Last week, I got an email from a lender who offers a “Certified Home Buyer” program to help in a bidding war against cash buyers. Now, that got my attention!
In typical real estate markets, cash buyers are not always that competitive. They tend to be professional investors or flippers, in which case cash may not be king. First, they want to buy a house “wholesale”, and second, have a tendency to back out of the deal before settlement. Finally, they may not really have the cash at all. But in today’s market, we’re seeing cash buyers who really are making offers that are indeed cash offers, and they are often people looking for a home they plan to live in for a long time. Perhaps they are move-down buyers paying with the equity in their last home that’s just been sold. And we are also seeing a fair number of first-time buyers getting an advance on their inheritances from parents. In most cases, offers from these two groups are the ones that are setting off the most aggressive bidding wars, with both a high net selling price and almost no contingencies. And for these buyers, cash is indeed the king of the world.
Still, it’s been my experience that some sellers don’t especially care whether the buyers are all cash, as long as the need for financing does not add undue risk to the transaction. Having a house inspected before you make an offer is a good idea, for example. If you have your incomes, assets, and liabilities verified and go through an actual underwriting process before you submit your offer, the risks of the transaction failing are significantly decreased, especially if you waive the financing and appraisal contingencies. This is what the Certified Home Buyer program is meant to address.
If you are using this type of program, your only risk as a buyer is the appraisal. If you have an appraisal contingency and the bank says the house is worth less than what you’ve agreed to pay – one of the major post bidding war issues – you can ask the sellers to lower the contract price, and if they refuse, you can walk away from the deal. If you waive the contingency, which you’ll have to do to be competitive, you have to agree to increase your down payment for the difference between the contract price and the appraised value. What is the risk of a low appraisal? In a bidding war, with a sales price often far above any available comparable sales, the risk is significant.
In the current market, the important considerations for both buyers and sellers is risk, and how much they are comfortable taking. A real all-cash offer from someone planning to live in the house is normally far less risky for the sellers than anything involving finances. Still, if you come in with virtually no contingencies, the right price on the offer and a loan that is approved ahead of time could move you to the top of the list.
The lender you plan to use is also important. If you are coming in with financing, and your lender has a reputation for being very conservative in their lending guidelines, you will be at a disavdantage, even if you are totally pre-approved. Many credit unions are unpopular with listing agents because they may not take contract deadlines seriously, meaning a real possibility of a delayed settlement.
Most of the lender letters I see today basically say the loan officers who signed them have looked the sellers over, and they appear to be able to buy a house for whatever price is included in the boiler-plate. They may be run through computer-generated underwriting software, but not through any process involving a human underwriter, who will often disagree with the software. And there are many disclaimers to get the lender off the hook if the buyers turn out to be deadbeats, or at least too dodgy financially to make the transaction work.
When you make an offer in a sellers’ market, you should think about crafting one that markets you, and your strong qualities as a buyer, to the people whose houses you are trying to purchase. If you can’t make an all-cash offer, doing a non-contingent offer with a Certified Home Buyer certificate could greatly increase your chances of coming in at the top. If you have a very high credit score, especially on in the 800’s, let the sellers know.
If you are planning a move, or if you are curious about what your home is currently worth, I would love to help. You can reach me easily by phone or text message at (202)549-5167, and unless I’m driving or in church, I’ll answer or call you right back. You can also email me at housepat@mac.com.
