RE sale: long close vs. bird-in-hand

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freebeer
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RE sale: long close vs. bird-in-hand

Post by freebeer »

I am selling a home (presently rented) and after some time on the market have two good offers. Home is in a desirable area, it's a seller's market (Seattle area). Both offers are from very qualified buyers.

Offer A is superior in price, in terms of net proceeds that works out to about 12% better (including a different RE commission level) but needs to close nearly a year from now with 6 months of rental occupancy prior (my tenant would be in there the prior 6 months). They want to first move and sell another home that for good reason they can't sell until late next year, but there is no contingency per se and they have enough assets that worst case they could close (paying all cash) even if they didn't sell the other home. Meanwhile I would better than break even on the rental but I only model the impact of principal reduction. It would not be a lease-option but we'd open escrow immediately and so a significant earnest money (3% of list price) would be potentially mine if they walked.

Offer B is a quick close. So assuming 3% annual return in investment of proceeds that reduces the difference to more like 10% in favor of Offer A.

I'm inclined to go for Offer A. The total net value here is close to mid six figures so 10% of that is close to mid five figures so not a trivial difference in my total financial picture. And I have spent some time with and like the prospective buyers (don't know the others).

But there is that nagging question re: passing up a "bird in the hand". In particular, if the economy tanks and the buyers walk, then I'd be exposed to that downside. OK I could take 3% if I can keep the earnest money but RE values could go down by 10% or more if the market cools. And in WA State it's not easy for a seller to keep earnest money even if buyer technically defaults (and legal costs could be considerable).

I am thinking that one way to mitigate my concern, if I went with Offer A, would be to hedge against a major downturn by say buying SPX LEAP options that would be comparable to the net value at risk over the 9+ month period. But I am not an option investor so I don't know how feasible that is.

Anyway I'm sure there are folks on this board knowledgeable about this type of situation and so I solicit any suggestions or perspective
mortfree
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Re: RE sale: long close vs. bird-in-hand

Post by mortfree »

Who has the greater sense of urgency with Option A - you or the buyers? meaning, if you request that they waive the need to sell their home first then you will go with them; otherwise you will do Option B.

call their bluff?

You could also tell Option A people you'll take a few grand less if they just settle sooner.

what does your Realtor think?
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freebeer
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Re: RE sale: long close vs. bird-in-hand

Post by freebeer »

mortfree wrote: Thu Nov 16, 2017 9:00 am Who has the greater sense of urgency with Option A - you or the buyers? meaning, if you request that they waive the need to sell their home first then you will go with them; otherwise you will do Option B.

call their bluff?

You could also tell Option A people you'll take a few grand less if they just settle sooner.

what does your Realtor think?
Yes countering either Offer A or Offer B folks is possible but I think it's unlikely to work re: Offer A folks, they are relocating here from out of state next year (husband starting new faculty position at university here but first has to finish the academic year there).

I am selling myself so no Realtor on my side.
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goingup
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Re: RE sale: long close vs. bird-in-hand

Post by goingup »

I'm a Seattle area homeowner and can't imagine taking Option A. They want to buy a year from now, live in it 6 months, sell their current home first. The only reason to consider such terms would be in a horrible market, with a undesirable home. And you're looking to hedge this bad deal with options? :oops:

Get a realtor. In this market you should be looking at multiple good offers, unless your place is undesirable. I'd be looking at taking highest bidder and a quick close.
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freebeer
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Re: RE sale: long close vs. bird-in-hand

Post by freebeer »

goingup wrote: Thu Nov 16, 2017 10:03 am I'm a Seattle area homeowner and can't imagine taking Option A. They want to buy a year from now, live in it 6 months, sell their current home first. The only reason to consider such terms would be in a horrible market, with a undesirable home. And you're looking to hedge this bad deal with options? :oops:

Get a realtor. In this market you should be looking at multiple good offers, unless your place is undesirable. I'd be looking at taking highest bidder and a quick close.
Yes well Offer A is unconventional although that's exactly how I got into the home myself so I know it can be a win-win under the right circumstances and it didn't come out of thin air but after mutual discussions. The home is not exactly undesirable but it doesn't appeal to the broadest universe of buyers in the price range.

