A Pocket Listings is a Real Estate Listing that is not listed for public sale on the open market. Pocket listings are not uploaded into the Multiple Listing Service (MLS).
Pocket listings can also be called: Private Sale, Off-Market listings, Quiet Listings, Hush Listings, Not in MLS, Sold Before Processing, or Whisper listings.
MLS is real estate industry lingo. The MLS is the public marketplace for real estate listings. It is controlled by a Local Board of Realtors and is an electronic database that member agents access to share listings.
Los Angeles County has several different “MLS-es” (made up that word). I am a member of the Combined Los Angeles Westside (CLAW) MLS. There is also the Southland Regional Association of Realtors (SRAR) for the Valley, and CRMLS for Orange County. It is common for surrounding regions to have reciprocity with one another- so if an agent in Los Angeles travels down to Orange County for business they can access Orange Counties MLS and vice versa.
From the MLS, listings are syndicated to the web. Those listings go to big consumer websites like Trulia, Zillow, Redfin, Movoto, Estately, realtor.com, and 1000’s of other sites- including local real estate agent’s own personal websites (like this one!).
The public has direct access to listings in the MLS, and can shop from home, whenever they want, without the help of an agent.
MLS Listings are worldwide. They reach anyone with an internet connection. According to Google, about 47% of the world uses the internet now. The ones that don’t have an internet connection, probably aren’t buying your property, unless they are on a meditation retreat in Tibet. People on the complete opposite side of the planet can see your listing once it’s in the MLS! I have received calls on my listings from all over the world- England, France, Dubai.
I’m a Seller- Do I have to list my property for sale in the MLS?
No- you do not have to list your property on the MLS. There is no law that requires a seller to sell their home publicly or even hire an agent.
The vast majority of homes are listed publicly, but for some owners, they prefer to pocket list. If you have a tenant with quite a bit of time on their lease left or a very expensive/unique property that only has a very small number of potential buyers, or you just don’t want that level of exposure from a public listing on your home you might want to consider pocket listing. Even if you add a “Do Not Disturb Occupant” rider to your For Sale Yard Sign, sure as day follows night, some nosy homebuyer will wander around your property or even knock on the door with no appointment!
How Common are Pocket Listings?
On Average, about 85% of the properties in Los Angeles sell on the open market, so the vast majority of home sales are public.
Most of the time, it is in the seller’s best interest to list their home on the open market, to get the most exposure, and the highest sales price, but there are exceptions.
Market conditions have the greatest impact on the number of pocket listing sales that occur each year. During Buyer Markets, where inventory is high and it is difficult to sell, the number of pocket listings decreases to 10% or less. During Seller’s Markets, where inventory is low and there is heavy competition among buyers, the number of pocket listings increases, as high as 30%.
I’m a Seller- Should I pocket list?
Privacy is the #1 advantage of Pocket Listing. If you don’t want your neighbors, family members, friends, tenants, boss, the media, or everyone else under the sun knowing your business and what you are up to then pocket listing might be right for you. If you are embarrassed about the condition of your home, or the situation that is causing you to sell, a pocket listing will help keep a lid on it. For celebrities, that live their lives in the limelight and headlines, sometimes pocket listing can help lower their profile.
Disadvantage- Less Exposure
Since you are exposing the listing to less potential buyers, this may translate into a lower sales price. It is difficult to get multiple offers with pocket listings which is one of the best ways to get prices over asking. On average, I find pocket listings sell for slightly less than listings in the MLS- about 5% less – sometimes as much as 10% less if rushed and in poor condition. But on the other hand, I have seen pocket listings sell for market or even more than market if the property was very desirable or unique. The fact is there is less exposure with a pocket listing- sometimes this affects the price and sometimes it doesn’t.
If you own some really expensive things, like a Rembrandt, Renoir, AND a Picasso painting, or have the hope diamond in your jewelry box- you might be nervous showing your home to John Q Public. Pocket Listings give you more control over who sees your house. You can choose to only show your home to prequalified buyers.
Not all buyers are equal. Sometimes you will encounter a highly motivated buyer that has no problem paying a big premium to get what they want. By limiting showings, you might miss this buyer. In addition, since it’s hard to get multiple offers, the sales price of pocket listings rarely goes above list.
When you pocket list, you might not get the best price from your buyer, or the highest price for your property. For properties that are unique and very hard to value- you might accidentally sell below the market value. This can happen in rapidly changing markets during the transition between down markets and real estate booms. A real estate friend of mine says, “you can never list a property too low”. I have found this to be true for public listings. Buyers will step in and bid below market listings up to the market value and beyond. But, you don’t have this same protection with a pocket listing. You as a seller must rely heavily on your real estate agent’s accurate assessment of the property’s true value.
Advantage – Less Preparation
If you want to sell your property quick, or don’t have the budget to prepare it for sale- pocket listing might be a good solution. Some sellers take months getting their home ready for sale- painting, staging, landscaping, decluttering and packing, making repairs. All of these things can add up to a large expense. If you can sell the property as it is, without having to do anything, you can save precious time and money. Pocket listings don’t have as a high of an expectation on appearances.
A lot of pocket listings are listed early before a seller is actually ready to sell. If the property sells quickly, like in a few days with a cash offer- the owner might not have a plan in place for where they are going to move next. Hopefully, you can get extra time with a leaseback if you need it. I have heard of pocket listing sellers having to rent a hotel because they sold so fast, which is a good problem to have I suppose but it can be stressful if you don’t know where to go.
Advantage- No Days on Market/ No Listing History
This is a big advantage of pocket listing. When you are listed publicly, the clock is your enemy, and it’s always ticking. Every day that goes by without an offer means you will probably sell for less money. Buyers get very suspicious of listings that have lingered on the market for several months. With a pocket listing, you don’t have to deal with questions like- have you gotten any offers yet? why hasn’t the property sold yet? Implying there is something wrong with your property. You are free to move at your own speed.
Disadvantage- Longer Sale Time
Fewer showings and less exposure, mean longer sale times. Although the number of days it takes you to sell won’t count against you, it will probably take longer. Want to jumpstart the sale process? Lower the price a little to spark some interest.
Everybody wants what they can’t have. It’s human nature. The clubby feeling surrounding pocket listings makes buyers drunk with power, and agents aren’t immune either. Who doesn’t love to feel smarter than the average bear? And why shouldn’t you? You know about a house for sale that other buyers don’t. Luxury brands have been using this tactic for years.
Disadvantage- Less Excitement if Later Listed
The top agents in the neighborhood will know about your pocket listing. When you do come on the market, there might be less of a pop- because many of the buyers in the market who are working with these agents were already exposed to your listing as a pocket.
Advantage- Lower Commission
Owners can save money on real estate commissions by pocket listing. If you list publicly, you usually have to pay 5% or 6% sales commission total. Half of that is a buyers agent commission of 2.5% or 3%. If the listing agent represents both buyer and seller, I know a lot of agents who are happy to give a commission discount- usually 4% but sometimes less. If the seller is a lawyer or part-time real estate agent or has an agent friend who will work for a minimal flat fee or drastically reduced commission- they can get away with offering a buyer’s agent a normal commission and save on the seller side fee. Any way you slice it, the seller usually saves 1% or 2% on commissions when pocket listing, which gets them a little money back that they might be giving up by not listing publicly.
Disadvantage- Dual Agency
The two most common causes for real estate lawsuits in California are disclosure and agency. If you are a dual agent, special care has to be taken that both sides are treated fairly. California allows Dual Agency, so it is legal. Real estate boards aren’t overly fond of pocket listings because they work against the spirit of cooperation that the MLS is based on. If there is a dispute later, the fact that the sale was a pocket listing may color an action in a pale light.
