Why You May Want to Turn Down the Best Offer

“Wait! You mean turn down extra money?”

Sounds crazy - but picture this:

You’ve listed your home and receive two offers that stand out above the rest:

• Offer #1 is 40k over the asking price.
• Offer #2 is 50k over asking.
• Both offers are firm (no conditions) and the same in every way other than the price.

Slam dunk, right? Take that extra 10k and plan that family trip to Disneyland (or turn it into 50k in Vegas - your call).

But what if the best offer is actually the worst offer?

Let me explain:

When bidding wars are prevalent, as they are this year in Kitchener-Waterloo-Cambridge, it’s increasingly common to see homes sell for well over asking price.

The concern with this? The bank/lender's appraisal. Upon appraising the home, the bank may determine that the selling price is higher than (what they determine to be) market value. If this happens, the buyer will face some complications:

• They can now only borrow based on the lower appraisal value, not the selling price. The buyer can't borrow as much as they may have planned.
• Since the max mortgage amount is now lower, the buyer may need to come up with extra cash to make up the difference between the bank's appraisal value and the selling price.

And there’s the main issue: CASH.

If the buyer has pushed their financial limits to make a winning offer and doesn’t have cash on hand to make up a potential 10-20k (or more) shortfall, they may not be able to finance the home and, therefore, close.

What’s worse: you, the seller, may not know if there’s a financing issue until closer to moving day (it depends on when the appraisal is done). At that point, all the buyers who made offers on your home have moved on; you’ll have to start from scratch, which could cost you A LOT more than 10k.

How do you prevent this?

If you plan on accepting an offer that is well above asking price, your Realtor needs to know a few things:

The state of the current market. If the offer you’ve received is much higher than comparable sales in the area, your home is more likely to be appraised below the selling price. This isn’t a guarantee, but it's a warning sign.

The buyer’s financial flexibility. Your listing agent should inquire about the following:

• If the buyer can make a larger deposit. If they can't get the funds together now, it's unlikely they'll be able to in a month or so.
• The amount of the down payment. If the buyer is only putting down 5%, they are 1) likely near their borrowing limit and 2) unlikely to pull together additional funds. These buyers present a higher risk, even if they've submitted a firm offer.
• Their ability and willingness to borrow more. Even with a 20% down payment, is the buyer approved for a higher mortgage amount? Are they willing to stomach a mortgage insurance premium they didn't intend to pay? While buyers can use a portion of their down payment to make up for a cash shortfall, they will in turn need to take on a higher mortgage, which they may not want - or be able - to do.

As you can see, determining “the best offer” goes beyond money and conditions. While selling for the most money possible is a priority, it’s even more important to make sure the deal actually goes through.

This is why, based on the information obtained by your listing agent, you may (smartly) opt to turn down the "best" offer.