Re: "Get a realtor" - I'm not inclined to pay another 3%. It is on the MLS so its had exposure (many dozens of showings) and the offers I have in hand are above what agents told me I would get. But anyway this thread is not about the merits or otherwise of going with a selling agent vs. FSBO - I consider that an orthogonal issue.
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freebeer
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Re: RE sale: long close vs. bird-in-hand

Post by freebeer »

I should have noted also - part of this is that I have been a bit torn about selling vs. holding for renting. As a rental it cash flows positive with 15-year mortgage which means I'm pocketing a few hundred net plus several times that in monthly paydown of principal. So if the Offer A thing ultimately fell through - as long as for other reasons than a major economic downturn - that would not be at all bad and could even have a silver lining. If I needed the money or it wasn't a good rental that would be a different situation and Offer A would not be at all attractive.
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8foot7
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Re: RE sale: long close vs. bird-in-hand

Post by 8foot7 »

Just get a LOT of earnest money upfront and go with Option A unless you want to go back on market and get better offers. Have an attorney draw up something that says the earnest money is yours and can only be applied to previously agreed purchase price.
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dm200
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Re: RE sale: long close vs. bird-in-hand

Post by dm200 »

What if you take Option A - and it falls through?
btenny
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Re: RE sale: long close vs. bird-in-hand

Post by btenny »

The earnest money proposed by the buyer for Option A is too small IMO versus the time and effort involved. If you really like the person and the deal and want to do that option then counter the offer and ask for more earnest money. Get at least 10% of the sales price and make it unconditional. And make sure they cannot say the house failed inspection or other issue a year from now to kill the deal. That way if they do not complete the sale by the exact day you planned for any reason you get the earnest money. This is the only way the deal makes sense. But do not delay or take a long time to get this deal completed. The issue is Option B can go away or other things can go wrong.

Good Luck.
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dm200
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Re: RE sale: long close vs. bird-in-hand

Post by dm200 »

Just noticed, in my opinion, a problem with Option A - they will occupy the house for six months before settlement - which gives them lots of time to "find" alleged problems with the house that they might demand be "fixed" at your expense before final settlement.
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freebeer
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Re: RE sale: long close vs. bird-in-hand

Post by freebeer »

dm200 wrote: Thu Nov 16, 2017 12:15 pm Just noticed, in my opinion, a problem with Option A - they will occupy the house for six months before settlement - which gives them lots of time to "find" alleged problems with the house that they might demand be "fixed" at your expense before final settlement.
Yes that is a risk and, certainly, it was a potential advantage for me when I was in that position (I occupied for nine months before settlement). However having lived in the house for nearly two years - and having done a bunch of maintenance - I know there aren't actual issues and as per my comment above I'm OK with continuing to keep it as rental which limits their leverage (and meanwhile they would be paying market rent - I had an even better deal as I was paying below market rent when I was in that position).

Re: other comment above - yes getting higher deposit would help, certainly. Countering Offer A with that is definitely something to consider.
J295
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Re: RE sale: long close vs. bird-in-hand

Post by J295 »

Personally, I'd try and negotiate something better with Option A (as has been noted), and failing success there go with a quick close with Option B.

You sound comfortable taking on the various risks associated with A in return for the premium. I have no problem with that for you going in with your eyes open. It's just that it's not my cup of tea in sales transactions. I prefer to do the deal and move on. A lot changes over 12 months and if A blows up then I just wouldn't want to spend the time and energy to re-load and start the selling process again (and who knows what kind of market we might have then, the home condition then, etc.). I've seen a fair share of buyers with big hats and no cattle so cash and a closing are almost always king with me.

Could it work -- sure. As for the extra $$$ with A, I'd just make that up from other sources instead of looking for a unique deal on a residence sale.

Best of luck.
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Re: RE sale: long close vs. bird-in-hand

Post by barnaclebob »

A seems to risky to me. What happens if the real estate market crashes in that year? Or even if it only goes down 15%? Are you left holding the bag then? Someones previous suggestion of a lot of earnest money and the price has to be locked in seems like a decent protection.
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Re: RE sale: long close vs. bird-in-hand

Post by 123 »

The long close alternative could simply be a flipper who is placing a bet that the house will appreciate in the one year period. Sure, maybe they've got a good cover story, or the story is true but it belies their real intentions. If property values decline they will simply walk away from their 3%.

A bird-in-hand is a real buyer. Real estate agents are good at finding them because they don't get paid unless the property is sold.
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tyrion
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Re: RE sale: long close vs. bird-in-hand

Post by tyrion »

This sounds great for the buyer in option A. They get basically a one year option on the house. If they market continues to go up (and Seattle is a very hot market) they have locked in year-old pricing. If the market reverses, they can find some things to scuttle the deal, renegotiate, or walk away from the earnest money.
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goingup
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Re: RE sale: long close vs. bird-in-hand

Post by goingup »

freebeer wrote: Thu Nov 16, 2017 10:18 am
goingup wrote: Thu Nov 16, 2017 10:03 am I'm a Seattle area homeowner and can't imagine taking Option A. They want to buy a year from now, live in it 6 months, sell their current home first. The only reason to consider such terms would be in a horrible market, with a undesirable home. And you're looking to hedge this bad deal with options? :oops:

Get a realtor. In this market you should be looking at multiple good offers, unless your place is undesirable. I'd be looking at taking highest bidder and a quick close.
Yes well Offer A is unconventional although that's exactly how I got into the home myself so I know it can be a win-win under the right circumstances and it didn't come out of thin air but after mutual discussions. The home is not exactly undesirable but it doesn't appeal to the broadest universe of buyers in the price range.