I’m an Agent- how do I market a pocket listing?
Pocket listings take away an agents #1 marketing tool- the MLS, so they require more work and are more difficult to sell than normal listings. What marketing you can do depends on what your seller wants and is OK with. Marketing a pocket listing is pretty similar to marketing a normal listing except no MLS more or less.
1- Ask the owner for permission to take pictures. Pictures will help you sell the thing! Consider getting a floorplan also.
2- Market the pocket listing to your Sphere of Influence. I always start by trying to sell my pocket listings to my existing clients first. Send out an email blast to your client database, and posting the pocket listing on your website/social media is where I’d start. If you write a monthly newsletter, you could also include it in there.
3- Didn’t sell it yet? Reach out to other brokers in your office, and in the community that you are friendly with. I would print out a flier of the pocket listing and stick it in every agent’s mailbox in my office. You could also go to a few other offices if your company has multiple locations. If your company has a weekly office meeting- pitch it there. If you have an email list of agents you are friendly with, email blast them. Or if you want to add the personal touch, pick up the phone and make a few phone calls.
4- There are places online you can post a listing that are not the MLS- if the seller allows you. Zillow.com is the first place I would put it online under coming soon– although you need to be a premier agent to unlock this function. Many Savvy buyers use Zillow to search for off-market coming soon listings, so you will get some internet exposure there. Craigslist is OK but has really dropped off in recent years. I have experimented with Forsalebyowner.com but found that the only people on there are hungry real estate agents looking for listings. I have posted several pockets on the site and never once got a buyer call, the only calls I received were from prospecting agents so I would avoid that one as a total waste of time.
5- Private listing groups. There are several different private listing groups for real estate agents to share pocket listings with one another. Top Agent Network (They charge a membership fee), The Pocket Listing Service, and this very popular local Pocket Listing Facebook Group, are a few examples.
6- If the seller gives you permission, install a yard sign.
7- If the seller gives you permission, hold a Pocket Listing Open House. Place your directional open house signs out on Sunday.
8- You can try to advertise the pocket listing with a print ad or Facebook ad to generate some traffic- or buy buyer leads Zillow, Trulia, Realtor.com, Yelp, or some other place.
I’m a Buyer or Buyer’s Agent- how do I find pocket listings?
Finding pocket listings can be a little tough because you have to do a little digging to turn them up.
You might find the article I wrote “7 different types of pocket listings” helpful background information for understanding the various reasons sellers decide to pocket list.
1- Ask Local Real Estate Agents. Here is your new favorite question- “Do you have any pocket listings?”. Real estate agents are spending big money on their marketing, and have past client’s that they have relationships with, as well as potential sellers they are working on to list. By asking them if they have any pocket listings you will find out what they have in the cooker. It is not uncommon for a neighbor to keep close tabs over a nearby listing to see what it sells for, they usually hire the agent who was the most recent to sell a home nearby if they did a good job. I see agents get pockets in the same building for condos or on the same street for houses pretty frequently.
Keep in mind when you are committed to working with a buyer’s agent, that you can get yourself into an awkward situation by asking other agents for pocket listings because some agents will only show you their pocket if you agree to work with them.
2- Ask Brandon Miller. Brandon is one of the hardest working title officers in Los Angeles and he is always posting pockets on his facebook. Title officers are on the front lines of listings because they are usually one of the first people an agent calls when they have a new listing (also true with photographers, stagers, and transaction coordinators).
3- Drive around the neighborhood. Sometimes you can catch a listing being staged, a suspicious moving truck, or a seller fixing their place up to get ready to sell. If you are feeling bold, knock on the door or walk up to the seller and ask them if they are planning on selling. Keep an eye out for a fresh for sale yard sign.
4- If you can afford new construction- it’s no secret when a property is being built and is close to being finished. Poking around at the job site, you can usually get to the agent or owner after asking a few questions from the workers. You can also try to look up in the public records the agent that sold the property last because the builder is their client.
5- Check Real Estate agent’s personal websites for their pocket listings. Here are some links to agents/Agencies that keep their website updated with their pocket listings:
Rex Real Estate is a discount brokerage- they do not offer any commission to selling agents, so real estate agents usually don’t like showing their listings. They get a decent number of listings so this is an OK place to search and none of their listings are on the MLS.
6- Send out a Buyer Need Email Blast
7- Search on Zillow Coming Soon
If you have a pocket listing or if you are looking to find one, let’s chat!
Owning your own home is a smart investment. Prices go up. Over the long term, your home will increase in value. Meanwhile, you have to live somewhere, and why pay your landlord’s mortgage when you can pay your own? If you rent for 30 years, at the end of the 30 years you will have nothing. If you own a home for 30 years, at the end of the 30 years you will own the home free and clear and it will have doubled or tripled in value. That’s a retirement plan.
Owing a home is a big responsibility. When you are renting you can pick up and move at the drop of a hat. As a homeowner, your living situation is not as flexible. It’s a big hassle to sell and the transaction fees are costly. Before you purchase I recommend to be certain you are going to be staying in the area for at least 3 years. You will also be responsible for property maintenance.
Make sure your finances are in order. If you are carrying a lot of credit card debt or student loans, it may be better to pay off your debt before buying a house. Check your credit score, if its below 680 you will need to work with a credit repair company to raise your credit score in order qualify for a loan. How much money do you have in the bank? For most first time home buyers saving up the down payment is the biggest hurdle. Thankfully there are a lot of low down payment loan programs that make buying your first home easier. Some good loans to be aware of are 10% down, 5% down, and FHA 3.5% down loans– keep in mind that if you are putting less than the traditional 20% down you will have the extra cost for PMI.
In Los Angeles, real estate prices are higher than other parts of the country. For the price you can buy a 1 bedroom condo in Los Angeles, you could buy a new construction two story house in the Midwest. Because prices are high, it is not uncommon for parents to give downpayment help to first time home buyers here. One trend I am seeing with Millennials, is Parents are giving their kids the inheritance early- so they can use it to buy a home. This makes a lot of financial sense, because you can put that money to good use working for you instead of laying dormant in a checking account for ten plus years. I always recommend for first time buyers to talk with their family and ask for help.
Tips for First Time Home Buyers:
If you are like me you want everything right now and hate waiting. The last thing you want to hear when you are trying to buy your first house is that you need to be patient. From my experience, it takes on average three to five years to buy your first house in Los Angeles, from initial planning stages to final purchase. Los Angeles is a big city and has big city prices that are higher than the US national average. Higher prices make home purchase more difficult. Zillow says the average age of first time homebuyer is 31, but in LA I think it’s a little higher because the prices are higher. Another factor, is that in a big city prices fluctuate wildly. Depending on where the market is in the real estate cycle, prices can go up or down as much as 15%-20% in a year. Saving a down payment takes time.
Don’t be Afraid to ask questions
When it’s your first time everything is new. You will have a bazillion questions rolling around in your head. Don’t be afraid to ask, ask, ask. That’s the best way to learn. Don’t just ask your real estate agent or lender either. Ask your friends and family. Watch HGTV. This is an important decision. It’s a good idea to rally the wagons and confer with your trusted circle of advisers.
Buying a house can be SCARY! It is a big commitment and the biggest purchase you’ve ever made in your life. At least one meltdown when buying a home is not unheard of. Even when you feel overwhelmed and stressed out, stick with it, you won’t regret it. I hear way more often from people regret of not buying when they could, then working a little harder, or saving a little more.
