Don't have cash to buy a home? Try This

Shopping for a home and don’t have the purchase price in Cash? Do this.

 It’s simple. Cash is King. Always was, always will be. An all cash offer for real estate will beat out a financed offer every time – assuming the same price. There is a risk for the seller to her taking her house off the market for a financed offer with contingencies.  That  risk has a price, however, and more about that a bit later

There are things you can do to improve your bargaining positon, however. Let’s examine them.
At one time during the foreclosure crisis here in Fort Myers we had over 120 listings of foreclosed homes in various stages of the pre-sales or sales process. Over 90 percent of those properties sold for cash. The bank needed to turn these properties as fast as possible and the risk of waiting for financing approval was too high and most homes was gobbled up by cash investors. Then the Federal Government stepped in and on all Fannie Mae  homes they created a “First Look Period” during which all homes had to be sold to owner occupants first before it was offered to investors. If you were an owner occupant and had cash, however, you still beat out a financed deal.

Today I work with many first-time home buyers as well as investors in multifamily properties, (Particularly six-plexes and smaller). My buyers are mostly financed buyers.  Here is what I recommend to them.

Pre-Qualification

If I am going to work with a buyer who will finance his purchase I insist on a thorough pre-qualification from a reputable and verifiable lender.  The lender must have, at the very least, sent my client through DU (Desktop Underwriting) or something similar, and reviewed copies of his tax returns, paystubs and run a full credit check as well as conducted a personal interview with the potential buyer.  In every case I also want to talk to the lender myself and verify the veracity of the pre-qualification

I want this not just for my clients, but I’m going to go “to bat” for him and I want to make certain that the representations I make are honest and true – as I will be putting my reputation on the line. I will not do this for a lender I do now know or who will not be as thorough as they need to be just to “Reel the borrower in” and then try to close the deal on higher interest rates and more costly terms to my buyer.
The pre-qualification process is something that buyers, especially first time home buyers, need to take most seriously – and take it seriously way before they start looking for a home. This is because there may be things you can do to improve your chances of getting a loan, lower your interest rates, or speed up the process; and a good loan officer can guide you in the process. The lender can also help your agent guide you to the acceptable price point based on your ability to pay and the amount of down payment.
Encourage your lender to speak to your Realtor and indeed allow your lender to talk to your prospective seller. Talk about condo or HOA fees, insurance costs and taxes.

The better the prequalification letter and the more thorough and personal the involvement is from the lender, the better it will be for you when your agent utilizes the lender to help strengthen your offer.

Yes, the letter will be full of “cover his butt” comments about why the lender can’t finally approve the loan for a number of reasons, but it should also  include statements like “I have thoroughly examined the applicants finances, tax returns and interviewed him thoroughly”.
I also do not recommend that you get separate letters for varying offers.  For example, if you are approved for a $225,000 purchase and you are offering on a $175,000 home, use the higher letter, it shows the seller that you have strength. Some buyers mistakenly ask for a new letter with the max approval of the $175,000 they are offering, thinking it will prevent the seller from asking more. What it will do is scare the seller

Go with your strength.

Cash buyers can close quickly. This is their strength. They can offer less and ask for repairs. A financed offer takes time and may have the following contingencies:
               Four-point inspection
               Home inspection
               Septic Inspection
               Appraisal
               Financing approval
Your strength must be the price. You are in fact, offering them a reward for taking the risk on a financed offer.  Offer the ask price or slightly more and minimize the risk the rest of the points.

Earlier this month we offered full asking price on a home that needed repairs. But I promised the four point inspections the next day, and I told the seller that we already knew that the roof had to be repaired and were not going to come back for money from the seller for the roof. Is essence I let him know we were going to come to a quick yes or no on inspections. We were minimizing the risk of taking our financed offer.

Often, I will do a four point inspection on a house immediately and BEFORE full inspection. The four point tells me two things. 1. Is the house insurable?  And , 2. Are there major repairs that need to be done? I can then call in a contractor for my client and get an estimate for those repairs. On the last home I did this on for a client we  secured  that client a 203K loan for the repairs and did not ask for money from the seller.

The other thing I will very early is get an estimate for insurance. As I have talked about before insurance costs can kill a deal, and I the deal is going to die, I want it to die SOONER rather than later, after my client has spent more money on the process.
The other strength you should have is your integrity. The more open and honest you are with your seller, the better you will fare. Remove all the uncertainly and friction for your seller. Be quick with your inspections, honest with your dealings, and forthright with your decision.
The appraisal is something that your agent should help you with. If he has done his analysis thoroughly, he can reduce the chances of any surprises in that department. But if the appraisal winds up low, you may be able to go back the seller – especially if you have been forthright on everything else, and ask for a reduction.

Let’s get back to Cash

When I first came to Fort Myers in 1989 I bought a condo at Parkside off Gladiolus. I offered $56,000 cash on a $67,000 ask price, closed in one week, put a tenant in and then financed the condo a month later and pulled out most of my cash. In this case I used my own cash to help me get the best deal when I made the offer. IF you are shopping and find your self disadvantaged for not having cash, examine your alternatives.  Some of them are: A HELOC on your existing home, a family loan or a short term loan from your retirement account may be the way to go. 

If you must deal with financing when making offers:
1.      1..Super pre-qualify and present your pre-qualification well
2.      2.  Make speedy and thorough inspections
3.      3.  Communicate with the seller and lender openly and often
4.      4.  Make your price and integrity your strengths
5.      5.  Remove friction from the process for your seller. Make it easy for him to sell  to you.