What comes to mind when you hear the word ‘currency’?
Do you think of coins? Gold bricks? Dollar bills raining around you?
Currency is nothing more than a medium of exchange in the form of coins and banknotes. Although we typically associate currency with cash, we know that it can take on many different forms. Time, labor, risk and other abstract versions of value can be accepted as currency by a savvy buyer or seller as well.
Take advantage of the opportunity to strengthen a deal for yourself by introducing other potential forms of ‘currency’
People tend focus exclusively on price and ignore the other points where they can give and receive value. Take advantage of the opportunity to strengthen a deal for yourself by introducing other potential forms of ‘currency.’
So what counts as another form of ‘currency’ in a real estate transaction?
The number one form of currency is time. We’ve all heard the phrase ‘time is money,’ and in real estate this is especially true.
It baffles me when I hear one side of a transaction pressing on a time issue when there is no need to. Obviously, if a seller is trying to sell their home and move into another they will be crunched for time. So when a buyer looking for a second home or someone else with a flexible time frame is unwilling to be flexible, they can cost themselves more money and even potentially lose the opportunity to purchase the home altogether.
Recognize what currency you can offer that means more to the other side than it does to you and you will come out on top
If you can offer a time-constrained seller the luxury of an early settlement with some sort of possession post-closing, you will have a far better chance of winning a competitive bid than losing it. Likewise, speeding up the inspection process to build a fully ratified contract or proposing a floating closing date — allowing ample time for the seller to find the home of their dreams — means everyone wins.
A buyer can either positively or negatively impact the seller’s next purchase, and the takeaway here is that sometimes an extra 30 days can mean the difference between winning and losing a bid. Recognize what currency you can offer that means more to the other side than it does to you and you will come out on top.
Just behind Time as a form of currency is Risk.
There are typically two sides to a real estate transaction. And while it may be easy to focus all of the attention on one side of the transaction, they are more often than not related — selling one home means buying another.
Because most transactions are two-sided, each side carries their own varying levels of potentially negative outcomes if the transaction fails. A buyer must spend money on loan fees, inspections, deposits and other items well in advance of closing. So if the closing falls through, that means sunken costs for the buyer. Similarly, a seller will be spending on these same costs, especially if they are looking to buy. So again (if the closing falls through) they will experience not only the loss of fees but also potential legal action for failure to uphold the terms of the contract for their next home.
It goes without saying, both sides of a real estate transaction carry their own risk. So when one party has the ability to mitigate a risk for the other side of the transaction, I see an opportunity to really strengthen the deal.
Pay attention to Days on Market — it can lend guidance on how to best structure offers
Imagine you are an owner with a home under contract and a builder who will be ready in ‘around 90 days.’ The home you currently live in is older and in good (not great) shape, so it probably needs some work done. You put up the For Sale sign, and within a few days you have three offers, all from buyers who are looking to purchase a vacation home:
- Offer One — Full price with the seller pre-approved by a local lender, putting 5% down and wants to close in 60 days. Asking for a response by 5 p.m. tomorrow.
- Offer Two — $10,000 less than asking price, but will close in 30 days and offer you a rent back for up to 120 days if needed. Have been pre-approved by a local lender and putting 10% down. They want a response in the next two days. Additionally, they will inspect the home within 7 days AND absorb the first $5,000 of any inspection items found.
- Offer Three — Full price with the seller putting 20% down. They have been pre-qualified by Quicken Loans, and want to close in 90 days, but needs 3 weeks for inspections due to travel. They have given you two days to respond.
Which one sounds the best to you? I know which one I’d recommend. Although the bid is below asking price, the second offer extends the most flexible terms to the seller (which they really needed) while simultaneously mitigating risk on both sides of the deal.
Win-Win is Important
‘Win-Win’ may seem cliche, but it really does provide the most durable framework for a contract.
Throughout the 20 pages of a typical real estate contract, only one paragraph is dedicated to price. The rest addresses the terms of the agreement, ranging from timing to personal property. Each of these additional clauses is designed to benefit both parties. ‘Win-Win’ may seem cliche, but it really does provide the most durable framework for a contract.
Take your time on each deal, recognize what currency each side can offer, and do NOT put all of your energy into price. Although price is undeniably important, don’t forget about the other terms. You will make a deal that is stronger, more likely to close on time as written, has lower risk, and will skyrocket.