Re: "Get a realtor" - I'm not inclined to pay another 3%. It is on the MLS so its had exposure (many dozens of showings) and the offers I have in hand are above what agents told me I would get. But anyway this thread is not about the merits or otherwise of going with a selling agent vs. FSBO - I consider that an orthogonal issue.
freebeer-
I can read between the lines enough to realize you see a bit of yourself in the prospective buyers in Option A. You have a sentimental idea to "pay it forward" to allow them the opportunity that you were afforded when you purchased.

I'm not inclined to conduct a home sale that way. The stakes are too high. My thoughts are to minimize risk and frankly, maximize profit. If you were to say that you were working with your current renters to help them buy your home, that could make sense. Their character and commitment is known to you. I don't think you can count on the Option A buyers to follow through, with modest earnest money, if the economy or housing market tanks.

I'm going to say it again (though I know you don't care to hear it), if you had a good realtor you'd be reviewing many more offers and be mulling the compelling stories of families who want to live in your home.

Sincerely,
Your Seattle Area Neighbor :happy
Trapper
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Re: RE sale: long close vs. bird-in-hand

Post by Trapper »

You are inclined to favor Option A.
My suggestion would be to offer A buyers an option to buy the property at the price during the next twelve months for the amount you have agreed. The price of the option is paid now. ( guessing about 50k given what you have wrote).
If they close in the twelve months you will credit the amount they paid for the option toward the purchase price. If they walk, you have the option money and can remarket the property.
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Re: RE sale: long close vs. bird-in-hand

Post by Sandtrap »

And I have spent some time with and like the prospective buyers (don't know the others).
Red flag.
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DrakeSRT
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Re: RE sale: long close vs. bird-in-hand

Post by DrakeSRT »

Option A is not an offer it's a wish.
I would try to get option B up higher. You stated that you like the cash flow so you really have nothing to lose.

I did like trapper's lease option suggestion too but the buyer probably won't. GTM
technovelist
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Re: RE sale: long close vs. bird-in-hand

Post by technovelist »

Take the bird in the hand.

There are too many ways you could end up worse with option A for it to be worthwhile to take the risk.
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Re: RE sale: long close vs. bird-in-hand

Post by AlohaJoe »

3% is the wrong discount rate to be using to compare the NPV of the two options. Using 3% means you think the deal with Buyer A is safer than a basket of AAA bonds from the largest companies in the planet.

I don't think that is correct.

The discount rate should be much higher, which makes the two deals more similar.
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StevieG72
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Re: RE sale: long close vs. bird-in-hand

Post by StevieG72 »

Sandtrap wrote: Thu Nov 16, 2017 9:40 pm
And I have spent some time with and like the prospective buyers (don't know the others).
Red flag.
Business is business.

"Bird in Hand"
Every day, all day, every time.
Take the win.
j :D
+ 100

I was scrolling looking for Sandtrap’s reply. Considering his background in real estate, I would weigh his opinion heavily.
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Re: RE sale: long close vs. bird-in-hand

Post by cherijoh »

goingup wrote: Thu Nov 16, 2017 10:03 am I'm a Seattle area homeowner and can't imagine taking Option A. They want to buy a year from now, live in it 6 months, sell their current home first. The only reason to consider such terms would be in a horrible market, with a undesirable home. And you're looking to hedge this bad deal with options? :oops:

Get a realtor. In this market you should be looking at multiple good offers, unless your place is undesirable. I'd be looking at taking highest bidder and a quick close.
+1
OP here are a couple of things to consider.

When my Mom died in 2006, we put her house in the DC suburbs on the market. Real estate had been going like gang busters but we decided to price it to sell within 60 - 90 days. The realtor with whom we chose to work had mentioned that prices were starting to soften and we were worried about having it linger on the market too long. (Plus an unoccupied house is never a good idea). We had an offer within our desired time frame that netted out at slightly below list price. Within a year, home prices had dropped by around 25% and bottomed out around 40% lower before starting to recover. Prices are still not back up to the price for which we sold the house.

