Three Mistakes Devouring Home Selling Profits Today.

Market conditions are fluid. We’re all familiar with seasonal, supply and demand, and consumer confidence changes that swing the pendulum of advantage between buyers and sellers of goods or services. 

We consider today, 9/21/2021, to be a Seller’s Market in the Madison, WI area. But that’s a large geographic area, and within that area are thousands of mini-markets with more or less potential to increase your profit and decrease risk when you put your home up for sale. 

Profit. 

We hear about people paying over the asking price to get offers accepted. Those offers increase the profits of home sellers beyond their expectations. Would you care to know even when you get a bid over the asking price, you may not be getting the maximum profit available? How much, you ask? I will show you:

  1.  Promise to Pay a Set Commission to a Buyer Agent. Ninety percent of sellers in a non-scientific review I made recently reported that they paid a buyer agent a 3.0% commission to represent the buyer who purchased their real estate. Three percent is a high-water mark that’s been around for decades, with few exceptions. The most costly mistake home sellers make is promising to pay a set fee of 3.0% when they sign a listing contract, which is well before the day they see any offers. Homeowners who offer 2.0% to a buyer agent and reserve their opportunity to negotiate a higher rate will most likely increase their profit by decreasing their selling expenses. A four hundred thousand dollar house has at least $4,000 of commission to negotiate in favor of the homeowner. 
  2. Agree to fees that the seller always pays. Offer to purchase forms and contingencies are pre-written for convenience. Buyers and sellers have some expenses related to financing, closing, and transferring ownership. In a regular or buyer’s market, the buyer gets off easy, and the owner pays most of the costs to sell. Negotiate to move expenses from you to the buyer, and you can quickly reduce your selling expenses by $2,500 to $10,000. The high costs that the buyer could pick up are Title Insurance, Transfer Fee, property tax prorations, and commissions. 
  3. Agree to Contingencies. “The rest is just standard terms.” The presentation of the offer to the home seller by the licensee or the attorney gets overlooked. Those standard terms are mostly contingencies. Contingencies are included in contracts to allow the buyer to complete their due diligence before being committed to closing. That accepted offer with contingencies is the buyer’s opportunity to eliminate competition and shift time to their advantage, setting the stage for renegotiating everything, including price. All contingencies are not crucial to everyone. As long as a person can leverage you into negotiating, the terms of your offer are at risk. Contingencies are often satisfied to the favor of the buyer by the seller making a financial concession. Two thousand dollars is a typical concession. 

Let’s do the math.  

Mistake 1. Promise to pay a 3.0% commission before seeing the quality of the Offers. $4,000 (or 1% of the sale price)Mistake

2. Agree to pay fees that the seller typically pays. $2,500 +

Mistake 3. Agree to unnecessary contingencies. $2,000

A conservative estimate of profit to be made by avoiding three common mistakes made negotiating is $8,500. I know people are making unusually high profits due to accepting offers well over the asking price. It’s not my business to decide how much profit is enough. It’s my responsibility to show you where you can make a profit, so you have the choice to determine the amount of money you keep from the sale of your home. 

These three mistakes are easy to avoid when your agent knows the contract.

Essential Real Estate Service

There are hundreds of things a real estate firm might do, but not all of the activities are for the benefit of their clients or customers. And only a few activities are services that require a real estate license. The majority of tasks done in the process of a consumer’s interaction with a real estate firm are administrative chores. A smooth transaction and satisfactory experience results when all of the work is done timely and with skill. The end result is intended to be more than just good. Because good-enough is not good-enough, the admin work is important. It’s just not essential real estate work.

The duties of the real estate broker and licensed agents are spelled out in the Statutes. Admin work is selective, the duties prescribed by law are not. The consumer participates in the chores. Hourly employees conduct many of the activities such as staging a home, pricing, photography, paper processing, scheduling appointments. Handling admin chores poorly is not acceptable, but they may be hardly of any consequence to whether or not the sale closes.

Handling the essential real estate services poorly carries tremendous consequences. If the job requires a license you can assume there are skills required, and rules of engagement. Failing to exercise skill or play within the rules can be catastrophic to the transaction’s outcome. And if not catastrophic, expensive in loss of time and money is almost certain.

