this deal goes through, there is no way I`m going to let you accept a conditional offer!`
They understood.
I guess they got lucky that their conditional offer was accepted, and in the end, they were granted extreme flexibility in a market that doesn`t usually allow any.
As I said at the onset ` everybody`s risk tolerance is different.
But combine risk-tolerance with emotions, and you never know what you`re going to get`
