Silicon Valley Real Estate: Making a preemptive offer

In an earlier post we discussed multiple offers which are very common in our local market area, especially in Palo Alto.  An aggressive buyer strategy is a “preemptive offer”.  A preemptive offer is when a buyer writes an offer with the hope that it is enticing enough that the seller will forgo the possibility of entertaining multiple offers on a later date that has been established and communicated.

• By their very nature, a preemptive offer should be a “winner” from the sellers’ point of view which typically means “big” price and aggressive terms.  Even with a substantial price, an offer laden with contingencies which create a contractual “out” for the buyers may not be viewed favorably by a seller who has gained marketing momentum and who may also have possible interest from other potential buyers.
• Buyers considering a preemptive offer should understand that success may include risks, i.e., few to no contingencies and they should be amply prepared to understand and assume these risks:
• “Big” price may mean paying a price in excess of comparable homes.  If the buyer is an “all cash” buyer, then understanding the value is critical.  Buyers have access to lots of information on-line but this information, while instructive, does not really provide a true idea of value because it is based entirely on numbers and not on conditions such as degree of updating, busy street, school enrollment area.  A Realtor or licensed appraiser is the best professional to provide this information.
• Financing and Appraisal are two contingencies that are different and that can work together for the protection of a buyer.  A financing contingency means that sellers share the risk in the buyers’ ability to obtain financing.  Even buyers who are already “preapproved” for their financing consider including financing contingencies in their purchases so that they are confident that the lender is willing to extend financing on the property.  In our local market area this is generally not a problem, however, it can come up occasionally in condominium projects where the lender also may want to “approve” the complex.  Lenders are concerned about the level of reserves, delinquent dues and even the number of loans they have already made in the complex.
• The appraisal contingency provides the buyer a decision making point in the event the

1. Property does not appraise at the purchase price.  When buyers have a large down payment it is possible to obtain the loan they are seeking even when a property under-appraises because lenders determine the maximum loan amount based on a percentage of the lower of purchase price or appraised value.
2. Buyers who write offers without these contingencies take on the risk of a property underappraising or the lender being unwilling to provide financing on the property.

• A condition of the property contingency permits buyers time to evaluate the entire property.  Buyers waiving this contingency are well advised to do their “homework” up front.  While you may not be successful in getting the seller and listing agent to cooperate with a new round of inspections assuming the seller has provided a complete disclosure package that includes disclosures and inspections, there are other steps buyers can take in advance of making an offer that can minimize risk if this contingency is waived.

It is important for buyers to understand that even when sellers establish an offer date, the sellers may change their mind when an attractive offer is presented to them.  When inquiring about an offer date on a property, seasoned buyers’ agents will also know to inquire about whether or not the seller will entertain a preemptive offer so that the buyers they are representing have complete information on which to base their decisions.