We created Essential Real Estate LLC to be the firm that strives to make better use of the contracts, and negotiating opportunities for home sellers and home buyers. The advantages a consumer can experience when their broker knows the contracts and contingencies are significant. Giving away leverage because you agreed to a condition that your agent didn’t comprehend happens every day, but not with us. We make it our business to help our clients get into a commitment with well qualified, and highly committed people. We work smart to identify the people committed to closing on the terms they agreed to and separate those who aren’t.

The essential real estate work is contract work. It’s negotiations. Confidentiality is a contract and license law responsibility. Our clients should expect a higher level of attention to the work that requires a license. They should also expect to see a more satisfactory profit after the closing.

Most Offers Aren’t Rejected…they’re just unacceptable as written.

You’re never competing with multiple offers… I’ll pause while you ponder that.

When an owner has a dozen offers on the table, more often than not, they have one offer that’s acceptable as written. Even if a few of the offers have exceptional prices, at best, one offer is acceptable without requiring changes. Most offers can’t be accepted without a counter offer. Those offers aren’t necessarily rejected, they’re simply unacceptable. You don’t have to compete with unacceptable offers. As a listing agent, it’s sad to see a person lose the opportunity to own a house when, except for flaws, and poorly drafted terms, their offer was the better choice.

Contract Drafting Skills are essential in this market. They’re also not a high priority subject of education. That’s too bad. Many years ago I decided I would make sure I was never at a disadvantage to anyone…broker or lawyer, in my knowledge of the Wisconsin purchase agreements and forms. I’m not saying I know the law better; I’m saying I know what’s in the purchase agreements, what’s not, what works for clients, and what works against clients.

Acceptable Offers are easier to craft than the ones that are peppered with errors and omissions. All of my clients can’t outbid the highest bidders. But none of my clients are submitting unacceptable offers because I missed something, or they weren’t given proper choices. Rejection is a fact of life. Acceptance is the goal. Submitting offers that can’t be accepted is avoidable.

Years of experience and ability do not go hand in hand. Some REALTORS get into the field because they like houses, or like working with people. Few people are inspired to get a real estate license because they love contract work. When you’re interviewing agents to represent you, take some time to discover their contract drafting ability and comfort. If you have a choice, expect higher standards.

drafting flaws. the avoidable cause of rejection.

Beyond the price and closing date, a typical offer to purchase might include ten to thirty pages of standard conditions. Attorneys participate in building the form REALTORs use to draft purchase proposals. Attorneys know every word and every sentence, and every punctuation matter to the interpretation of the parties’ intent. Brokers, licensees, and government officials on form committees have input too. With so many cooks in the kitchen, there’s a good chance the soup they produce will have flaws. 

Given the choice home sellers are wise to commit to buyers who submit offers that can become enforceable contracts. Ambiguity is one reason for a judge to determine an agreement is not a contract. Alternative meanings the parties didn’t agree to is another. I’ve seen enough to know four out of five offers have a flaw that may render them unenforceable, or insufficient for the owner to accept. A counteroffer to clear the deficiencies or errors is unlikely when an acceptable alternative offer is in hand.  

Company Addenda are frequently modified to fit with the current versions of an approved Offer to Purchase document. The creators have the best intentions in mind. And still, the forms go into use with flaws that will cause some sellers to accept another Offer over one that would have been accepted had it not had the defect. I’ll give you a few examples from a 2020 Version of one firm’s Addendum.

  • Financing letter: Buyer shall deliver to Seller written verification that Buyer has been Preapproved for financing, which may be based on criteria such as satisfactory credit history, employment verification, buyer income, and debt ratios. 

What does the company mean by “…which may be based on criteria…”? Is the better word SHALL? I don’t know if may means, might be, or is permitted to be.  Is this ambiguous? Ask a lawyer. The answer might depend on which side is paying the legal bill. 

  • Personal Property: Parties agree that all appliances and personal property included in the sale will be in working order at the time of closing…All personal property in the Offer has no monetary value…

Check with an attorney to decide whether it is safe to prepare a document where the parties agree that personal property left on site has no value to either party. Is it logical to assume if a person wants the thing to be in working order that it does have value if it’s working? I don’t know. I have an opinion. And if the parties do believe there is value, why am I having them sign a form that says something contrary?

  • Earnest Money: If this offer is rejected by the Seller, withdrawn by Buyer prior to acceptance…then the Earnest Money shall be returned to Buyer within 3 days of rejection, withdrawal, or termination. 