Your first home is not your dream home, it’s a stepping stone. Your third or fourth home will be your dream home. Be ready to make some compromises with your first home in order to keep it within your budget. Maybe choose a condo instead of a single family house to keep cost down- if you do decided on a condo you can usually get a better location and security than comparably priced homes but lose privacy and yard. Or: pick a neighborhood that is in transition and up and coming, instead of a neighborhood that is well established. You will get more bang for your buck in a transition neighborhood. Remember you aren’t going to live in your first home forever. Most buyers are very excited to finally buy their first home they forget about all this stuff and just can’t wait to move in.
Stretch Armstrong Toy 1976
Owning a home is always more expensive then renting. So your monthly living expenses will be going up if you are coming from a rental. Buying your first home can be a stretch sometimes. But trust me, it’s a good stretch! When you are young you can afford take more risks, and as you get established in your career you will make more money. It’s ok to be ‘mortgage poor’ when you are young because you are willing to rough it. You may feel like you are in college again, surviving on Ramen noodles and Peanut butter (ok maybe that’s stretching too tight!). LA is expensive, I usually recommend for first time buyers to ask a family member(s) for help with down payment when it comes time to buy. Saving up the down payment is usually first time buyer’s biggest challenge. Most of the time, but not always, family members are happy to help their children and nephews buy their first property if they have been responsible. Their Parents probably helped them when they were buying their first house! Another thing to keep in mind when you are stretching, if you feel like you are stretching too tight, you can always rent a room to a friend for some extra income. Many of my clients have done that.
First Time Home Buyer? Hire a Great Realtor
Final piece of advice: hire a great realtor. When you are buying your first home, you don’t necessarily need the biggest most successful realtor in your neighborhood either. As a first time buyer, you need a lot of time and attention, and very busy realtors may not have the time to devote to you. Look for someone who is hardworking, and does real estate full time, who you get along with.
First Time Home Buyer FAQs
Do I have to pay a realtor commission?
No, as the buyer in Los Angeles you do not pay any real estate commissions. The seller pays the real estate commissions. Check out this article you’d like to see a breakdown of your buyer closing costs.
Do I need a home inspection?
Emphatically YES. Always get a home inspection. The last thing you need as a first time home buyer when you are stretching is to have some large unexpected expense.
As a first time home buyer, should I get preapproved?
Yes, I recommend talking to a lender and getting preapproved right away. They will be able to talk with you about different loan programs as I mentioned earlier, and give you an idea of your monthly cost so you know how high you are comfortable looking.
What is the best way to get started?
Best way to get started is to just go out and look at some houses. Sunday open houses are great- you might meet a great realtor while you are out looking if your friends/family don’t have a referral.
As a first time home buyer, you can have a lot of questions. I am here to help. Just click the button below to get started!
So What Exactly Does it Mean to Buy a Property As Is?
Garage Sales are as is
“As is” is a real estate term that pop-ups frequently in the Los Angeles Market. Selling a property “as is” means that the seller makes no warranties about the condition of the property and will not fix anything or make repairs, nor will they lower the price or give credits because of the existence of problems or defects. In other words, what you see is what you get.
“As is” sales are common for foreclosures, short sales, trustee sale, probates, major fixers/teardowns, New construction (although they allow punchlists), and in strong seller’s markets- even some standard sales! Seasoned Real Estate investors are accustomed to AS IS Sales because they can understand the risks better working directly in the construction industry. For first time home buyers, you need to be extra careful!
Be extra careful with foreclosures or trustee sales, where the owner has never lived in the property. Since they have never occupied the property they are not required to make the standard seller disclosures.
Many sellers think that an “As Is” sale means that the buyer agrees to hold the seller harmless for all claims related to the sale of the property. Remember that old saying “Buyer Beware”?
This is not the case in California. State law (Cal. Civil Code 1102) mandates certain disclosures must be made with residential transactions, and that buyer and seller can’t waive these requirements.
An “As Is” clause should be considered putting the buyer on notice that no repairs or credits will be given.
“AS IS” still means that the seller must disclose all known material facts to the buyer.
What is a Material Fact?
Here is the test to determine if a fact is material or not is:
(A) Does the fact impact the desirability or market value of the property?
(B) If the buyer had known the fact, would they not have entered into the contract?
(C) Will the fact affect a buyer’s use and enjoyment of the property?
If yes to any of these questions, it is probably a material fact. In California, you do not need to disclose if someone died on the property or how they died, but it is usually a good practice to do so because the nosey neighbor will always tell the new owner about it so you might as well tell them first.
If a seller hides a material fact that is not visible or observable to the buyer, that is known to the seller, and that is discovered later, then the seller may be liable for negligent misrepresentation and failure to disclose and fraud in court. The statue of limitations is 2 years for these types of claims.
As is clause is not a way to avoid disclosure, but instead a way to shift responsibility for the condition of the property to the buyer.
When selling your property as is, it is highly recommended to either conduct presale inspections yourself to be provided to potential buyers, or allow buyers access to the property to inspect it themselves.
By providing buyers a presale inspection, or allowing them the right to inspect, you can dramatically lower your liability.
For buyers, If the seller demands no inspection contingency in offers, then as a buyer you have to bite the bullet and pay for inspection upfront before you are in escrow. It might really stink if you pay for the inspection and the seller chooses another offer, but its much better than the alternative, which is the seller accepts your offer and you find out there are huge problems and you might lose your earnest money deposit.
In strong seller’s markets, where prices are going up rapidly, and there are few houses for sale, Multiple offers are plentiful. It can be discouraging as a buyer when every new house that hits the market gets 3 or 4 offers right away, and then the listing agent drags the sale out ten to fourteen days while they hold Brokers Open Houses and Saturday and Sunday open houses collecting more and more offers. If you aren’t lucky enough to snag a home quickly, you will start to feel the impact of the rising home prices- that same $800,000 house from two or three months ago, might be an extra $20,000 or $30,000 now. Ouch!
The more offers, the more competition.
With tough competition you need to go the extra mile to make your offer strong and to give yourself the best chance to win. When buying houses, there is no prize for second place (although- ask for formal backup position #1), so make your offer count!
Here are a few things you can do improve your offer’s chances of winning in a multiple offers situation:
1.) Offer the highest price.
Duhhh! In multiple offers the #1 most important factor for sellers is price. It doesn’t matter if you have everything else in your favor- you will lose if your price is too low. Ask yourself: at what price would I not be disappointed if I didn’t get the property? Then, if you do lose, you won’t feel bad about it and kicking yourself afterwards thinking you should have offered more.
Let’s reverse the tables and assume you are the seller and you have received these six ‘best and final’ offers on your house that is listed for $749,000:
Offer 1- $751,000 20% down
Offer 2- $650,000- all cash 15 day close
Offer 3- $735,000 10% down
Offer 4-$785,000 30% down
Offer 5- $766,500 5% down
Which of these offers would you choose?
2.) Introduce yourself! And don’t be a grump.
Make sure you introduce yourself to the listing agent of the houses you plan to write offers on. It only takes a few minutes at an open house or showing- and if you are friendly and genuinely interested in the property, the agent will remember. Negotiations began long before an offer is ever written. Even before you walked through the door. It starts the moment you meet someone, and before. I have had buyers lose properties because they complained during showings, which lead the listing agent to believe they didn’t really want the property. I have also camped out with one of my buyers for an entire open house (yes three hours- it was boring as hell) just to show the listing agent he wanted the place (he got it, and it was a great deal). Anything you can do that is memorable, and makes you more familiar will help the listing agent feel confident about presenting your offer in a positive light.
