Sellers feel that cash buyers can perform and close quickly which provides a sense of comfort. How do you compete for the same home if you have a loan? Here are some tips and secrets to be a strong competitor against ‘all-cash’ buyers on the home you want.
Why sellers often believe ‘all-cash’ is a better deal from a buyer?
- Risk of Loan issues removed.
One reason of many that all-cash is attractive to a seller: much of the hassle that comes with selling a home, the buyer’s financing, is eliminated. And if you’re shopping for a house, there’s a good chance you’ll compete with all-cash buyers.
- Wealthy International Buyer with cash are highly motivated to close.
International buyers coming the the United States bring their cash over because they sometimes can’t get mortgages.
Real estate investment or home ownership is very attractive to them as well, increase the amount of competition against you.
- Buyer is flush with cash from their prior sale of their home and need to buy a place to live!
Some all-cash buyers are people who have accumulated equity or savings. The proceeds from a home sale combined with savings can be enough to pay cash for that next property. And they need a another place to live, so they too are motivated to close.
“I need to get a loan. Will we lose every time against cash buyers?”… you ask?
The truth is, a buyer getting a mortgage can still compete against cash home buyers and win.
Here are some initial items that can help make the difference of winning or losing against all cash buyers:
- Do you have a 20-percent down payment? (or more?)
- Are you well employed?
- Do you have cash reserves in addition to your down payment? (ie, 12 payments worth in bank?)
- Do you have very little debt? (ie, below 30% ?)
- Do you have good credit? (ie, above 740?)
If you answered yes to most or all of these questions, then so far, so good.
Strategies to increase chances of beating all-cash buyers
- Make your best and highest offer up-front. Don’t play games. Many all-cash buyers are bargain hunters, whether because they’re investors or because they know being a cash buyer puts them in a strong position. Beat them out by making your final offer up front. When you see a house you want, put your best foot forward immediately. Making an offer because you are being “too cheap” is good way to fail. If you want THAT house, then GET that house. Make you most serious best offer, but it should still be a price that makes sense for the property. You don’t want to make a poor investment, and banks won’t lend based on an inflated price.
There is no time to try to get a deal on the house you love in a strong seller’s market with cash buyers lurking around.
- Be up front about your finances. In addition to a pre-approval letter from your lender, be open to allowing your agent or lender to provide financial information with your offer. Tell them what you make, and how much money you have in the bank. Show bank statements and even a copy of your credit report. Overload the seller with proof to show them that you’re as solid as the cash buyer.
Make your competitive offer as strong as cash by providing the seller the confidence they need to accept your offer.
- Ask your lender to get a head start on the mortgage. See if your mortgage professional can move the process along sooner. Send the lender a copy of the preliminary title report, if available. If you’re buying a condo, find out if a condo questionnaire or HOA documents are available and give it to your lender. Presenting a strong mortgage pre-approval letter from your lender when you make an offer is the traditional way to show you’re a serious buyer. Pre-approval has almost no meaning today. Pre-qualification is reasonable and gives the seller some confidence your financing will come through later in escrow.
THIS IS THE MOST IMPORTANT TIP: If an underwriter’s does a full review and FULL APPROVAL of a loan application prior to making an offer, it is as close to “all cash” as possible and may allow an offer to be created with the “No Loan Contingency” box checked, thereby removing a major concern for the seller. This process is emerging as a more thorough first step. Not everyone offers underwriter review and full approval, so you should ask your lender or broker first. When you need a loan with your cash, this step of a ‘Full Approval’ puts offers on closer-to-equal footing against all-cash offers.
- Shorten the loan and appraisal contingencies. Ask your lender how quickly they can send an appraiser to the property, and how long the loan would take to turn around. Some loans are being approved in less than 14 days — sometimes even 10, 8, or even 7 days.
Sellers often want their net profit of the sale sooner rather than later.
- Pre-order an appraisal. This may not be as easy with a bigger bank. But smaller banks, direct lenders or mortgage brokers usually can line up the appraisal in advance. At the time your offer is written, tell the seller the appraisal has already been ordered.
If you can get the appraiser out within 24-48 hours of coming to terms with the seller, even better.
- Inspect quickly. Along with the quick appraisal and loan contingencies, get your inspector in and out. Shelling out a few hundred dollars and getting the inspections done within days of having your offer accepted shows the seller you mean business.
Give sellers comfort that they’ll get over this hurdle quickly.
- Overpay. If a seller is faced with a few thousand dollars’ difference between all-cash offers and yours, the seller probably wouldn’t risk taking your offer. But, what if your offer is five percent higher than the cash buyer’s? The seller, perhaps wanting the best of both worlds, may go back and ask the cash buyer to raise his or her offer. Some cash buyers will offer more, but not always enough to match. If you plan to live in the house for many years and it’s the home of your dreams, paying a little more than the lower all-cash competition to get the home might only translate into $20-200 (or more) per month over the course of a long-term mortgage (ask your lender for real calculated examples based on your loan).Sometimes a sale doesn’t close because a buyer’s financing falls through. And if financing is going to fail, it may after the appraisal. Appraisals are problematic in a rising housing market because appraisers rely on previous sales to set the value, a key determinant of how much you can borrow. When recent comparable sales on record lag behind the current home values that have risen, the home might appraise well below the contract price, and you may not be able to borrow enough to complete the sale. Put more “skin in the game” by offering more cash, and you improve your odds of a seller accepting your offer. Why? More cash involved with your loan in an offer is more acceptable because it’s far more likely to close in escrow since a larger cash-deposit offer (+ loan) almost ensures the value of the home is worth more than the amount the buyer needs to borrow. With more equity in a home because of your increased cash portion in your offer, a lender is going to be less concerned with appraisal value because there would simply less risk for the lender.