A licensee must promptly deposit Earnest Money in a trust account. Let’s say a buyer submits an offer for a property and includes a $10,000 Earnest money check. An agent receives the check. The clock begins ticking on the time the broker has to deposit the check. Assume the check is received on January 11 and deposited on January 12. Later on January 12 the Seller rejects the Offer and accepts a competing offer. Buyer and Seller agreed the $10,000 will be returned by the end of the day January 15. Who has the money? The Seller doesn’t. Maybe the listing broker has the $10,000. Maybe the check has not cleared within 3 days. Can the Buyer take action against the Seller, and does the Seller have a complaint against the listing broker?

An agent who reads and comprehends the terms of the contract should catch these issues. When I present offers with suspicious terms I suggest the Seller get a lawyer’s opinion. As a broker, I will protect my firm from any complaint arising over a dispute related to drafting. These issues may appear to be small. They’re not small when they cause the Seller to move on to the next Offer. That’s unfortunate for the clients. 

Review your addenda and the addenda that comes with an Offer for flaws and ambiguity. Sure it could get cleaned up on a counter. To be the Buyer to beat, you want to be the Offer that doesn’t need fixing.

Negotiate Fearlessly. Buy your house in a Seller’s Market.

What do you think is the number one reason given to explain why the home seller did not accept your Offer? If you said price is the deciding factor, you might be right. A proposal to purchase can be 10, 20, 30 pages long. Price takes up part of one line of a standard purchase agreement. Get that one little thing wrong, and you’re going to get rejected. That is true if everything else is equal. Your Offer should never look like all of the other Offers, and a lot of the other Offers will look a lot alike. 

Exploit the FEAR advantage. Clients of Essential Real Estate have the benefit of their REALTOR’s expertise with the purchase contracts. By knowing more about you, your ability, commitment, and lack of fear, we give our clients more ideas to improve their Offer without increasing their price. Understanding the consequences contingencies have on home sellers allows our clients to decide if the contingency belongs in the Offer or not. You need to know that all contingencies are solutions to a fear somebody has. When somebody is not our client, the contingency has no place in the Offer. Something that’s a risk to me might cause me to be afraid and in need of protection. If you don’t see the same thing as a risk to you, protecting you from it only weakens your Offer. 

Change the conversation. Change your thinking. Owners are focused on price one time in the transaction; when they first review offers. Their concern for the rest of the study is the one that will keep them up at night for the next four weeks until closing. Fear of failing to close on the terms agreed upon will stick with a seller long after they commit to a price. Essential Real Estate clients receive ideas to alleviate fear for the home seller by wiping the Offer clean of nonessential conditions. We call this strategy changing the conversation. If beating others on price is not your strength, but flexibility and commitment are, we want to change the conversation from price to security and safety…for the seller. 

Competition is an Illusion. At Essential Real Estate we see our clients as the people other people have to beat. Real estate is a standardized form of business. Standardized forms make it easy even for contract averse agents to write Offers. Therefore we expect eight out of ten offers will look the same enough that when the owner says no to one, she’s saying no to all but two. At worst, you might be competing against one person. Our objective is for the best scenario. You always have some advantages to write into your Offer to make it the one everyone has to beat. We find those advantages by asking questions and listening to your answers. 

You can buy a house in a seller’s market. The talk on the street is 2021 will be another hot seller’s market. Hire Essential Real Estate as your buyer agent and expect to change the conversation to your advantage.

Real Estate is a Compliance-Based, Standardized Business…The Agent is Easily Replaced.

The more we work to standardize the real estate purchase agreement, the closer we get to eliminating the real estate licensee from the transaction. 

Programmed computers are better than humans at compliance-based work. We prove we believe this by suppressing innovation and forcing licensees to check the same boxes and write the same words in the blank spaces, with little regard for their customers’ and clients’ circumstances. To see this in action, attend a real estate training session, or sit in on a forms committee meeting. Talk to REALTORS. Ask them WHY they check this or that box, include this or that contingency, and fill in this blank but not that one. The answer is likely to be a version of “That’s the way we always do…we were taught to do that.” It doesn’t matter if they are relatively new or seasoned licensees; repetition and standardization eliminate the opportunity for customization.  