3.) Put your best “offer” foot forward
When you are writing your initial offer, I advise clients to make it pretty close to your best and final. Lets suppose there is a listing for $1,450,000 and you think it is going to sell for $1,600,000. And your willing to go to $1,580,000. I see buyers make this mistake that they write a low offer and plan to “go up a lot” and that that will get the sellers attention. They might write $1,475,000 in the scenario above, and are planning, when they get a counter to go to $1,580,000. However, there is one problem. You might not get even get a counter! Or your agent might have to beg the agent to send you one. The damage is already done. The seller will see the low offer and not take you seriously. It is far better to get the sellers attention right away with your first offer, and keep it. In this situation, write $1,550,000. When you get the counter, go up another $30,000 to your maximium- $1,580,000- this looks far better to the seller.
Many buyers don’t bother to do this! If you want the property badly, make yourself standout and take the time to write a thoughtful coverletter to seller and tell them why they should sell their home to you.
5.) Put as much money down as you can.
Sellers want to pick the strongest buyer they can. The larger the downpayment the more likely the deal will close. Buyers with more money in the bank are stronger. In rapidly appreciating markets appraisals commonly fall short of the contract price, as the market could take several must to readjust to new price levels. Sellers want to get the price that they were offered. If the appraisal does come short, the fact that you have extra cash to cover the difference, helps them rest at ease.
Incomplete offers won’t be considered, they are thrown in the trash. If you don’t have all your ducks in a row yet, do it right away, because when the market is moving fast it doesn’t wait for you to talk with a lender and get preapproved or obtain a copy of your most recent bank statement.
7.) Find out if the seller wants any special terms and include them on your offer
Being flexible with any terms the sellers want (or dictates…) can push the bar in your favor. A lot of sellers in an rising market, will be moving- and they will be facing the same challenge of finding a new property as you do. Giving a seller a leaseback provides them time to purchase a replacement property. Usual seller leasebacks are 30-60 days, and terms are a small security deposit and monthly lease payments equal to your holding cost (mortgage, taxes, and insurance). Maybe the seller already bought a property and wants a quick close. Go to your lender and have them start working on your loan so you can close faster. Seller wants to keep the fridge? Take it!
8.) Choose an ODD number to write for you best and final offer
Veteran agents who deal with multiple offer situations frequently know that you never write round numbers. Think of it like the game show, the price is right. There is nothing more frustrating than losing a property because another buyer with more experience in multiple offers chose to write an odd number offer price ever so slightly above yours! (I once had a client who lost multiples a few years back with a $1,700,000 offer to a $1,710,000 offer…neither of us were happy campers). Let’s say your best and final is $450,000- I’d recommend making it $453,632. Or maybe $451,105. What’s your lucky number? I hear 8’s are lucky- $452,888. What is the property address? 305 Mohawk Ln? 450,305. Whatever you do, just don’t make it the same number everyone else is going to pick. Make it an odd number that is slightly more and give yourself the best chance of being the highest.
9.) When the counter offers are sent out, wait until near the end of deadline to respond
When you ask the listing agent what the property is going to sell for- they don’t know, because it depends on what the buyers are going to do. When you wait for some of the responses to come in before submitting yours, you give yourself a chance to try and glean some information from the listing agent where you need to be at. I might tell the listing agent what offer we are going to make verbally and ask them if this is going to get the property, and gauge their reaction. If you have a relationship with the listing agent, they may give you some hints.
10.) Have your agent Present your offer in person
This goes a long way with real estate agents that come from the old school. Twenty to thirty years ago, before emails, cell phones, and fax machines, driving to the listing agents office and presenting your offer in person was the way everyone did it. When you go the extra mile, the listing agent will notice and know you are serious and want to close.
11.) Shorten your Inspection Contingency
The purchase agreement has a 17 day inspection contingency by default. In fast markets listing agents are usually countering buyers inspection contingencies down to 7-10 inspection periods. This can put a lot of pressure on your buyer’s agent to get all the inspections done. 7 Days is the minimum time required to do inspections, and 10 is a lot better. You can voluntarily cut down your inspection time from 17 days to strengthen your offer. Maybe to 14 or 12 days, or 10 if you want to be aggressive. 17 days is more time than you need so shaving a few days off won’t hurt you if you stay on your toes.
12.) Waive Contingency
There are three main contingencies in the purchase agreement- the loan, appraisal, and inspection. Waiving a contingency, or three, will significantly strengthen your offer.
If you are a cash buyer, you have no problem waiving the loan contingency. For everybody else who is financing, this is not an option.
The most common contingency to be waived by buyers in multiple offers is the Appraisal contingency. In strong seller’s markets, properties sell for more than their asking price, and sell for higher prices than the most recent comps. This can create problems with getting an appraisal at value. Sellers don’t want to accept an offer that is ‘only as good as the paper it is printed on’. By waiving the appraisal contingency, the buyer eliminates any doubt about the final sales price and cannot renegotiating the sales price if the appraisal falls short. But, if you do this, be ready to pick up the tab!
In fast markets, sometimes the Listing Agent will provide buyers with a pre-sale inspection report paid for by the seller. The reason sellers do a presale inspection is to find any serious problems with their property before they list it. The seller then has the opportunity to fix those problems or disclose them, instead of dealing with them in escrow. The purpose of a presale inspection is to do an “as is” sale. The seller will demand a very short inspection contingency 10-7 days.
If you know me, like a broken drum, I always recommend to get an inspection. I would strongly advise buyer’s against waiving the inspection contingency. The only time I would consider it, is with an off market property that you have no choice, or with a property you intend to complete rehab or tear down. The seller is trying to avoid granting any repair credits to the buyers. For liability purposes most listing agents and sellers do not want to force buyers to waive their inspection contingency- so you really don’t need to give this up. So hold on to it!
Keep in mind that having less or no contingencies as a buyer can be risky, because if you don’t close, you will lose your earnest money deposit– so be careful you understand what you are doing before you start waiving these contingencies right and left.
13. Set up to the plate
When you receive the sellers best and final counter offer- go up and pick a number that you think will actually win. I have had client’s who dig in, and refuse to raise their offer. That’s fine if you don’t care whether you lose the property or not, but if you do want the property, make the winning bid. Sometimes the seller doesn’t always choose the highest price, but they are not foolish- there is a range that the best offers orbit, and you need to be in that ring.
13.) Write an Escalator Clause
This is a trendy new tactic buyers are using to win multiple offers in Los Angeles. In states like Michigan and Oregon, escalator clauses are common practice, but in California escalator clauses are not widely used. If you plan to use an escalator clause make sure the listing agent is open to it and understands it, because many listing agents will not have heard of it.
Unlike a normal best and final response offering a specific price, with an escalator clause buyers offer some amount higher than the next highest offer so they cannot be overbid. The language for the counter offer response may be something like “buyer offers $5,000 above next highest offer”. This would be an example of $5,000 plus escalator clause. The amount you bid over the next offer depends on the price range, for $500,000 $5,000 over the next highest offer is probably appropriate, and for $1M $10,000 and so on. Don’t want to bid above a specific price? You can add a cap to the escalator as well- such as “price not to exceed $950,000” for example. I would also request the listing agent to produce a copy of the next highest offer so you have some proof.
Some agents feel like escalator clause is an unfair practice and have negative response to it. That is why I say to check with the listing agent before writing one in to your counter offer. I can understand where those agents are coming from- if every buyer responded to a multiple offer counter offer with an escalator clause it wouldn’t work, and for buyers who lose out to an escalator clause, they may feel that the bidding was unfair.
I think in certain situations it can be an excellent strategy but not right in every situation so check with the listing agent first.
