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? (i.e., at least 12 mortgage payments worth in bank?)
- Do you have very little debt? (i.e., below 30 %?)
- Do you have good credit? (i.e., above 740?)
If you answered yes to most or all of these questions, so far, so good.
Strategies to increase chances of beating all-cash buyers
Moving forward, here are additional items to consider and take action on:
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. There is no time to try to get a deal on the house you love with cash buyers lurking around. 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.
Be up front about your finances. Make your competitive offer as strong as cash by providing the seller the confidence they need to accept your offer. 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 to show them that you’re as solid as the cash buyer.
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. If you take any of these steps, let the seller know. 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 is more rigorous than pre-qualification (which really means nothing today) and gives the seller confidence your financing will come through. But getting an underwriter’s review of your loan application prior to making an offer is emerging as a more thorough first step. Not everyone offers underwriter review, though, so you should ask your lender or broker first. Many or most of the big banks will not do this, so at least interview or talk with two or more non-bank lenders and loan brokers and ask about this powerful step. When you can’t outbid a cash buyer, this step puts you on closer-to-equal footing with them.
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. In some parts of the country, loans are being approved in less than 14 days — sometimes even 10 or 8 days.
Pre-order an appraisal. This may not be as easy with a bigger bank. But smaller banks, direct lenders or mortgage brokers 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. It also gives them comfort that they’ll get over the biggest hurdle quickly.
Overpay. You’re thinking right now “What the ??” …keep reading.
Cash buyers nearly 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. To increase your chances, beat the competing cash offer with money, even if means paying a little more than you think the home is worth. If a seller is faced with a few thousand dollars’ difference between offers, 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 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 to get the deal might only translate into $20-100 per month over the course of a long-term mortgage. Ask your lender for real calculated examples based on your qualifications. The most common reason a home sale doesn’t close is that the 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 homes 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.
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. You 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 $75 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 deal sweetener will appeal especially to sellers who are carrying two mortgages.
Do NOT us 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 barely qualify because of low credit scores and are more likely to hit snags 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 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. If you’re trying to compete 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. Competitive buyers with financing may accommodate the seller in the following ways:
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 you are buying, 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. You also 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 almost always (whether they know it or not) wants to know more about the potential buyer. 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.