Ask the leaders of the committees assigned to revising the existing real estate forms why they choose to include standardized contingencies where there had not been one before? Is simple and the same better for the consumer? How do we know?

The Price of Simplicity

 Without thinking and customizing purchase agreements to the situation, and the parties’ personal preferences, the differentiating factor between offers is the price. And when the price is the only way to differentiate, the consumer will pay higher and higher costs. When the consumer can find something less expensive and more effective than the common real estate licensee, they will turn away from REALTORS and run to the innovative, robotic alternative surely to become available sooner than later. 

Think. Customize. Learn. Resist Becoming Trained.

When the real estate industry looks at their business from the perspective of delivering a better product to the consumer, standardization and repetition will be seen for what they are; detrimental to the consumer and the broker. Tech giants see the future of real estate is in robotics and AI. The non-thinking, box-checking licensees, will be out of work. The computers can pick the boxes to check and the words to write in the blanks, and they can do it more accurately than humans. Those who have a future as a real estate licensee will be the people who think, learn, customize, and contribute to the consumer’s better experience.    

The solution to overpaying is in the Offer.

Two lines is all it takes to include a price in an Offer. The remaining 579 are dedicated to the rules of the transaction, and the promises made with exceptions. On price alone an Offer might be judged good or bad. It’s the easiest condition to see and when it’s good, it shines like a bright star. So bright in fact that a person may overlook the essential aspects of the Offer. Rules and caveats are ignored at great peril. Price is a one-time thing; security lasts longer.

Getting the most money in the shortest amount of time is said to be the goal of home sellers, and maybe it is until we have more information. When we take the time to look at the ‘more information’ we discover that security, not price is the overriding factor in negotiations. Price being objective ($100 is greater than $50) is simple to see. Security is subjective. (A $100 bill today that I can never spend is not as appealing as a $50 bill I can spend in a week.) It’s harder to see but becomes clear when we know what the rest of the words mean.

Real estate transaction drafting is primarily a trained practice. When working with a practitioner trained to insert this here, that word there, and cross this off but not that, the client is left looking just as unprepared and insecure as the next person. A wise seller will not get tied up in an uncertain contract. A big price won’t distract them from the clutter of the Offer.

On the other hand, the person working with the professional who understands that the contract is filled with qualifiers, exceptions, caveats, and cautions will have more to offer to appeal to the desires of the seller. Price will always be a factor, but it’s not the only factor. It is in the lack of conditions where buyers are given a chance in highly competitive markets. Knowing how to structure Offers is a skill under developed in the world of fill in the blank and check the box, one-size-fits-all, standardization. At Essential Real Estate we made it our business to know the conditions of the contracts so our clients can make informed decisions about what goes into their contracts, and what is left out.

New WB-11 Residential Offer to Purchase: Changes

An Offer to purchase is as simple as a written form of a conversation a Buyer may have with a Seller. It makes sense the the Offer document would flow from beginning to end the way the conversation would begin and end. Buyer: “I’ll buy your property for this amount, on this day.” Seller: “OK”.

The new WB-11 isn’t that simple, but it is formatted closer to the natural conversation. Highlights:

More of the answers owners typically want to know are right where they should be–on the first page. Price, Binding Acceptance, and Closing date. The definition of a fixture is front and center on page 1, with some clarification tweaks.

Page 2 has long been boiler plate with definitions and explanations. Now it’s a working page where Earnest Money and the rules of Earnest Money disbursement are together.

Page 3 Conditions Affecting the Property use the entire page. The list should be a closer match to the Condition Report items.

Page 4 now has only the Inspection Contingency and the definition of Inspections and Testing. By itemizing the 3 steps a buyer is authorized to take to inspect it’s expected the process of inspection will be better understood. Seller’s right to cure is unchanged.

Page 5 A radon testing contingency is part of the Offer for the first time ever. Good news for the testing and remediation business, not so good for buyers who will have that contingency included without understanding the three day test is unreliable for determining long term exposure, and the fix is almost the same price as the cure. Buyer agents may want to sharpen their Radon issue knowledge before they fall into the habit of checking the test contingency out of habit and costing their client an accepted offer.

Financing Commitment Contingency As long as we can remember, there has been no Contingency to Obtain Financing in any version of the WB-11. By labeling the contingency what it is, a contingency to be able to obtain a financing commitment, if a buyer wants the Offer to be contingent upon getting the money, they will know they have to create that contingency.