14.) Ask for the “Take it Off the Market Price”
In multiple offer markets, listing agents are really drawing things out, holding the house open for one or two weeks, and setting an offer deadline at the end, and collecting offers that come in, but not presenting them until the deadline, at which point they counter offer. Some buyers get really frustrated having to wait two weeks, then get countered, and have to wait another week, just to lose the property they want. This strategy wont get you the best price, however, in some situations I have seen it successfully take a property off the market before the offer deadline. You need an agent on the listing side who is receptive to it, some agents will refuse to present offers (even though they are suppose to) until the deadline no matter what price they are. However, as an agent myself, I can’t resist showing a seller a really good offer when I get it. Like in the Godfather movies, you have to “make an offer they can’t refuse”. If you are successful you can head the property off at the pass, and take it off the market before weeks go by.
Buyers often ask me how much are their closing costs. Typical buyer side closing costs range from 2%-3% of the purchase price as a rough rule of thumb. The biggest buyer side closing costs is the loan, so if the purchase is all cash your closing costs may be as little as 1%.
Buyers ask if they need to pay for the buyer’s agent real estate commission. The answer is no you don’t, all real estate commissions are paid for by the seller. This is great for you as a buyer because it lowers the amount of cash you need to buy a property, but keep in mind you will have to pay both commissions when you sell. I say that it averages out to half a commission each transaction, but it is loaded on the backend.
With some deals, if you are running short on cash, and it’s a slow market, you may be able to work out a deal with the seller to help pay for your closing costs.
At closing, Escrow prepares a HUD-1 closing statement, which is all the actual closing costs. It is a good idea to review the HUD-1 to make sure everything is correct.
Here is the breakdown of the different buyer side closing costs:
You’ve completed your final walk through and signed the loan documents and wired cash for the remaining balance of the purchase price. The loan has funded, and the deed has been recorded.
Congratulations, you have just closed!!
Once the deed has been recorded, You are officially the new owner of the property.
Here are some things to do now as the new owner:
Pick up the Keys
The listing agent will hand you or your agent the keys (gate keys, house keys, mailbox keys), garage door openers, remotes, and anything else that passes along with the property. Sometimes organized sellers have the manuals for their appliances and equipment and will leave these too.
Bert from ALL LA Key Service 818-558-5083
Every Realtor recommends rekeying your property after you close because there is no telling who has a copy of the old keys- a neighbor, a friend or relative of the previous owner, a contractor that has done work on the property, who knows. Also, if the property was on a lockbox while it was for sale, anybody with the lockbox combination had access to the keys while the property was on the market and could have made a copy. Perhaps the property was rented at some point by the previous owner before they sold it and some ex-tenant out there somewhere has a key. The only way to be sure that your property is secure after you close is to change or rekey the locks. Expect to pay about $400-$500 for this service
For a smooth move in, try to avoid closing on Fridays or near the end of the month. Public utility companies work business days M-F, not on the weekends or holidays. The typical time to start new service is 2-3 business days. If you close on a Friday, the earliest you can start new service is Tuesday or Wednesday. Not fun to live with no hot water, no heat, no light, no stove, and no power for 4-5 days.
Most people move the 1st of the month. If you are trying to start service during this time, expect to add 2-3 days in delays because it is busy. Avoid closing at the end of the month, there will be less wait time to start new service.
There are two major providers of electricity in Los Angeles- The Department of Water and Power (DWP) and Edison. The DWP services the city of Los Angeles, and Edison services the county and some of the incorporated cities.
Gas is harder to turn on than electricity because the gas company is liable for gas leaks. It is not just a simple matter of flipping a switch and reading a meter. When the Gas Company turns on the gas, they must test every gas appliance for leaks. It takes about 30 minutes to check everything.
This picture shows a gas meter with a lock. When the gas is shut off, the gas company places a lock on the gas valve so that it cannot be turned back on. If you see this lock, then service is disconnected and you will need the gas company to come out. As a side note, if the gas company comes to a property to read a meter, and the property appears to be vacant, they are required to shut off the gas.
The Peak season for gas companies is Nov 1st – April 30th, you will have longer wait times to set up service during the winter months, instead of 2-3 business days, expect 4-5 business days. The worst week to set up service is around January 1st because they get a very big backlog from all the holidays around that time so plan for extra time in Late December, early January.
If you need a gardener or pool man, I like to start by asking the seller who they are using and if they are good. Many times it is easier to just continue using the same gardener and pool man. Make sure to ask how much they are paying each month- I know from experience that pool and gardener prices sometimes go up when there is a new owner so it is a good idea to check how much the seller is currently paying as a reference. If you don’t want to use the seller’s people- then ask your real estate agent, friends, or new neighbors for a referral.
What is my Trash Pickup Day?
You can look up your trash collection day on the Los Angeles Sanitation Department’s homepage:
You can update your mailing address with the US Post office by going to a post office and getting a change of address form, or change your mailing address online at the United States Postal Service website:
Now that the property is all yours you will want the for sale sign taken down. Most listing agents remember to take their sign down, but sometimes they can forget. Send the listing agent a reminder if they forget to Remove their Yard Sign after the close.
Special Closing Items for Condos
If you purchased a Condo, register yourself as the new owner with the property management company managing the building or the HOA. You will usually get a new owner information form along with your HOA disclosures. If the building has an intercom entry system you will want to change the number on the intercom to your phone number, and if your mailbox doesn’t have your name or unit number on it- you can add a label on it with your name.
Some High Rise condo buildings have special move-in/move-out procedures. The HOA documents should give you the specifics on those procedures before you close. Sometimes these can include a moving fee.
Before you move in all your things, it is usually a really great time for interior paint if you want to change the colors of the walls or personalize a room with an accent wall.
Hang your art
.. and finally, the Last thing to do is plan your housewarming party!!!
Fixtures are items that are attached to the property. Their presence enhances the use and enjoyment of property and they transfer upon sale to the new owner. Fixtures are part of a broader category of property known in law as real property. Think of them as “belongs to the real estate”.
Some example of common fixtures are: Garage Doors, openers and remotes, Wine Coolers, Video Projectors + Screens, Dishwashers, built-in speakers and sound systems, Recessed Lighting, Baseboards and Molding, HVAC systems, Fireplace Screens and Fake Logs, Pool equipment, Chandeliers, Gates, Sheds and Fences, Security Systems and alarms, planted landscaping (but not potted plants), and Window Coverings such as blinds, Shutters and curtains (however be sure to specify curtains in writing!)
Fixtures are not personal property (which is not conveyed). Personal Property “belongs to the owner”. Personal property is anything that if you turned the house upside down and shook it would fall out. Some examples of personal property are Flat Screen TVs (what about the Flat screen TV wall mounts?), Safes, furniture, rugs, kitchen utensils, food, bicycles and cars, clothing, pictures and paintings etc.
As you can imagine, differentiating between fixtures and personal property can get confusing!
For agricultural properties like an orange grove- the Orange trees are considered fixtures, but the oranges are personal property.
A lamp is personal property, while a ceiling fan is a fixture.
Keep in mind that everything in real estate is negotiable. Personal Property, like furniture, or even a car, can be included in a sale, and fixtures can be excluded from a sale.
Sometimes sellers will want to exclude a fixture from the sale. I recommend to sellers who want to keep their curtains, or chandelier, or washer dryer, or whatever- to just removed them before they list if possible, and replace them with a comparable substitute. That way the buyer won’t see it and fall in love. So there is nothing to argue about. Communication is key. If you clearly communicate exclusions and inclusions that is the best way to avoid hurt feelings and disputes.
The biggest issue I see with fixtures is when buyers expect a fixture is included in the sale, to discover at their final walk through that the fixture has been removed without their approval. This can really sour a deal. Remember in Real Estate, disclose, disclose, disclose. If you are unclear about what is staying or going put it in writing.
