There are two main aspects to every offer. The first aspect is the offer amount (=money from buyer). The second aspect is the “strength” of the offer.

Offer Amount

This is very straightforward. No matter how the buyer comes up with the money, the title company will receive the agreed upon purchase price from the buyer / lender / salty loan shark, and distribute the money to all the people to whom the seller owes money in relation to the property and transaction, then the remaining money to the seller. For the amount, it does not matter where the money comes from, it is all the same money to the seller at closing: dollars $$$.

The amount that reaches the seller depends on the seller’s situation, and can be estimated with a Net to Seller, example here. It does not depend on the source of the buyer’s money nor what the money is labeled within the offer.

The only way that an offer of the same purchase price can yield less or more to the seller is if there is another specific amount written on the contract that obligates the seller or buyer to pay something at closing. The most common example of this is, for example:

“Seller to contribute $2000 toward buyer’s closing costs and related fees.”

Let’s compare two offers.

Offer A: $150,000 / $2,000 in closing costs.

Offer B: $148,000 / $0 in closing costs.

Offers A and B are equal in amount because in offer A – though higher than offer B – the title company will distribute $2,000 from the seller’s funds to the buyer at closing. Offer A might be slightly more attractive to the buyer because the buyer brings less cash at closing because of the money being “kicked back” by the seller. To the seller, these offers are essentially the exact same.

Other common examples are when the seller pays for a warranty on the house, usually $500-$600 to a warranty company, or perhaps the seller agrees during the remedy period to pay for some defect that was found on the inspection.

Offer Strength, The Cash Continuum

“Cash is king,” so cash can get you good deals! … This is true, but there are many factors that influence a seller’s decision of whether to accept an offer or not, or which offer to accept if there are multiple. From strongest to weakest, here are the types of offers that a seller can receive, why they are strong / not as strong, and also which types of sellers consider which aspects of offers. Imagine you are the seller in this case and you are receiving multiple offers of the same amount, but with different strength factors:

Strongest

Cash, “As-Is,” No Inspection

This means that the buyer accepts the house in its current condition. The seller need not so much as set foot on the property again, only give the buyer agreed amount of time to arrange his funds (1-3 weeks usually), schedule a closing, then sign the deed to the buyer and receive the money.

Sellers who care: this matters most to a seller who is selling a house for which most banks won’t issue a loan. For example, when floors are not installed (sub-floor exposed), banks often will not lend even if the house would clearly be very valuable with just $2,000 worth of carpet installed. Complete rehabs want cash buyers because they don’t want to wait for the buyer to convince a construction lender’s slow bureaucracy to finance his project.

Sellers who don’t really care: cash is always strong, but for example when a seller is selling a house that is almost brand new, built by a reputable builder in a neighborhood where 3 similar houses have sold recently after passing inspections for near the offered price, the seller doesn’t really care where the money comes from. A cash buyer might be able to close faster, but it is only a difference of a few weeks at most.

Strong

Conventional Financing

This means that the buyer has been pre-approved for a standard loan. Most banks can close within 30 days, and require an appraisal. The appraisal is the primary risk to the seller, and the seller might also care about time to close. Sellers usually prefer banks that specialize in mortgages as opposed to “big banks,” but on a normal deal, either bank will close within 45 days at the most, and usually within 30 days.

“The Cash Continuum”

As we progress down this list, the buyer is bringing less and less of his own cash to the table. More cash is a stronger offer, so sellers are more likely to accept, and also as a general rule, the more cash you bring, the better deal you get from the lender. Most people know about the cut-off at 20% down, where the lender does not require the buyer to purchase Private Mortgage Insurance (PMI), but 20% down is just one of several levels. 10% down gets a slightly better deal than 5% down. “No money down!” loans exist, but they are expensive like credit card loans. There are deals above 20% as well. Banks will often give slightly lower rates to buyers who can bring 30% or 40% down. Most people don’t even consider purchasing with cash only, but still the more of your own cash you bring, the less risk the lender is taking, and the better deal you get.

Not as Strong

FHA Financing

This means that the buyer is getting a loan with help from the Federal Housing Administration. The FHA is a government entity and has inspection requirements and bureaucratic paperwork to complete. These often take more than 30 days, carry risk to the seller, and require more work from both parties to complete. FHA loans are therefore less attractive to sellers and considered weaker offers.

Contingent on the Sale of …

This means that the buyer can only complete the contract and purchase the house if the buyer sells his house first. Agents often advise sellers to turn down these offers (while encouraging the prospective buyer’s interest as much as possible), and remain on the market. However, sometimes sellers will take the chance and accept such an offer for an attractive price (this means it costs the buyer money).

Another option for the seller is to include an “Escape Clause” in the contract that says the seller still has the option to escape from a contract and accept another offer if a second buyer comes along while the first buyer tries to close the sale of his house. Click here for an explanation of the types of contract contingencies / MLS status.

Click here for all real estate posts on this site.

This is the continuum of how “in contract” a house it.

