A pig and a chicken are walking down the street. The chicken says, “Hey pig, I’m thinking we should open a restaurant!”
The pig replies, “Hmm, maybe. What would we call it?”
The chicken responds, “How about Ham-n-Eggs?”
The pig thinks for a moment and says, “No thanks. I’d be committed, but you’d only be involved.”
Personally, I prefer my ham in the form of bacon. Either way, though, the pig has some serious skin in the game. Quite literally. Over a decade ago, the housing bubble burst. There were little to no consequences for the subprime lenders who pushed bad mortgages on buyers who couldn’t afford them and then quickly packaged those loans up and sold them to less than educated investors. The losers here were not the lenders.
Nassim Taleb recently had a book published titled "Skin in the Game." In this book, he brings up a thought provoking point: Any offer is bad if the proposer benefits from it while your outcome is uncertain. It is for this reason that it took me a full seven years to get through college. Not because I failed class after class and had to retake them. In fact, I only “almost” failed one — it was algebra. In my defense, the professor, or teacher assistant, or whoever it was teaching the class, did not speak a word of the same language I speak. Not a word. And I’m not talking about the universal language of math, which I also don’t speak.
Fortunately, I have an aunt who was also a math professor at my alma mater. She taught much higher levels of math than I would ever be required to take, but she taught me exactly what I needed to know to pass the test and I sailed through. Oh, the irony. It just so happens that I consistently use those same algebraic equations in my life almost every day. It’s easier when I can see the concrete use for them.
Back to the point. It took me seven years to get through because it was my skin, and my skin alone, that was in that game. I was the ham. In my mind, my outcome was certain. If my mom had financially gifted a college education to me, it wouldn’t have been my skin in the game, it would have been hers. By Taleb’s definition, it would have been a bad offer. I would benefit, but the outcome for her would have been uncertain.
In our current housing market, Taleb gains credibility for his theory. It seems that the seller is the only one with skin in the game. Sure, the buyer deposits an amount of earnest money as good faith. However, that earnest money is almost always refundable, unless otherwise stated, all the way up until the finance and appraisal deadline. That means if the buyer decides to cancel the contract at anytime before that, they are out nothing.
In a market where multiple offers are happening within minutes of putting a listing on the market, this poses a problem that is resulting in a much higher rate of cancellations than normal. Ultimately, a buyer can put an offer in, tie up the home while they make a decision as to whether they want it or not, and then cancel without consequence — the chicken in this case.
Sellers may want to prioritize offers that put skin in the game by offering their earnest money, or a portion of it, to be nonrefundable within a very short period of time after acceptance. This is a way for buyers who are competing under more difficult circumstances to gain a leg up in the competition (buyers who need closing costs, or VA/FHA buyers competing with conventional buyers). I think it’s time to bring the ham to the table.
Jen Kirchhoefer is an associate broker and Realtor. She can be reached at email@example.com or 801-645-2134.