Paragraph 8 of The Residential purchase contract specifies inclusions and exclusions. There are special boxes given for the big appliances since they are expensive, and movable, so it is good to indicate if the Fridge, Stove, and Washing Machines are part of the sale.
Not sure if something is a fixture?
M-A-R-I-A is an acronym for the legal test the State of California uses to determine whether an item is considered a fixture or personal property.
Method of attachment. Is the item permanently affixed to the wall, ceiling or flooring by using nails, glue, cement, pipes, or screws? Would removing the item damage the property? Even if the item is easy to remove, it may still be a fixture.
Adaptability. If the item becomes an integral part of the home, it cannot be removed. For example, a security system. One could argue that custom designed appliances such as a Miele wine refrigerator can be considered a fixture, although it can be unplugged, because it fits inside a specified space.
Relationship of the parties. Buyer to Seller, Landlord to Tenant.
Intention of party when the item was attached. When the installation took place, if the intent was to make the item a permanent attachment, for example, a built-in bookcase, the item is a fixture.
Agreement between the parties. Whatever is written in the Contract rules. If there is nothing in writing, it is not possible to prove the intention of the parties.
Special Notes for Tenants and Buyers- I never recommend to improve a property you do not own. Sometimes buyers will get excited in escrow and start ordering custom drapes, or hire a contractor to do some work. Tenants sometimes will work out “deals” with their landlord to reduce the rent in return for them to upgrade an appliance, or remodel. If the buyer doesn’t close, you are out of pocket for the money spent. For tenants, if they pay to install a fixture in a landlord’s property and get nothing in writing, they will probably have to leave it when they move. Be extra careful when purchasing tenant occupied property to ask the tenant what is their property and what is the owners. Finding out who owns what can save yourself a lot of headaches later on.
‘Multiple offers’ situation is when a listing has received more than one offer. Multiple offers are common during seller’s markets but can happen in any market. Multiples are more prevalent in big cities like Los Angeles where there is higher demand for real estate from large economies and global investment.
-I keep losing Multiple offers- how do I beat the Multi-offer Blues?
Why are there multiples?
Whether a listing gets multiple offers or no offers depends on: the property, market conditions, and listing strategy.
Every real estate location is unique. No two properties are the same (but they can be alike). There is no ‘perfect property’ that every buyer wants AND can afford to buy. To revamp an old saying- Beauty is in the eye of the buyer. Even if you have $10M to spend in Los Angeles, there are still going to be compromises. Properties meet peoples needs. Properties that appeal to the broadest base of buyers will be the easiest to sell and have the highest demand. Affordability can play a big part. For properties that are entry-level or middle of the market, they will receive more offers than luxury properties because there are more buyers plain and simple. Properties that have ‘issues’ or as I like to call them “quirkiness” – tend to be more difficult to sell and get fewer offers. For open-minded buyers who don’t fuss, these properties can be great opportunities. What they may lack in one department they may make up for in spades in another. A classic example is a busy street in a better neighborhood. For buyers who are not as sensitive to noise, they can trade noise for a more desirable location and stay in the same budget. Some other property turn-offs for potential buyers are: Power-lines in the view, crime, no parking, stairs up to the house, lack of natural light, small lot size, odd floorplan, the house looks ugly (not all houses are destined to win a design award- the ugly ones usually make up for it by being larger in size with low price per square foot). With a little creativity, any challenge can be overcome. One of my many real estate mantras is: Everything sells. Everything sells.
The current market conditions affect the likelihood of multiple offers. In Los Angeles, the real estate market goes through a full cycle every 7 to 10 years. The market goes through three phases- Buyers Market, Balanced Market, Sellers Market. When the market is a buyers market, there are more listings than buyers, and inventory is high and days on market are long (typically 6 months to a year). Property values decline in buyer’s markets and multiple offers are rare. In a balanced market, inventory and buyers are fairly balanced, and the average number of months to sell is 3-6, and prices are fairly stable. In seller’s markets, things really speed up. Listings can sell in one or two weeks and garner 5 to 10 to 20 or more offers. The most offers I have ever heard of on a property is 100. I would not want to sort through that pile of offers. Prices are going up in Sellers Markets as buyers compete with each other for a limited supply of properties. Multiple offers are very common during seller’s markets.
Some areas of Los Angeles like the Eastside, or the Valley, and Fixer-upper Properties too, regularly price properties 5% to 10% below market to encourage multiple offers. New buyers to the market are sometimes confounded when they make a full asking price offer, to not even receive a counteroffer from the seller! Once you are looking in the market for a month or two, you will have a good idea of what prices listings are selling for versus listing for in your neighborhoods, and whether a property’s list price is high or low. Listings that are priced low appear like great deals and get buyers excited- but don’t be fooled! A lot of times with the pricing under market strategy, the listing price is just a teaser price. On the Westside, it is very common for listings to be listed for 5 – 10% over the market price. Sometimes even as high as 20%! When listings come on the market that are overpriced, they tend to sit around for a while until they have a price reduction or the market catches up to them if it is going up. It can get very weird with these high priced listing. They can sit for months with no offers, and then all of a sudden have multiple offers. One sophisticated Westside socialite once told me- “the Higher the Price- the Higher the Offer!”.
What does Multiples Offers mean for the buyer?
Multiple offers means paying higher prices. Buyers competing with each other raises prices. As a general rule, the more offers a property receives; the higher the final sale price. If a property is listed for $600,000 and has three offers, it might go for $625,000 or something like that. If that same $600,000 listing gets 10 offers, maybe it will sell for $650,000. If that same property has 20 offers, maybe it will sell for $750,000 or even as high as $800,000, there is no telling.
First showing on R3 Property in Hollywood with multiple offers
Will the Seller send me a Multiple Offer Counter Offer?
In my experience when a seller has two or more offers, they usually send a multiple offer counter offer. For buyers, their first offer is rarely their best offer. Sellers want the highest price, but they also want to treat everyone who submitted an offer on their property fairly. By giving everyone who wrote an offer an opportunity to make their best and final- everyone has an equal chance to put their best bid forward.
When the number of offers gets high, around 10 or more- there is a lot of work involved with preparing counteroffers. Usually, the seller will pick 3-5 of the best offers to counter and reject the rest. It is very important if you think it is likely to be a multiple offers situation to put a strong offer forward first. It may be scary to write an offer in the dark above list, but if you write too low, you may not be considered. Of course, if the price goes outside of your budget or what you are willing to pay for the property, then the point is moot.
What can I do to stop the listing agent from “Shopping my Offer”?
Listing agent’s love multiple offers. Nothing feels better for a listing agent than showing their sellers what a good job they are doing for them by meeting with them and presenting multiple offers. Some listing agents, when they receive their first offer, will try to create multiple offers by notifying every real estate agent and buyers who saw the property that they have received an offer.
Every real estate agent does things different. Some agent’s will appreciate a strong offer, and not shop it because they don’t like playing games. Others, will act like the town crier and march around town square with a bell in one hand and the offer in the other hand yelling at the top of their lungs “I HAVE AN OFFER!” for anyone drunk or sober to hear.
One way to combat shopping offer syndrome is to write a short expiration on your offers or ‘response due upon presentation’ clause. The default expiration time for an offer is 3 days, shortening the response to 1 day can create some urgency. Unfortunately, if it’s a very strong seller’s market and the listing agent knows it they usually won’t be swayed. Sellers don’t need you. They have plenty of buyers vying for an opportunity to buy their property, so in these markets, you don’t have as much leverage.