A few years ago, a friend retired and was relocating out of state. She put her house on the market and things were going smoothly until the day before she was supposed to close on the sale. The realtor called to tell her that the buyer had lost his job that day and the sale fell through. So it was back to square one! :shock:
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F150HD
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Re: RE sale: long close vs. bird-in-hand

Post by F150HD »

dm200 wrote: Thu Nov 16, 2017 11:49 am What if you take Option A - and it falls through?
that was my thought. A lot can happen in a year- not only w/ the market, but the buyers health might fail, lose a job etc.

plus, in a sellers market only 2 offers (?)
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Pretzel lover
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Re: RE sale: long close vs. bird-in-hand

Post by Pretzel lover »

I think OP stated that Option A people could afford to buy outright....

Why don't you have them buy now and then they rent it out until they are ready to move? Everybody wins.

Otherwise there is a lot of risk and you are basically rolling the dice on future conditions and follow thru
simas
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Re: RE sale: long close vs. bird-in-hand

Post by simas »

+1 get a realtor.

I do not know how many houses you sold but you seriously underestimate complexity and milestones towards the sale. You also not clear in your messaging and position - are you selling or not?

if you are not selling, and want to be a landlord - be a landlord and dont waste your time and everyone else time
if you do not want to be a landlord, and want to sell - then sell, get to close, get the money, and move on.

if you sell, know that offers could be withdrawn for any reason and at any minute and also have many outs in any decent contracts buyer attorney would write. what happen when another house will catch your buyers eye and they want that? how long is attorney review? what about other contingencies? would and then appraisal be done and how many times (they are valid only for 30 days) ? what happens when appraisal is lower than your sale price, will you credit? what happens if appraisal a year from now comes in different and lower, will you credit them? what happens if buyers encounter a different home (i.e. your neighbour across the street become "motivated/desperate seller" because of whatever and offers them a house for cash deal at 100k less than yours, will you lower the price?)

many things could happen and the longer you prolong the sales process, the more likely it would

if you are serious about selling then sell.
if you are not serious, then dont sell and play the rental, rent to own, or whatever else game.
WhyNotUs
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Re: RE sale: long close vs. bird-in-hand

Post by WhyNotUs »

freebeer wrote: Thu Nov 16, 2017 8:56 am
I'm inclined to go for Offer A. The total net value here is close to mid six figures so 10% of that is close to mid five figures so not a trivial difference in my total financial picture. And I have spent some time with and like the prospective buyers (don't know the others).

But there is that nagging question re: passing up a "bird in the hand". In particular, if the economy tanks and the buyers walk, then I'd be exposed to that downside. OK I could take 3% if I can keep the earnest money but RE values could go down by 10% or more if the market cools. And in WA State it's not easy for a seller to keep earnest money even if buyer technically defaults (and legal costs could be considerable).

Managing investments is balancing fear and desire based on your personal situation. You have obviously taken a clear-eyed look at the situation and desire the additional net profit but have a lingering fear. If the difference in profit between the two is worth the risk with Offer A then go for it and acknowledge the risk by spending some money on an experienced RE attorney who can write a contract or counter than manages your risk to a reasonable extent and then be okay with whatever happens. You cannot control macroeconomic risks to the housing market or someone's health or employment. You cannot have your cake and eat it too, so if that risk is too unsettling, then take your nice profit from the immediate sale and move on.




I am thinking that one way to mitigate my concern, if I went with Offer A, would be to hedge against a major downturn by say buying SPX LEAP options that would be comparable to the net value at risk over the 9+ month period. But I am not an option investor so I don't know how feasible that is.
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BuffaloBill21
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Re: RE sale: long close vs. bird-in-hand

Post by BuffaloBill21 »

Can you do Option A with a kick out clause (at least that’s what we call it here). You accept their offer but retain the right to continue marketing the property. If you get another acceptable offer then they can match or you can move on. You could do this until a month or two before their U&O period.

The poster who is concerned about them uncovering conditions during the U&O period this can be easily dealt with in the P&S by stating that they accept the premises as is at the commencement of the U&O period.

I’d ask them to bump the deposit up a bit, if they have assets to purchase then they can put 10% down which would make them trying to walk more painful.

Edited to add that in addition to the above you could require that they conduct their diligence (title, inspections, etc.) within a month or two of signing the P&S to eliminate a potential out for them later.
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quantAndHold
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Re: RE sale: long close vs. bird-in-hand

Post by quantAndHold »

I just sold a house in Seattle. I’m wondering why you don’t have 6 offers instead of 2, and agree with the person who suggested a real estate agent. Worrying over 3% when you’re probably leaving more money than that on the table through inexperience, seems penny wise and pound foolish.

Regardless, I would never take option A. Option A is a buyer’s market ploy, and you’re not in anything close to a buyer’s market. The only reason they would make an offer like that is because they, like everyone else in Seattle, expect the market to continue to go up. Either take option B, counter with a higher price to buyer B, counter with a 30 day escrow to buyer A, or get a realtor and start over.
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