Why do sellers care if the offer has a loan or is all cash?

Image of $20 and $10 bills with the words "Why do sellers care if it's a loan or all cash?"Why are all cash offers such a big deal?

Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts or which are “all cash, no loans”.

The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a lower interest rate FHA backed loan be suitable?

All cash is better because there’s less risk

Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies.  For sellers, the fewer contingencies the better and no contingencies is ideal.  Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)

Low down payment, conforming loans are back

Low down payment conforming loan is backFirst time home buyers, you have cause to be grateful as low down payment, conforming loans are back.  This means that if you have less than 20% saved toward your down payment, you aren’t stuck needing to utilize FHA backed financing.  FHA insured mortgages can be a wonderful thing for home buyers in particular situations (such as not having enough of a credit history), but they are costly – especially now, with the requirement that the mortgage insurance stay for the life of the loan.  Buyers with FHA financing also are less desirable to sellers and listing agents as FHA has stricter requirements than conventional lenders.

Being able to purchase a condo or house with 5% (or possibly less) using conforming loans will open a lot of doors – at least in theory.  In our crazed Silicon Valley sellers’ market, though, where multiple offer situations are the norm, having a high loan to value ratio may get you on the list of bidders to be eliminated.  San Jose area sellers want large downs, or better, all cash buyers.  It’s hard to compete with that!

The smaller your down payment, the more important it is to either avoid multiple offer bidding situations altogether or to aim at properties with lower numbers of offers.  What may help you most is targeting condos, townhomes or houses which have been on the market a month or more, as these seldom will have more than one contract presented at a time unless there’s a price reduction.  You and your real estate agent may also target the homes which are not offered via the multiple listing service (yes, they are harder to find), whether represented by another Realtor or licensee or sold without professional representation (aka, a FSBO).

Related reading:
First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

Writing an Offer in a Multiples Situation? Financing Tips (Part 2)

ten-dollar-billMultiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

  • good faith deposit (initial deposit)
  • increase of deposit (if needed)
  • loan type (conventional, FHA, VA, seller carry?)
  • loan costs (will you pay or are you asking the seller to help pay?)
  • loan terms: are they realistic?
  • is there a pre-approval letter or a pre-qualification letter?
  • what is the total down payment amount? (and % of purchase price)
  • will you provide the “proof of funds” to the seller?
  • will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)

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