San Jose is a hot seller’s market in entry level prices of many neighborhoods (Alum Rock, Evergreen, Blossom Valley, South San Jose, Willow Glen, Cambrian and more), and because of that, we are finding that in many cases, homebuyers are having to compete in multiple offers. (Offer writing generally tends to produce a lot of anxiety for buyers, and there are a lot of questions you may have about the whole real estate purchase offer process. Please also see my Q & A on Making an Offer on my other website.)
This post is part of a series on how to write a competitive offer when bidding in a multiple offer situation in Silicon Valley. We’ve looked at what terms are and why terms matter generally, and then we drilled down to particular financing terms: the deposit (and related issue of liquidated damages & default), loan type, downpayment amount & percentage, and loan terms.
Today we’ll finish up the section on offer finance terms and will cover a couple of “easier” financing items:
- presenting a pre-approval letter for your loan
- having a copy of the check when presenting the offer
- providing “proof of funds” with your offer
This will be the last post on financing terms for your Silicon Valley real estate purchase agreement. After these we’ll move into a discussion of other terms in the contract.
The Importance of a Pre-Approval Letter
Why be pre-approved? Why not just be pre-qualified? A “pre-qual” is not very helpful to you in negotiating for the best price with any offer, so even if you are not in a multiple offer situation, I would encourage you to go to the trouble of getting your loan pre-approved. Getting pre-approved is either no cost or low cost (I know one B of A lender who charges $50 to do a pre-approval, but many will not charge you for this service). It does take time because you must gather together your financial documentation, but it is in your best interest to do it for a variety of reasons. You do not want to find the perfect home only to find that you really don’t want to get the only loan that will help you to purchase that property, for instance. Know what your budget is before you shop and you will save yourself time, energy, and disappointment. And when you are ready to make a bid, you will be far stronger.
Pre-approval letters are not all equal, by the way. Some mortgage brokers will zip out a pre-approval letter because they feel “confident” that you can get the loan. That’s not a real pre-approval. A true pre-approval for a loan means that all your supporting documentation has been turned in, together with the application, and your credit report has been run, etc. Further, it has been packaged together and submitted to an underwriter. With an actual pre-approval letter, there should only be three things needed for the lender: the ratified purchase agreement, the appraisal, and the preliminary title report.
Experienced agents can see that some pre-approval letters are really just gussied up pre-quals. When receiving an offer from a buyer’s agent, the listing agent may phone your lender (mortgage broker or mortgage banker) and ask a few “hard” questions to test how solid the pre-approval is. So realize that since the letter is part of your offer package, it too should be rock solid.
If you want to buy a home, eventually you need to do a little work to get a loan approved. Do it upfront and have a good letter of pre-approval in hand and it will strengthen your positions in multiple offers. Anything less will hurt you in terms of your competitiveness with other offers.
The Check, Please
Getting ready to buy a Santa Clara County property? Get your money into an accessible account, because you’re going to need it! If you write an offer and your contract is accepted, your good faith deposit money will go into an escrow account and will be cashed within a very short time.
When your offer paperwork is submitted (the agency disclosure, the offer, certain other advisories and disclosures, pre-approval letter etc.), you should expect to write a check – made out to the escrow company – for that initial deposit (a much longer discussion of the deposit can be found in Part 2 of this series). Don’t forget to give your agent a check before finishing the appointment! Your Realtor (or other real estate professional) will photocopy the check and present that with your offer. It shows the seller and the listing agent that you are ready to go. A missing check is not the end of your chances to get the property, but if put together with other weak spots in an offer it can collectively hurt you. Since it’s easy to do and doesn’t cost but a penny or two to part with the check, this is something you should plan to do if you hope to be competitive.
Proof of Funds
Since we have been in the middle of a deep recession and incredibly tough financial crisis for well over a year now, the way buyers and agents present themselves as they bid on homes has changed. Lots of wealth was lost with the housing market decline and stock market crash, and with it went a lot of confidence. It’s turning around now, of course, but there’s still a sense of being shaken up that prevails. As a result, buyers now want to “show strength” and many agents are not only sending in the regular paperwork, but they are sending in proof of funds too.
It used to be that documentation on cash in the bank was only required with “all cash offers” to buy a home. But this year I’m finding that about a quarter to a third of all offers are accompanied by bank statements, credit union account statements, and statements from financial planning companies indicating the potential buyer’s holdings in some sort of liquid account (not stocks or mutual funds, but cash, CDs etc.)
Although it strikes me as going a bit far to suggest providing proof of funds in multiple offer situations, I can tell you that if you don’t do it, someone else will and that other offer will be stronger than yours. As an angle on how to raise the bar, this is one more thing which you can do to make your offer stand out. It is a “term” that does not cost you anything but a little time.
Of course you can “white out” or “black out” account numbers, your home address etc., leaving just your name and the bank balance showing.
This request can be really unnerving to people because we are all so afraid of identity theft, so I am not happy that this has now become a way in which homebuyers in Santa Clara County negotiate. But things have changed, and any discussion of how to compete when writing multiple offers in Silicon Valley would be incomplete without making you aware of this.
Financing terms in contracts & multiple offer situations: summary
In conclusion, there are a lot of financing terms to weigh when putting your offer together. If you are bidding against other home buyers, you will improve your position relative to the others if you can strengthen all your terms, with the financing terms being very important. In some cases, you may not have any control. For instance, if you only have so much cash to put down, you cannot simply make that number bigger than it can be. But in others, with a little effort, you can tilt things more in your favor: having a real pre-approval letter, providing proof of funds, writing in a realistic loan interest rate, providing a copy of the check, putting 3% down upfront – this is usually doable if you’re putting any money down at all. Sometimes agents are new or inexperienced, and they may play light of these issues and tell you that they aren’t important. But if you’re up against 5, 10 or 20 offers, they are all important.