It has become increasingly more challenging for buyers who require financing to compete with cash purchasers. Given the chronic market conditions of tight inventory and high demand, buyers continue to outnumber sellers, and multiple bidding has become the norm. For every five bidders, as many as three can be all cash. Clearly the cash purchaser has obvious advantages over the buyer who needs financing to close a transaction; however, there are definite tactics to consider when competing with all cash rivals.
To the seller, an all cash buyer removes significant risks and streamlines the process from contract signing to closing. Each of the following strategies is meant to assure the property owner that a financed deal will in fact close.
1.) Foremost, if the buyer has the funds and ability to close with cash and then finance within 90 days of closing, and if the property is a co-op and the buyer has sufficient liquid reserves to pass muster with the co-op board, this should be considered as a first option. If financing occurs 90 days after closing, the loan may be considered a refi and rates may be less favorable. For a co-op purchase, reference to subsequent financing and the reasons why should be explained in a cover letter to the application package, so that the buyer’s intent is not misconstrued and the board is not taken off guard, ultimately approving the purchaser but denying the later financing.
2.) Written evidence of preapproval from a known lender is fundamental with any offer to demonstrate that the lender has reviewed the buyer’s loan application, supporting financial documentation and credit history and has approved a mortgage up to a certain amount. If the purchaser is intent on having a financing contingency in the contract, there are a number of ways to make this more palatable to a seller.
· A directed financing contingency to a specifically named lender can help. Relationships with lenders matter a great deal and aligning with partners who can be counted on to deliver what’s promised can add a certain level of security.
· Shortening the window of the contingency clause from 30 days or more to 12 days or less can circumvent delays. A strong relationship with a lender can generally produce a commitment letter in 7-10 business days, albeit one with multiple conditions.
· Increasing the escrow down payment from 10% to 20% can often make the deal more appealing.
· Reducing the amount to be financed to less than 50% may make the risk more acceptable.
· Waiving the appraisal contingency can remove the guess work that comes with a rising market. To avoid low estimate surprises, very often the appraisal can be ordered before a contract is signed. Alternatively the buyer can agree to accept a lower loan amount should the appraisal come up short.
3.) Equally important, the lender will need to determine whether the contract property qualifies as collateral. If the building is not on the lender’s approved list, due diligence should begin immediately. Once the building has been approved, the buyer should seriously weigh the risks of waiving the mortgage contingency altogether to increase the chances of getting an offer accepted. If financing is denied however, and the financing contingency has been waived, the escrow deposit is on the line. My attorney friends tell me it’s not so easy for a seller to retain the entire escrow deposit. While this sum may be tough to collect and can often be negotiated, if a buyer has demonstrated good faith in the process and doesn’t get financing, what is the likelihood that the board will approve the purchase? Nonetheless if a buyer lacks confidence about obtaining a mortgage, the financing paragraph should not be stricken from the contract.
4.) Partnering with professionals who are known and respected in the industry often trumps other deals. Proven relationships between real estate agents, attorneys and bankers do count. In a competitive bidding process, when everything else is equal, I go with the agent, lawyer and bank that I know will get the job done.
Cash may be king, but a qualified buyer who needs to finance to complete a purchase is not necessarily always at a disadvantage. There are strategies to stay competitive.