Buyer $5,000 short: How to close the gap
5 options to get deal done
By Bernice Ross, Thursday, November 12, 2009.
DEAR BERNICE: We need $237,900 to pay off our first mortgage and to cover closing costs. We have an offer from some buyers who qualify for a total purchase price of $233,000. We have to move because of my job change. We have the money for the downpayment on our next house. If we take this offer we will have to use part of our downpayment money to close the deal. That will probably put us short on our next house. Our agent says we should be thankful we have a preapproved buyer who can actually close the deal. Do you have any suggestions? --Mark L.
DEAR MARK: First, if you have a preapproved buyer who can definitely close the transaction, it would be very smart to take the offer, even if it's $4,900 less than what you need to pay off the loans and closing costs. There has been quite a bit of commentary in the press about a new wave of foreclosure properties entering the market in 2010. This could be well over a million properties. A flood of new inventory would have the effect of lowering prices even further.
The other concern is that our government is having trouble selling Treasurys. The lack of demand will probably force the government to raise the rate of return to attract buyers for our debt. When these costs increase, buyers experience them as an increase in the interest rates. When rates go up, the number of buyers who can afford your home decreases.
Thus, you could be facing the double whammy of more foreclosure properties competing with your property, plus a reduced buyer pool if interest rates increase.
When you are ready to purchase your next home, an increase in inventory means that you may be able to get a much better home at a lesser price. Even if interest rates increase, however, many people will lower their price to move their property.
Given that you have money in the bank and enough to purchase another property, a short sale where the lender takes a reduction in their payoff amount is probably not a viable option for you in terms of bridging this gap. Here are some other alternatives to consider.
1. Is the buyer going for a fixed-rate or an adjustable-rate mortgage?
If the buyers' lender qualified the buyers for a fixed-rate mortgage and the buyers really want your house, perhaps they would be willing to apply for an adjustable-rate mortgage? This can be a great solution for someone who is just starting out and who doesn't plan to be in the property for 30 years. ...CONTINUED
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Submitted by Gregory Schreiber on November 12, 2009 - 7:39am.
I'm sorry, but why does the agent get less?
Submitted by Bobbie West on November 12, 2009 - 10:51am.
A $5,000 difference in price isn't enough to screw up a mortgage approval.
If the APPRAISAL is the problem..it has come in $5,000 lower than they need to sell...still not enough to kill the deal.Ask the appraiser if he has enough room to accomodate the $5,000 in price.That is usually not a large enough number to kill a deal.Appraisers can NOT be so precise in value that they can narrow a value down to $5,000..appraisal is a GOOD ESTIMATE of value...there is usually enough latitude to cover such a small difference.
OR...see if the underlying lender will accept......WITHOUT penalizing the seller's credit....a shortage in payoff.
That would be my LAST choice since $5,000 is a small enough amount that you should be able to work this out without going that route.
Submitted by Evelyn Herczeg on November 15, 2009 - 5:04am.
I agree with the previous comments regarding the appraisal being the primary obstacle to a higher price - that is the case with many transactions in Central Texas too.
This article also suggested a buydown program as another avenue for a buyer to qualify for a higher purchase price/higher loan amount, a strategy builders used to rely on heavily to entice first time buyers, but it's no longer valid (at least for FHA loans; not sure if conventional loans can still be structured this way.) Now, buyers must be able to qualify for the payments at the full interest rate. Loan approval is NOT based on the payment amounts in the first and second year with the temporarily reduced interest rates.
Originating mortgages with payments that the buyers cannot afford without a temporarily subsidized rate was one of the risky lending practices that got us into the present situation and thankfully, FHA loans are no longer being approved on that basis.
Submitted by Ruthmarie Hicks on November 15, 2009 - 11:17am.
By mentioning commissions at all you are pouring fuel onto an already out of control fire. Do you know how many times people are asking me to "chip in" on commission "kickbacks" these days?
I just had one client who wanted to "cancel" a listing because I wouldn't chip in $3k from my side. Their home had been on the market 5 months they had had close to 50 showings - and this was their only offer. I worked on this offer and brought it up over $60k from the original low ball. Apart from hiring the Good Year Blimp - there was little more I could do to market their property. It was plainly obvious that this house wasn't going for one dime more than was on the table. The market had spoken.
I told them it was a 4-way split and it would ALL come out of my side...They were unmoved by this and indicated that I should be grateful to recover my costs! Note that the commission was low by most people's standards (about 1/3 lower than what is standard in the US.) I had also generously offered $2k to close the gap because they were good clients that had worked with me several times before.
Discounters have crushed commissions in our area but sellers still want MORE. There is no more. This is roughly a $700k transaction. An average agent on a standard split from a big-box broker would gross less than $3k on such an arrangement. After that you have to add expenses and what about the time involved? How on earth can anyone earn a living like that?
I learned a valuable lesson...with commissions low in our area - no more closing gaps with even less commission. Once sellers get that bee in their bonnets they are back to the table for more again and again.
Submitted by Lorraine Schindler on November 15, 2009 - 12:36pm.
"Share The Pain" Doesn't that send the message that we aren't worth what we are charging in the first place?
$1600 is a lot of money on a low end property. In most instances a high end property won't fall apart for $5000.
Comissions are based on the what the cost of doing business is and what it takes to do the best job possible in representing clients while still making an adequate living. Holding onto our commission is what allows us to be in business.
Once it becomes known that it is a practice to cut commissions it will be expected.
A cooperative agent should expect to be assured of the cooperative offering that is in place at the time of the contract, otherwise how can we expect agents to live off of what they make selling real estate; and listing offices/agents should be able to cover the costs of holding/marketing the listing, and still show some profit.
Submitted by michael Espiritu on November 15, 2009 - 7:15pm.
There are a lot of other options not even mentioned in this article. The seller could accept the deal , sign a promissory note for the very small deficient amount, have the sale approved by the nbank as a short sale paid in full.
I have cut my commission on deals to get the done. I would rather get paid a smaller sum than ZERO. Most agents aren't worth the commission they get paid anyway. To kill a deal for this small amount means somebody needs to hone in their negotiating skills.
The sellers property will definitely be worth less in six months. An appraiser cannot just independently value a property at $5,000 higher without comp data and proof. Any appraiser who "inflates" a value that is not in line w/ other recent sales in the area will get a field review to verify that appraiser's opinion of value.
Michael Espiritu
Broker
Elite Realty Group
SoCal
Submitted by Bobbie West on November 19, 2009 - 11:54am.
Did any of you figure out the dollar difference an increase of $5000 gives to the buyer???It is $26.84.There is NO way a lender can't increase the mtg amount enough to cover the sale price and increase their borrower $26.84 in pmt.And if the appraisal is $5000 short..THAT is easy enough for an appraiser to cover.As I mentioned the first time...appraisal work is NOT an EXACT science.$5000 is a miniscule amt to have to negotiate over and can most likely be handled easily by the appraiser.