Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. In many cases, they write offer after offer, and each time not only are their bids rejected, but they never even get a counter offer. 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.
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 3.5% FHA backed loan be suitable?
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.
What happens if the property doesn’t appraise?
With the 20% down (or FHA or other loan product) situation, if the property does not appraise to the sales price, either the buyer will have to put in more cash, the seller will have to reduce the price, or the house/condo/townhouse will end up going back on the market, depending on what the ratified contract says. That appraisal is a great “safety net” for buyers but for sellers it’s an albatross!
Don’t lose heart, many cash buyers are unrealistically low in their bids
What I’m finding is that with multiple offers and cash buyers, some of those with money in hand are overly confident on what that no-loan status will bring them. Awhile back I got 20 offers on a Santa Clara condo listing, 8 of them cash, but of those, only 2 or 3 were really ever contenders. The rest of the buyers who were flush with money grossly under bid the home. The cash is probably worth a 2-3% discount – but some cash buyers were off by much more than that – a giant gap of more than 15% from the lowest cash offer to the highest financed offer.
In most cases, the best cash offer will get a counter that raises it closer to the financed offer – but perhaps not all the way to that amount. But the unrealistically low cash offers will get completely passed over.
As a buyer with a loan, what can you do? Here are a few ideas:
- Try to avoid multiple offer situations (that may mean bidding on properties which are overpriced, distressed, need work etc.)
- Ask your agent to assist you in finding off-market properties (this will probably involve your signing a buyer broker agreement, since the MLS is the way in which agents are promised compensation for their work)
- Analyze which parts of the valley appear to be over heated – are there other areas which would suit you as well which are not getting so much attention? you may find a much better deal, and better odds, there.
- Find ways to make your offer less risky to the seller. Some buyers will write non-contingent offers (no loan or property)
It’s hard to be a buyer right now, especially a first time home buyer. There are often lots of offers written before one gets accepted. If you can bring in a larger cash down payment, it will improve your odds tremendously. Cash remains king!