If you know the listing agent has loose lips and you don’t want them spilling the beans about the details of your offer, try to submit your response right at the deadline. That way, anyone calling before to fish for information on the other offers, won’t get an extra information about what you are up to.
Should I write a complete offer?
Absolutely yes. If your offer is not accompanied by documentation backing it up it will be thrown in the trash. If you are planning on financing the purchase make sure you include a preapproval letter, and have a bank statement or stock account to show proof of funds for down payment and closing costs. I also strongly recommend writing a cover letter.
What should I expect to see in the sellers Multiple Counter Offer?
Seller Counters always say something about price. Usually seller’s don’t specify a specific price but instead, ask for the buyers “best and final” offer. This can be frustrating for buyers because buyers just want to know how much it is to buy the property and don’t want to play a guessing game. But, the seller honestly doesn’t know. It is not up to them. It depends on the buyers, and which buyer is the highest bidder.
The counter-offer usually gives 2 or 3 days to respond, so there is some time to think it over before making your best and final bid. Most of the time the seller will not accept an offer before the counter offer deadline has passed. In rare occasions, a counteroffer will come back so strong that the seller is convinced there will not receive a better offer and they just accept it.
A less popular counter offer strategy for sellers with price, is to put the price of the highest offer the seller has received “or higher”. If I was the highest offer, I wouldn’t be happy. It feels a lot like the seller is using the highest offer to provoke other buyer to pull off an upset. Why make the strongest offer feel like they are being abused, when they are probably the most likely to tender the highest offer?
Sometimes the seller will just counter all the offers with the price they want if all the offers they have received are short. This can happen when a seller listed their property low to attract multiple offers but the offers didn’t get high enough for them to get the price they wanted, or they decided once they received a bunch of offers, that they want more money. As a buyer, I would doubt the sellers motivation to sell when I see this term appear in a counter offer, because the seller is trying to dictate to buyers how much to pay. It can work, if a buyer is willing to pay that price. It can also backfire and make buyers lose interest in the property if they feel the seller is unreasonable or unrealistic.
Sellers asking for “best and final” is the norm. I advise buyers faced with this difficult situation, to ask themselves “what price would you offer and if you didn’t get the property you would not be upset”. Then if you lose in multiples you don’t have to second guess yourself or feel regret that you should have big higher.
In multiple offer situations, the seller not only can go for a higher price but also can try to improve the sale terms as well.
Sellers usually try to reduce or eliminate buyer contingencies. There are three main contingencies in buyers offers: Inspection, Appraisal, and Loan.
The Inspection Contingency timeline, by default is 17 days. Multiple offer counters will reduce this to 10 days, or in some cases as little as 7 days. Some sellers will try to write in “sold as is” language into their counter to discourage buyers from making a request for repairs. If there are no presale inspection reports, this clause is pretty flimsy. However, if the seller provides a full bevy of different inspection reports, they are expecting you to factor any of the problems found in the reports into your offer price and not to ask for a credit or repair for them later.
Appraisals are another point of contention. What is the point for the seller of getting buyers prices up, when the buyer will ask for a lower price when the appraisal falls short. In strong sellers markets where prices are rising quickly, appraisals often do fall short. The seller wants to know that if the appraisal falls short the buyer will cover it. It is not uncommon to see sellers asking for the appraisal contingency to be removed. No Appraisal happens a lot during boom years when the market goes up 10% to 20% a year.
The General Inspection is the most important inspection, always get one of these. Your general inspector will recommend any specialty followup inspections (Foundation, Mold, Chimney, Drainage, Roof, Plumber,HVAC) if they feel that they are warranted. For Houses I recommend Sewerline Inspections and Permit Reports too, and if it has a chimney, and chimney inspection also. If you smell mold or there is evidence of water damage or you have bad allergies, a mold inspection might be a good idea. Surveys and Geological Inspections are for hillside properties. Tree inspections and Soil Tests are for builders.
Some buyers are overwhelmed when they first receive their inspection report, these inspection reports usually average 30-40 pages. Keep in mind, that if the inspector doesn’t find anything wrong with the property- it looks they are not doing their job! An inspector is going to point out every single thing they find wrong with the property. Don’t be discouraged by the report, chances are it is still a good property.
Remember when I said houses aren’t perfect? Minor things such as cracked sidewalks that might be a trip hazard,
This sidewalk is a trip hazard. Property owners are responsible for maintaining the sidewalk, not the city!
dirty air filters:
Example of an inspection report – dirty filter, this is very common
doors that don’t open or close properly, loose tiles, a hairline crack in a sink or mirror, old but functioning water heaters or air conditioning units, sticky windows that are difficult to open and close- these minor problems you have to put up with as a buyer. The older the house, the more of these types of problems you can expect.
Inspections are for finding major defects, such as a cracked foundation,
active termite infestation, leaky roofs, broken sewerline, eroding hillside
Illegal drainage, this hillside is getting an erosion scar from a small amount of water
Should inspections uncover a major defect, there is a process known as request for repairs that allows the buyer to renegotiate the price with the seller or request for the seller to make the necessary repairs.
The inspection contingency begins the day after Acceptance and is measured in calendar days NOT Business days.
Paragraph 14 Purchase Agreement
The default contingency period is 17 days, which is plenty of time to complete all inspections. I would be very careful with inspection contingency time period of less than 10 days. With that short of an inspection contingency, you may not be able to complete all of your inspections within the contingency time period. Inspection companies tend to be very busy, and they need a few days advanced notice to book an appointment and a few days afterwards to write their report. Inspectors work Monday through Friday, and might squeeze a Saturday inspection on occasion. If the general inspector finds a problem that requires an additional specialty inspection or a construction estimate/bid you will need extra time to contact contractors and experts to give you an estimate on how much the work will cost. That takes time too. Add a weekend in there and your 10 days is up!
It is customary for the buyer to pay for all inspections except the termite inspection (paid for by the seller).
I strongly recommend, being present during inspections or have your real estate agent there in your place.
Contingencies are an escape plan, like a fire escape, if something goes irreparably wrong during escrow. Before writing an offer, buyers sometimes become quite macabre, and start thinking up doomsday scenarios about their deepest home buying fears coming true. What if the roof leaks? What if there is an earthquake during escrow and the property is destroyed? Do I still have to buy it? What if I lose my job and can’t qualify for a loan? What if the property doesn’t appraise?
Contingencies allow a buyer to cancel an escrow for specific reasons without breaching the contract. Which means, after canceling, the buyer’s earnest money deposit is returned to them safely.
Why are Contingencies Important?
As long as there is even (1) one contingency, the buyer may cancel the transaction for the contingency reason and have their earnest money deposit returned. Once all contingencies are removed, if the buyer doesn’t close- the seller may keep the buyer’s deposit as liquidated damages- OUCH!
There are THREE standard Contingencies in the Purchase Agreement: The Inspection Contingency, The Appraisal Contingency, and The Loan Contingency.
The inspection contingency protects the buyer if there are defects in the condition of the property, like a bad foundation, termite damage, sewer line replacement etc. During the inspection contingency, this is the time in escrow where a buyer hires a professional inspector to evaluate the property. If the buyer finds a big problem they can either cancel the deal or try to work out an agreement with the seller with a request for repairs.
The Inspection contingency is the broadest contingency. There are no precedents for what the buyer may or may not find “satisfactory” in regards to the condition of the property. The buyer is not even required to hire an expert, they can find the property unsatisfactory from their own inspection. The inspection contingency becomes even more broad to apply not only to the physical condition of the property but also “and any other matters affecting the property”.
