Whose interests are being served by rushing offers and accepting offers that close the fastest? Some of the time, the seller wants and needs a quick closing. Some of the time, the seller’s agent is advising their client to take the easy deal, and not necessarily the best deal.
As the market heated up this spring, the inevitable happened. Seller’s agents started limiting showings and rushing buyers to quick offers. Yes, that spring market!
Seller’s agents seemed to pick cash offers over financed ones. They convinced sellers that finance contingencies lead to failed offers (they rarely do!). Then, the inevitable happened again. Commercial investors and moneyed people walked away from their deposits a week after their offers were accepted. Some never provided their earnest money. Some lost it as a cost of doing business.
Why are failed cash transactions inevitable? Because the rush-rush of this type of market leads to hasty decisions and over-competitive tactics. People are putting in more than one offer at the same time. Then, if they get both of them, they default on one of them. An Offer to Purchase is a contract, so we think this is an unethical practice to sign a contract they can’t afford to complete; they are qualified for one property, not two. Even though it is unethical to sign their name to a contract they you might not fulfill, people are doing it. Our clients don’t do such things. That helps our reputation, because our clients can do what they sign up for.
How does a hasty offer affect our buyers?
When the hasty offers fall through, our reputation as the agents who represent well-informed buyers pays off for our clients.
As of the middle of April, we were hearing from seller’s agents that their listings were coming back on the market. Would our clients like to put their (losing) offer back in? In our office, we call this being “the silver medalist.”* The analogy is that if someone earns a silver medal, and then the gold medalist is disqualified, the prize goes to that silver metal winner. Because we put in well- developed offers, we are good silver medalists.
It benefits our clients that we remain in touch with, and on good terms with, the seller’s agents. We leave the door open, so that we will hear about failed offers and upcoming properties. Sometimes this works out.
In the third week of April, one of our clients was a silver medalist on a property that came back on the market. Because the previous buyer backed out, the seller was in a hurry. That gave our client leverage. We were able to get a home inspection, and money off after that inspection. That is a win in this Covid-informed spring market.
For sellers, what are the risks of choosing an offer which has a mortgage contingency?
All Offers to Purchase will have pre-approval letters. There are three types of documentation that lenders will do prior to writing that letter. Unfortunately, there is not a uniform term for what research has been done. You can confirm that the buyers have solid financing by contacting the lender. One phone call should do it. (Well, you may need to wait for a call back.) If a buyer will not give you permission to talk to their lender, this is a warning sign.
- A “pre-qualification” is when a lender has spoken to a prospective borrower and made note of what the borrower earns and owes. The lender also pulls a credit report and documents an acceptable credit score.
- A “pre-approval” is when a lender has documents that show what prospective borrower earns and what assets they have. The lender also pulls a credit report and documents an acceptable credit score.
The risk with a mere “pre-qualification” is that the lender has not validated the earned income and debt. The buyer, with less experience in these matters, can easily forget details that could change the lending picture (like, the presence of a bonus in last year’s income that is not guaranteed this year).
What is usually called a “pre-approval” involves the lender seeing proof of income, assets, and debt, as well as pulling a credit report. This is good proof that the borrower will get the mortgage, based on the borrower’s qualifications.
- What is called a “full pre-approval” or a “pre-underwritten pre-approval” involves the review of income, asset, and debt by both the loan officer and the underwriter who will be giving the final “clear to close” decision. This is excellent proof that the borrower will get the mortgage, based on their qualifications.
Once a reputable bank or mortgage broker confirms a full pre-approval, mortgages rarely fall through.
The reasons for failure are:
- Buyer loss of income due to termination, sudden disability or death.
- The house not appraising for the market value.
About that appraisal
Those days are more or less over. The market is rising and appraisers are likely to confirm that your property would sell again for the price of the Offer you have in hand.
There is another commonly mentioned concern about appraisals. If a borrower is putting less than twenty percent down, the appraisal must be acceptable to both the initial lender and a Private Mortgage Insurance (PMI) company. In the current market, values are strong and this is unlikely. However, as the market begins to fall again, it will come into play.
There is less risk than most sellers realize to choosing a fully pre-approved buyer, compared to a cash buyer. Did you buy your house without a mortgage? Probably not. Most home owners cannot afford to do that. Choosing an Offer from someone who wants to live in your house, be a good neighbor, and enjoy your house or condo has intangible benefit. Those non-pros are more likely to be invested in the community and the neighborhood.
*I first heard this term from Ron Rothenberg of Homebase Real Estate in Belmont.