The satisfaction of the Commitment Contingency is modified to allow buyer signed commitment letters to be used to satisfy the contingency OR a Buyer’s written direction to deliver. However, a commitment sent by the lender does not satisfy this contingency. Essentially, this change reverts the practice back to pre 2011 and in line with the changes firms incorporated in the Addenda to allow deliverance to be done without a Notice from Buyer.

Default days and amounts have been added to fix the issues that come with leaving blank lines unfilled.

Page 6 Seller Financing: Wisconsin has a unique provision which made 100% of the Offers subject to a Seller’s right to provide financing if the financing as described was unavailable. This is now an optional condition of the Offer.

Non contingent on Financing Offers are not “cash offers”. The revised condition for the Buyer to provide evidence of funds available allows the buyer to provide verification that funds are available at the time of verification, or some other documentation. This change was driven by a need for buyers to bargain for the ability to make a non financing contingent offer when the funds are not available today, but will be available in the future when the sale of their real estate occurs.

Closing of Buyer’s Property Contingency: The forms committees worked to make this provision’s steps easier to understand and to tighten the Buyer’s ability to waive the contingency. A few options for proof of buyer’s ability to close are provided and the term “Bump Clause” is used to head the steps Buyer and Seller will follow once Seller accepts a secondary offer.

Page 7 There must have been a flood of confusion about who pays home owner association one time fees at time of closing. Why this condition was necessary is a mystery. Association fees have always been seller’s responsibility. I’m not sure why this one time fee is treated differently. Buyer’s who agree to pay this will want to know the fee in advance.

Page 8 Special Assessments/Other Expenses: Have you ever wondered what the term “Levied” meant? Wonder no more, it’s defined now.

What happens if an optional provision is completed but the box is not checked? Well, according to page 8, the provision is not part of the Offer unless the box is checked.

Page 9- 10 Foreign Investment in Real Property Tax Act (FIRPTA): Who knew a buyer is responsible for paying up to 15% of the purchase price to the IRS when purchasing a property from a “Foreign Person”. Page 9 not only includes a WARNING, the WARNING includes a provision to allow the Buyer to terminate the Offer, or withhold the 15% if Seller fails to deliver certification of Seller’s Non-foreign status NO LATER THAN 15 DAYS PRIOR TO CLOSING. Special care is needed to make sure this exit clause is closed on 100% of the transactions we are part of.

Page 10 Additional Provisions: We have a total of six lines to include additional provisions and those six lines are all on page 10.

Optional use date is November 1, 2019. Mandatory use date is January 1, 2020. I can’t think of any good reason to continue to use the old WB-11 after November 1.

On The Hood of The Car

In the middle of a movie, while the kids want our attention, when it’s nearly midnight. Are any of these safe environments where you do your best work? A University of Minnesota study revealed multi tasking is a killer on our ability to remember. When remembering the directions of a client, or the caution you heard a week ago, a distraction free environment is a safe place.

There was a time when writing an offer on the hood of the car was fairly common. The WB 11 wasn’t the back of a napkin, but it wasn’t the complicated instrument it is today. Maybe the hood of the car has been replaced by the coffee shop down the street. Neither place is where we do our best work.

Building your business on sound practices of safety will never do you wrong. Compare the coffee shop to an organized desk, a quiet place, free from interruptions and sufficient time. Multi tasking can be done. Doing any of those tasks well is an illusion.

If more money won’t guarantee an accepted offer, what will?

Every home seller wants something so they can be somewhere by some date.  Knowing what they want most is the key to getting your offer accepted.

More money is likely a want of every owner.  Less stress is near the top of a person’s wants.  Stress is related to risk and perceived consequences.  Fear and worry are relatives of stress. We are safe to assume eliminating fear and worry about undesirable consequences will be recognized and valuable to a home seller.

Every REALTOR should have at least ten good ideas for you to consider, to present you and your offer more risk free, safe, and sound for the seller.

The ideas we have for you are simple to understand. You can think of a few by simply switching your perspective to the view from the Seller’s side of the table. If you were her, what would you want to see in an offer?  Before committing to be represented by a Buyer Agent, find out what smart strategies the agent has to give you an edge in a competitive market. If the first and last idea is more money, they have no idea.