- The cash market has been falling since January 2013. However, with cash buyers making up a little more than 30 percent of the market, your clients are going to need every competitive edge they can find.
- The FICO score is calculated by analyzing all open accounts on a person's credit report. One of the first things you need to be aware of is making sure clients are well below their credit limits and consistently make larger than the minimum monthly payment.
- With the seller, and possibly the listing agent, a larger earnest money deposit can go a long way toward greasing the wheels.
Even though the cash real estate market is slowing, it’s still important for you to help your buyers who need to compete with cash buyers.
In February, CoreLogic data showed 37.9 percent of closed deals were to cash buyers, which is down from 40.6 percent the previous February.
For buyers who plan to finance, this is excellent news. The cash market has been falling since January 2013. However, with cash buyers making up a little more than 30 percent of the market, your clients are going to need every competitive edge they can find.
These five tips will help you help them beat the lure of cash.
1. Understanding creditworthiness
The single most important thing you can do to help your clients position themselves as competitive buyers in this market is to impress upon them the importance of good credit.
As buyers who need to finance, they should be keeping tabs on their credit. The target FICO score should be at least 700. As their agent, you need to be prepared to have a tough love conversation with them about their creditworthiness.
If you are uncomfortable having this conversation, try partnering with a lender you trust. A reciprocal agreement with a local lender can be mutually beneficial.
For 2014, Ellie Mae statistics show 67 percent of buyers who financed had scores of 700 or greater. If you are not working directly with a lender or have lost deals in your local market, you have to start wondering if credit-based denials are the cause.
However, this could also become an excellent opportunity for you to work with a client. Credit scores do not move quickly, so it might take a year or more for clients to push their scores over 700.
If you are checking in with them along the way, there is a better chance of them coming back to you when they are ready.
Some credit points to remember: The FICO score is calculated by analyzing all open accounts on a person’s credit report. One of the first things you need to be aware of is making sure clients are well below their credit limits and consistently make larger than the minimum monthly payment.
Credit histories are broken down and weighted as follows: 35 percent payment history, 30 percent balances owed, 15 percent lines of credit, 10 percent new credit and 10 percent types of credit.
One of the hard things for clients to understand is paying off and closing accounts will not boost their score — the opposite is true. Pay those accounts off, but leave them open.
It seems nonsensical, and it is, but that is the one of the realities of the FICO scoring system.
One of the hardest pieces of advice to give is convincing a client more debt can help them. One way to give a credit score boost is to open a small personal line and then pay it off within six months. This little trick can bump a score up to 100 points higher.
2. Convincing a client time is on his or her side
An often overlooked advantage of taking the time to help your clients raise their credit scores is higher scores can bring pre-approval letters from their lender of choice.
Pre-approval letters offer the seller security. They also reduce the amount of time to fund the loan. Part of what makes cash buyers so attractive is the instant gratification aspect.
In addition to increasing credit scores, there are other things your clients can do to help sweeten the deal.
3. Waiving contingency clauses
Assuming your clients have great credit or a pre-approval letter, you should feel comfortable advising them to eliminate funding contingencies.
It does expose them to a small amount of risk in the event they are not able to secure funding, so offer this option wisely. Competing with cash by writing a smart, reduced-contingency contract is great right up to the point when clients become reckless.
Just be smart as you suggest waiving contingencies. To compete with cash, however, your clients need to keep the contract as unencumbered as possible.
About funding options: Novice buyers might think an FHA loan looks good. To attract buyers, the FHA accepts lower credit scores and smaller down payments.
However, to the seller whose home has an issue or two, an FHA loan is an instant turnoff. To finance a home with an FHA loan, Brad Jensen of Jensen & Company in Park City, Utah, said homes need to be in near-pristine condition to pass inspection.
Sellers are not going to want to take the time to make their homes FHA-worthy when a cash buyer is not going to be so picky. If clients need to finance, a conventional loan will make them a more attractive buyer.
4. Extra earnest money
With the seller, and possibly the listing agent, a larger earnest money deposit can go a long way toward greasing the wheels.
As you know, earnest money is the promise this deal is going to happen. If you have a confident buyer, a larger earnest money deposit is virtually risk-free for them.
The only time plunking down a larger earnest money deposit is a risk for your clients is if they fail to secure a mortgage on the property. Be responsible as you suggest this option to your clients and only do so if you are confident they are a solid qualifier.
5. Making an emotional appeal
Typically, the cash buyer does not intend for a property to be their primary residence, so use this as leverage. As you know, selling a home can be an emotional experience. It might help if you have your clients write a handwritten note to the seller expressing their love for the property.
As they explain what it will mean for their family, it might be the sway the seller needs. Remind them they don’t need to be obnoxious or overdramatic. A genuine expression of what being the owner of this property would mean to them could go a long way in their favor.
Typically, cash buyers ask for a 5 percent discount. You could suggest your client’s offer to pay a 5 percent premium to demonstrate their commitment. In a head-to-head with a cash buyer, that 5 percent is going to do a lot of talking.
Agents, it is possible to beat a cash offer. These tips seem simple, but they will go a long way toward helping you and your clients ink the deal.