Making a change in where you live is one of the biggest changes you can make to your life, and if it involves buying or selling, it’s also a huge financial decision. Are you over-extending yourself with that purchase and will you be able to make the payments over the term of the mortgage? Is that sale price enough to get you to where you need to be at the next stage of your life or will you regret it in the years to come?
Even if we’re talking about tenants or landlords and a rental decision, it can have significant financial repercussions. If you sign a lease to rent a place at a higher rate than you were hoping to pay, it can impact your financial security moving forward. If a landlord accepts a tenant who then doesn’t pay on time (or at all!) that also puts the ownership of the property and their financial future in question.
One thing that we have seen again and again with our clients is that if someone is asked to make a decision with significant consequences, a lack of time to fully consider the issue means that they often default to the safest, most common choice.
While it can vary depending on the situation, the safest response to a difficult decision is often saying no. It might not be a no forever, but it is often a no for now, no until we can think it through, no until we can figure out what the best answer actually is to the question.
The challenge with real estate decisions is that they are often made under significant time constraints. So, a big, impactful decision with huge financial consequences, that you need to decide on quickly. Given the above point about no being the safest response to whether to proceed right now, it’s no wonder that real estate transactions are so stressful for many people.
We’ve learned a few lessons over the years to deal with this aspect of real estate, and here’s the key one. Uncertainty increases risk, and in order for deals to go forward, that risk needs to be mitigated.
We have developed a number of ways to mitigate risk in real estate transactions to help make sure our clients get the best results, regardless of whether they are buying or selling. Let’s review!
First off, what’s the big deal?
It can be tempting to dismiss the impact that uncertainty can have on decisions. This is often due to an inability to see a way to mitigate the risk rather than a genuine belief that the risk doesn’t matter. Here are some examples of how the activity (or lack thereof) on one side of a deal creates the appearance of risk and the consequences that result.
- A seller doesn’t have a pre-listing home inspection done because they know the home is in good shape and it’s a waste of money. A buyer is uncertain if the home is in good shape and lowers their offer price to compensate for any potential problems.
- A buyer has a pre-approval for their mortgage fully done but still isn’t clear on if they need to worry about the mortgage going through. They insist on a financing condition on their offer as a result. The seller is uncertain if the buyer can actually close the deal and decides to go with another offer that doesn’t have a financing condition.
- A tenant only partially fills out a rental application, leaving out past addresses as they don’t have that information handy. The landlord looks at the application and doesn’t know if the tenant has previously rented and whether they are likely to be a good tenant and decides to pass.
- A landlord refuses to sign a lease renewal document with an existing tenant because they think that would make it harder to evict the tenant if they stop paying rent. The tenant hates the idea of living with the uncertainty of their tenancy term and gives notice so they can rent somewhere else.
Successful real estate agents understand that mitigating risk (or even just the appearance of risk) is a huge factor in getting deals done.
Whether we are representing the buying or selling side, a key aspect of our role is making sure that information is shared that makes it clear the level of risk in the transaction. It’s how the people involved in real estate transactions get comfortable with the deal.
Here are some of our favourite ways to reduce risk in a real estate transaction.
Reducing Risk to Sellers
While we are talking about reducing the risk in the eyes of sellers, it is actually the actions of the buyer and their agent that can be most impactful in this regard.
One of the most often overlooked risk in the eyes of sellers is whether the buyer for the property is in fact going to close the deal. Signing paperwork may legally obligate a buyer to close but speak to any lawyer about whether some deals fail to close despite having binding paperwork and they will tell you it happens on a regular basis.
When we represent a buyer, we make it clear that we ARE going to close the transaction. We talk about how we only work with serious buyers, we provide proof of mortgage pre-approval, we discuss how we understand home inspections are not to quibble over small imperfections, and so forth. In short, we do everything we can to make it clear to the listing agent and their client that if they sell the home to us, it will be a smooth, successful experience.
In addition, if there are aspects to the seller’s situation where we can mitigate risk, we do so.
- If the seller is worried about having the house clean and empty (due to ill health or financial constraints), we write in a clause that allows them to leave whatever they don’t want. For the cost of hiring a junk removal company to get rid of some stuff, we remove a worry from the mind of the seller, making our offer more attractive.
- If the seller doesn’t know what their ideal closing date is due to not having bought a home or arranged movers, we include a clause that allows the seller to adjust the closing date by a set number of days. When our buyer has flexibility on closing and the seller is uncertain about what date is best, this allows us to remove that worry and make our offer more attractive.
- If the listing agent makes an error on the listing (which is more common than you might think), we include wording acknowledging the error and accepting the accurate information. In two recent offers, the seller had over-estimated the square footage of the condo. We had the report showing the actual square footage and put in wording that said we were fine with the lower square footage. The seller now has our offer where that will not become an issue, compared with the other offers where it might be raised and cause problems.
There are many different ways in which a buyer can put themselves in the shoes of a seller and work to reduce the appearance of risk and help get the deal done.
Reducing Risk to Buyers
If we consider the perspective of buyers, it is the seller who now has the onus on them to reduce risk in the eyes of the buyer.
There is an expression in real estate that goes “Buyers live in the future, sellers live in the past.” The meaning behind it is that buyers are deeply concerned about whether the home will continue to maintain value and even appreciate in the years to come.
By recognizing that buyers are worried about this risk, when we represent a seller, we provide all the information we can to show the home and property is in good shape and a worthy investment for the buyer. By sharing detail on renovations, materials used, surveys, warranties and other information about the home, we make the buyer feel comfortable about the current and future value of the home.
In addition, if there are aspects to the buyer’s situation where we can mitigate risk, we do so.
- If the buyer is worried about the insurability of the home due to factors such as current wiring or plumbing systems, the seller can co-ordinate with their current insurance company to be able to tell the buyer they will continue to insure the home moving forward.
- If the buyer doesn’t know what their ideal closing date is due to not having sold their current home, we include a clause that allows the buyer to adjust the closing date by a set number of days. When our seller has some flexibility on closing and the buyer is uncertain about what date is best, this allows us to remove that worry and make our offer more attractive.
- If the buyer is concerned about whether the home will appraise at the sale price and allow them to close on the property with their planned financing, we can write a clause that provides for a small vendor take back mortgage from the seller for any deficit. It’s unlikely to happen, but by offering to do so, we allow the seller to get the sale price they wanted and the buyer gets peace of mind with knowing they won’t have difficulties financing the purchase.
There are lots of ways in which sellers can make a buyer feel more comfortable with the property and the price being paid. By doing so, the buyer sees a reduced level of risk and deals can take place.
The key element to reducing risk, for both buyers and sellers, is being willing to look at the transaction from the eyes of the other side. Buying or selling real estate is a huge investment and for many of the parties involved, it is a nerve wracking experience.
If uncertainty increases risk, by sharing information and being willing to do things to remove uncertainty, deals that are good for both sides get done and we have smooth, successful closings.
If you are considering buying or selling real estate, give us a call so we can take as much risk as possible out of the transaction. Sounds nice doesn’t it?