Q: I’m trying to buy a house and have made offers on foreclosures and on regular homes. I’ve had about eight different offers rejected. Almost every time, the sellers said they took an all-cash offer. But after they closed, a bunch of them actually sold for less than my offer! I don’t understand this — after closing, isn’t the money the seller gets from my bank’s mortgage just as good as the cash they get from a cash buyer’s money? If so, why wouldn’t they want more (meaning, my offer)?
A: Money is money, so you’re correct — more is better. But that’s an overly simplistic view of something that has gotten much more complicated than ever recently: a seller’s decision as to which offer to take. There are some very significant differences between "your money" (i.e., a mortgage-financed offer) and a cash offer.
Sellers would LOVE to take your money. But that assumes that they would, in fact, actually get your money. And that’s not an assumption many sellers are willing to make, if they have another attractive option.
The reality is that your mortgage lender interjects a whole laundry list of guidelines that you and the property must meet in order for the seller to get your money. From the seller’s perspective, every one of these guidelines has the potential to become an obstacle that stops the seller from getting your money. This list of guidelines or obstacles, as the case may be, takes an average of 30-40 days to get ticked all the way off. Only then can the seller collect — you guessed it — your money.
For the seller to collect your money, you and your spouse must have:
- acceptable credit scores (and maintain them throughout the transaction),
- acceptable employment and sufficient income (and maintain them throughout the transaction),
- sufficient assets in reserve,
- sufficient cash to close, from sources acceptable to the lender,
- acceptable other outstanding debts and monthly obligations. …CONTINUED
In addition, the property must appraise at the purchase price and must not have any characteristics or conditions that would stop it from being insurable. It must not have any significant "health and safety"-threatening conditions. And if your loan is an FHA or VA loan, there is an even longer list of conditions the property must meet and not violate.
If any of these items has a glitch along the way, it could take longer for the seller to collect their money or, worst-case scenario, your lender won’t fund your purchase and the seller will collect nothing. Then it’s back to the drawing board (i.e., MLS) for the seller, who has to start showing her home all over again, two months later. This is no exaggeration — in 2008 and 2009, lending and appraisal issues were the top reasons purchase deals fell out of escrow.
By contrast, what stands between the seller and the cash from a cash offer? Very, very little. A smart cash buyer will at least have a title search done to make sure they’re obtaining clear title, and might get some inspections, too, just for their own information. But many forgo appraisal, inspections (especially if the seller has already had some inspections done) and many of the other guideline/obstacles the bank would have required. Cash buyers have to leap none of the qualification and underwriting hurdles that you do. They have no property condition requirements except whatever works for them. And a timeline for a cash transaction is running about 10 days to two weeks, versus four-plus weeks for a financed deal.
Between certainty and quickness, the cash buyer does make a compelling case — one that many sellers will take, over yours, even if you’re offering more than the cash buyer. It goes back to that old bird in the hand being worth more than two in the bush.
So, where does that leave you? Assuming that you don’t have a few hundred thousand dollars handy so you can become a cash buyer, your next bet is to make sure your broker or agent makes as strong as possible a case that your offer is highly likely to close.
Have your mortgage broker revise your approval letter to include your credit scores, job tenure or other indicia of closeability, if they are strong. If you have a good deal of cash at your disposal, let the seller know that you would be willing and able to bolster your planned, lower downpayment if the bank required you to at the last minute. If you qualify for a conventional loan and would obtain one, if necessary to close the deal, let the seller know that, even if an FHA-insured loan would be your first choice. Do what you can to minimize the perceived closeability gap between your offer and a cash offer, and the extra money you’re offering might be more persuasive than it has been in the past.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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