Imagine you are a buyer looking at houses and you want to know how available a house is based on its “MLS status.” In order from most available to least available, here they are:

Most Available

Active

• The seller advertises that he will sell for the listed price. Make an offer!

Back on the Market

• Same status as active, but the house was previously in a contract that fell through for some reason.

Active* …

*But Listed Very Low

• When the list price is clearly below market value, it has only been on the market a few days, and it is a hot sellers’ market, there could very well be multiple offers arriving to the seller, and the house will go to the highest strong offer. These usually close for near market value rather than the advertised lower price, or “over list price.”

Contingent Escape

• This means that the seller has a buyer who intends to purchase, but the seller demanded that the contract include an “escape clause” that he can “escape” from the contract if he chooses, i.e. something better came along.
• The most common reason for a Contingent Escape status is that the seller received an offer from “buyer 1” that was contingent on the sale of another house. Rather than deny the offer, the seller gives buyer 1 a chance to perform, motivating buyer 1. However, knowing that such an offer can take a long time and be very fickle, the seller wants to have the option to take a stronger offer if buyer 2 comes along to swoop the house up.
• When I want to search for just houses that are truly available, I do include Contingent Escape. These are not common, and it is better to be buyer 1, but they are likely to be available if you really want them.
• When Contingent Escape, you are buyer 2, and you have to contend with buyer 1, but the seller is not obligated to sell to buyer 1. The seller can choose your offer if he decides that it is better.

Probably not Available

“Contingent on Finance and Inspection”

• “Contingent on Finance,” and “Contingent on Inspection” do not exist separately as options on the MLS when the listing real estate agent enters status data. Therefore, when you see “Contingent on Finance and Inspection,” the seller has accepted an offer from a buyer, but the contract is still contingent on both or just one of these, finance or inspection. You do not know which without calling to ask. The agent / seller are not obligated to disclose the details of the contract.
• The seller must sell if the buyer performs.

Contingent on Inspection

• This means that the seller has a buyer, but the buyer has not yet completed the inspection portion of the due diligence. The inspection is probably the most common reason that a house returns to the market, but still is fairly rare. Either the inspector finds something unexpected that is wrong with the house, or finds something that that particular buyer will not accept.
• When this falls through: the house is in contract, and the buyer orders the inspection. The inspector lifts up insulation that covered the basement wall and sees large cracks in the concrete blocks, indicating that the foundation is shifting. The buyer is now looking at a house with a major problem that affects the sale value and the buyer’s overall interest. The seller will now probably have to go back on the market, and now officially knows about the cracks and is legally obligated to disclose the cracks to all future buyers.
• The seller must sell if the buyer performs.

Contingent on Finance

• This means that the seller has a buyer, but the buyer needs a loan and does not yet have a loan commitment. The deal is very likely to close, but there is a chance that the appraisal will be low, or the bank may do an inspection and decline to lend on the house.
• When this falls through: if the appraisal comes back below the contract price, often the buyer asks the seller to drop the price. The seller can then decline and go back on the market, accept the lower price, or demand that the buyer bring cash to cover the difference over the appraisal. The buyer is not required to brign cash unless that was written into the contract. These usually close, but in hot markets where buyers go over market value to get a house into contract, these deals fall through sometimes.
• The seller must sell if the buyer performs.

Pretty Much Sold

Pending

• This most often means that the seller has accepted a cash offer, no inspection, and is only waiting for the scheduled date at the title company or lawyer’s office to close the deal.
• When a bank / loan is involved, once a contract has progressed through the inspection and remedy period, the appraisal is complete and sufficient, and the bank has issued a loan commitment (commitment is much more than a “pre-approval”) the status becomes pending. In the most common transactions involving banks and loans, the loan commitment is not issued until just a few days before closing, so the listing agent never changes the status to pending just for a few days. These go directly from “Contingent on Finance and Inspection” to “Closed.”
• The seller must sell if the buyer performs, and the buyer is finished with due diligence. Pending houses are pretty much sold.

Not for Sale

• What it means: You can make an offer on a house that’s not for sale, but of course you have to offer enough to make the owner want to move unexpectedly.
• What you have to do to buy it: you approach the owner personally or through an agent and make an offer. The owner has to accept the offer.
• Cool story: I heard of a couple in Washington DC who lived in a townhouse worth ~$800,000. They lived in the townhouse because they had sold their house in a nearby neighborhood that was worth ~$1.5 million. It was not for sale, but sold like this. They were eating dinner one evening and they heard a knock at the door. There was a Chinese couple at the door who asked to look around the house they’d like to buy it. The owners said, “Uh, OK, why don’t you come back tomorrow at x time.” The Chinese couple returned the next day, looked around and said, “We would like to buy it ‘as-is,’ with the paintings on the wall, furniture, everything, all included, how much?” The owners consulted with a real estate agent and a lawyer, and asked for $2.5 million. The Chinese couple agreed. Sold! for an extra $ 1 million. The Chinese couple’s daughter was attending a nearby university and they wanted a place to stay while they visited.
• There are also companies that make offers on houses not for sale from distressed owners. “Cash for your house!”

Click here for all real estate posts on this site.