Most realtors (including myself), tell our buyers “as long as you have your inspection contingency in effect, you can cancel for any reason”. You are supposed to exercise this contingency in good faith and have a legitimate reason to cancel – but there is no test for good faith or punishment to enforce it even if it isn’t acting in good faith (one reason for bad faith- another property came on the market that I like better). Cancel for any reason? Not exactly a comforting thought for sellers. Many a seller has lost a nights sleep over the inspection contingency. Understandably, sellers are always anxious to remove it.
In Buyer’s markets, the inspection contingency is the standard 17 days which is plenty of time to complete all investigations of the property. Remember, some of the buyer’s investigations depend on information provided by or obtained by the seller, so if the seller drags their feet on providing their disclosures (TDS, SPQ, Prelim), ordering the city 9A report, or ordering HOA Docs for condos, this can make the inspection contingency late. Once a buyer receives a disclosure they have a couple of days to review it.
In Sellers Markets, where multiple offers are common, sellers can improve the terms of the sale by reducing the number of days for the inspection contingency. They usually want 10-14 days (but sometimes they even try to chop it down to 7!). 10 days is just barely enough time to get everything done. Keep in mind, most inspectors don’t book inspections on Saturday or Sunday, and they are booked a few days in advance. Couple that with the fact that they need a day or two to write their inspection report and you have already spent 4-5 days.
If the buyer’s inspection turns up a problem that requires following up with a professional or specialist, and you will need more time for follow up inspections. Anything less than 10 days, is very short and will be very difficult to complete on time. If the seller as for less than 10, hopeful they have some presale inspection reports to provide the buyer to give them a head start.
Expert tip: If you know you are going to have a short inspection contingency (because the counter offer says so), book an inspection before you respond with your best and final and have an accepted offer. That way you don’t waste the first few days of escrow if your offer is accepted. If you offer is not accepted, you can cancel the inspection that you prebooked. As a courtesy to my inspectors, I tell them I am doing this.
2.) Appraisal Contingency – 17 Days
CAR Purchase Contract 3.I
For buyers getting a loan to buy a property, they will want an appraisal contingency to go along with their loan contingency. Lenders will complete an appraisal in the first week or two of escrow. If the appraisal comes in for less than the accepted offer amount- then that can be a problem. You can always request for the bank to do another appraisal, or ask for a reconsideration of value, but in my experience appraisers rarely change their value- and if they do, it is only by a very small amount. In my experience, it is easier to switch lenders and start the loan process all over again, then it is to get a higher appraisal!
Let’s suppose you are in escrow for $500,000 planning to put 20% down, which is $100,000 and the appraisal comes back at $460,000 and now there is a $40,000 gap. There are a few things that can happen: 1)The seller can lower the purchase price to the appraisal price and everything is fine. Buyers will argue that if the bank says the property is only worth $460,000 – it’s only worth $460,000 and why should they pay more? 2) If the buyer wants to buy the property regardless of the low appraisal, the buyer can come up the difference. The Bank is still willing to loan on a value of $460,000. The buyer could stay with 20% down and on the $500,000 purchase price the bank will loan $368,000 on the $460,000 value, and the 20% down payment is $92,000- which the buyer adds the $40,000 difference so that they are now putting $132,000 down (if the buyer has the cash to bring to the deal). If the buyer doesn’t have the cash, they could change the financing and put less down so that they have more cash to pay the seller. They could change from a 20% down loan to 10% down, then the bank lends $414,000 and buyers downpayment is $46,000 instead of $92,000, and they use the extra 10% just to pay the seller- a negative to the buyer will have PMI if under 20% down or 3) the buyer and seller can try to negotiate the difference and if they can’t come to an agreement cancel. Whatever happens, the appraisal contingency protects the buyer if the appraisal comes in short.
1.) Loan Contingency – 21 Days
CAR Purchase Contract 3. (J) 3
If the buyer needs a loan to purchase the property and the bank denies them, this contingency allows the buyer to cancel at no fault. In Sellers Markets financing loosens and loans move quick. I have several lenders now who can approve buyers (DU approval) before they even write an offer! In Buyers Markets, or with big banks with lots of red tape, getting loan approval can take 25 days or more. Loans are being done in 30 days now, but just a few years ago they were taking 45 days as the banks were really scrutinizing every detail. This contingency takes the longest, and is usually removed right before closing.
With Loan contingencies, you can specify a maximum interest rate that a buyer is willing to pay.
I hardly ever fill this out, but you should, because it protects buyers from a sudden increase in interest rate. If you leave it blank the interest rate is just assumed to be prevailing market rates. Let’s say the interest rate is 4%, you usually pad the current interest rate an acceptable amount, maybe 4.25% or 4.5%, because rates do change. If the rate shot up overnight to 6% or something, the buyer would not be obligated to take such a higher interest rate loan than what they intended.
Q: Are the days for Contingency Calendar Days or business days?
A: Calendar Days.
Q: I didn’t remove any contingencies, can I still close?
A: Yes, you may close with contingencies in place. This sometimes happens with inexperienced listing agents, they don’t understand how important it is to remove contingencies to protect their seller. There is nothing that says you can’t close with any or all contingencies still in place. I have had buyers who have done this before.
Q: I am over my contingency period, is the contingency removed?
A: In the old days, contingencies were removed by passive removal. Passive removal means contingencies were automatically removed when the contingency expiration date written into the purchase agreement lapsed. As you can imagine, this led to many lawsuits!
Today contingencies are removed by active removal. To remove a contingency or contingencies the buyer must do so in WRITING by signing a Contingency Removal form. It’s one page. As long as the contingency removal form has NOT be signed, the contingency remains in effect, even if the contingency period of 17 days or whatever it was in the contract has passed. You can remove contingencies one at a time, or remove all contingencies except a specific contingency, or remove ALL CONTINGENCIES with this form.
Q: Are there any other kinds of contingencies?
A: Yes, some other contingencies: Sale of Other Property, if you need to sell a property first to buy the new one. Short Sales and Court Approved sales are contingent on the bank or the courts approving the sale, Sellers can also accept buyers offer contingent on them finding another property. Contingent on interior inspection is common with tenant occupied property. For large commercial deals that may require investors, syndicates might have a contingency period to raise the capital to close the deal.
In real estate everything is negotiable, so you could just make up a contingency. One of my clients wanted to make their purchase contingent upon their parent’s approval. Just remember, you don’t want to go contingency crazy because contingencies weaken offers. Most of the times you just want to stick to the basics. I don’t like adding weird contingencies to offers- the Inspection Contingency offers plenty of protection for as long as it is in effect.
Q: I want to exercise my contingency and cancel, is there any cost to doing so?
A: You will get your earnest money deposit back, but there are some costs associated with canceling escrow. Any money spent on inspections or an appraisal will not be returned. Sometimes, if the escrow was very far along, escrow may change a $300-$500 cancelation fee.
Q: I have removed all my contingencies, but I no longer want to close, can I still cancel?
A: Yes, you can always decide not to perform. As a buyer, liquidated damages does protect you, because the seller may only seek damages in the amount of the earnest money deposit and not more. Sometimes buyers just change their mind. Other times there is a hardship that prevents them from performing, like a family emergency. If you do cancel, you may lose your earnest money deposit. Sellers are people too, and if you are canceling because of a hardship rather than a changing your mind, sometimes they will just give you your earnest money deposit back, and find a new buyer.
Unfortunately for sellers, they don’t have contingencies (unless they add one), so If they change their mind or have a hardship, they are still required to sell. If they refuse the buyer could seek specific performance and get a court order to make them sell. The Residential Purchase Agreement is a very buyer favored contract. The state believes for residential transactions, that the seller is a Wolf and the buyers are sheep, and that the buyer needs to be protected from the seller.