Cash buyers almost always expect a discount from the seller simply because they’re offering cash and are a sure thing. As a result, the cash buyer will often make a lower offer…and sometimes “too low” or “low-ball”.
- Offer to inspect the home in advance before submitting an offer. Most buyers make offers contingent on a home inspection so that if there’s anything major wrong, they can back out. It doesn’t have to be that way. Your agent should be confident to ask if a home inspection can be done so YOUR offer can be submitted with no inspection contingency!
This shows the seller a significant commitment to the property and a strong desire to close.
- If Seller is under pressure of time to close, offer incentive. Time is typically one of the seller’s main concerns, buyers with financing should make their contingency periods as short as possible and offer the seller a per-diem so that if the sale closes late, they get compensated each day. Each party agrees that if you can’t close on a certain date, the seller will automatically extend the contract for, say, up to 15 more days, but it costs you as the buyer anywhere from, for example, $20 to $100 per day until escrow is closed. Putting this provision in your contract will keep the lender on top of your loan for your sake and it also shows the seller you are really willing to put your neck on the line for your financing.
This may appeal especially to sellers who are carrying two mortgages or have to close concurrently on another escrow of their own purchase.
- Do NOT use an FHA Loan. One major downside to getting an FHA loan is that you’ll be forced to pay Primary Mortgage Insurance (“PMI”) premiums for the life of the loan (unless, of course, your loan-to-value ratio is below 80%, where your PMI is dropped. Ask your lender for specifics on this). FHA loans also are unattractive to savvy sellers, who recognize some FHA buyers (usually) barely qualify because of income limitations, lower credit scores, debt-to-income issues, and are more likely to hit snags or failure in the loan process.
If you have FHA financing, you’re not only at a disadvantage to cash buyer but also competing against buyers with more strong, conventional financing.
- Give the Seller the non-money things they want. When you’re submitting a purchase offer, there are many points of negotiation in addition to price. Competitive buyers with financing may accommodate the seller in the following ways:
- Earnest money: At a minimum, offer what they are asking.
- Title company: Let them choose.
- Inclusions: Let them decide which fixtures, furnishings or personal property they want to take.
- Inspections: Limit how much you will ask sellers to fix if the inspection reveals problems.
- Closing date: Give them the date they want.
- Possession date: Ask them if they want a day or two to move out after closing.
- Offer a rent-back (daily rental cost) so the seller has time to move out/close another escrow.
When competing with cash buyers, a smart strategy is to give the seller what they want on every other point since you can’t offer all cash.
- Sell your home BEFORE you buy. If one of your contingencies is selling your home first, the deal is far from a sure thing. Who knows when or if your home will sell? Having your offer to a Seller be contingent on selling your home to close escrow on the house your are buyer, well, this contingency will make you noncompetitive in all but the slowest of housing markets, where buyers are desperate to accept any offer on the house they have to sell first before they buy to satisfy an escrow. In a strong market, especially one with a high percentage of cash buyers, it’s a deal killer; after all, in such as case the Seller does not need to bother waiting for you when there are a lot of qualified buyers ready to close a deal. While selling your existing home first is a hassle — it means packing, moving and unpacking twice, not to mention finding a month-to-month lease for a place to stay when you shop for a new home— it will give you advantages beyond being able to make a more competitive offer. First, you’ll know exactly how much you have to spend. And each month that passes, you can save more toward your down payment.
If at all possible, sell first so you won’t be rushed to get a new home under contract in that small window between when your old home goes under contract and the buyer moves in.
- Make yourself known to the seller. Some buyers write “love letters” to sellers, hoping to appeal to their personal side. Does this work? Sometimes. If you’re competing with a cash buyer, particularly an investor who plans to rent the home out, it can’t hurt to get a little personal with your real estate offer letter. The seller often (whether they know it or not) want to know more about the potential buyer as a home is indeed a very personal possession.
Ask your agent to work with you to write an HONEST and heart-felt cover letter and an introduction. Let the seller know who you are, why you like the home and what your intentions are.
Do the best you can and be realistic. Make sure your financial “‘house” is in order. Work with a good local real estate agent, and start working with a local mortgage professional well in advance. Structure your offer to show that you’re ready to roll.
Cash is King.
But Kings can lose sometimes.
Buyers just need to be informed and prepared on how to win with the latest information!
Have thoughts of Selling or Buying a home in Orange County, California? Contact me so we can talk about what additional advantages and leverage I can provide when I represent you! – Tony Babarino, Real Estate Agent.
On mobile device now? Click here Call me! or dial: 949-633-6741