Hot-market-can-you-stand-it?-Finance-tipsIn recent posts, I’ve raised the issue of why “terms” are so important when writing a competitive purchase agreement to buy Silicon Valley real estate.

Whether you are buying your first condo, a retirement home, a luxury property or a move-up house, the basic challenges of competing in multiple offers when you want to buy a home but not overpay and not give away your most critical rights tend to be very similar. Finding that balance is tricky but hopefully this series of posts will shed some light onto how listing agents and home sellers tend to respond to offers and what they’re looking for so that you can position yourself in the best possible way with that balance in mind.

Today we’ll continue on with tips specifically related to the finance portion of your contract: loan type, loan amount, cash downpayment and loan terms.

Why should the seller care what type of loan you get? In the end, sellers usually get “all cash” once the transaction closes, right?  If there’s only one offer, and it doesn’t “cost” the sellers anything (they aren’t asked to pay points or other fees for you), that certainly seems to be the way financing is viewed: it will be all cash, eventually.

But in multiple offers, the type of loan you get and the terms that go with it can make a very big difference to your positioning versus the other potential buyers. It comes down to the issue of risk. Home sellers and agents know that some buyers have such solid financing that there is little or no risk there that the transaction won’t close.  And others have more risky loans.

At one extreme is the all cash home buyer.  With an all cash offer, there is literally no financing risk. (At one time, buyers sometimes foolishly made all cash offers when their money was actually tied up in the stock market. With downturns in 2000 and more recently, though, the industry and buyers both have wised up: the cash must be liquid, as cash in a bank account.)    At the other extreme is the no-down or low down payment offer.  The less “down”, the more risk – every time.  Likewise the less down, the worse your chances are of winning out in a multiple offer competition for a home.

Additionally, some loans are inherently more difficult to get through escrow.  FHA loans are wonderfully popular right now, but they usually need 45 days to close, not 30.  Further, they require a higher level of property condition and the appraisals are therefore much more involved.

There are a lot of special loan programs available to first time homebuyers, to veterans, to teachers and to municipal employees. Many of these are excellent programs for the homebuyer, but for the seller they often translate into more risk because there are more loans, the involvement of grants, extra costs or simply more complications – more that could possibly go wrong.  Most often, buyers with these special programs are anxious to buy but if put into a multiple offer situation will not have the winning bid unless everyone they’re competing against also is in the same financing situation (all offers happen to be FHA, for instance).  If you have a special loan – one that is not 20% down at least – it is very hard to compete in multiple offers, maybe impossible.

So, one of the most important aspects of your loan is the type, including the loan to value ratio (percent of loan to the purchase price).  The greater the amount and percent of cash down, the less  risk to the seller, generally, and the more favorably your purchase contract will be seen by sellers and by their agents.  A standard, conforming loan with 20% down or more will have a far better chance of success against multiples than a “special” loan with little or no down.

Another issue is that of loan terms: what interest rate is sought? which bank is going to fund the loan?  Are there points, and if so, who’s paying for them?

If the interest rate suggested on the purchase agreement is unreasonably low, it creates an easy exit loophole that will be a red flag to sellers and their agents.  Here’s why: let’s say you want to buy a property with a conforming loan, 20% down. Prevailing rates are at about 5% but you write 4%. What’s the problem? The problem is that your sale is contingent on your being able to get the stated loan – so if you say you’re buying the house IF you can get a loan at 4% but that’s not possible, it’s a hole as wide as can be in terms of getting out of the contract too easily for the seller’s taste.  Many agents will discuss and write in a rate which is just a little higher: 5.125 or 5.25% to show that you’ll still buy the house even if the rates tick up a little. That’s reasonable.  The sellers can tell you’re serious. But don’t go too far – don’t be talked into an unreasonably high rate either.  Do the math and know what you’re agreeing to.

Which bank is going to fund the loan? Right now, some banks have a great turnaround time and others are horribly slow.  Recently I saw MLS comments for agents stating “no financing from XYZ bank” (I’m leaving the bank’s name out, of course).  Why? That particular bank is taking a month to get preapprovals done – so sellers won’t want to deal with a loan from that bank if it can be helped.  Conversely, some mortgage brokers are also mortgage bankers – they can fund their own loans, later reselling them to a bigger bank. This can really expedite a sale.   Some credit unions are fabulous to work with too.  Have an online pre-approval letter?  That is, do you have a bank from out of the area and a person you’ve never met? That will not usually help your case in multiple offers. Listing agents generally want to know that they can show up on the lender’s doorstep, if need be.

And what about points?  Points usually don’t matter to the seller but in some loan scenarios, the sellers are required to pay any points – and that, of course, cuts into their bottom line so normally they won’t be too enthusiastic about it.

In terms of the financial “strength” of your offer, here’s the progression:

Weaker offers:  almost nothing down, non-conforming loans, more than one loan, requiring the seller to pay points.

Normal offers: 20% down, just one loan, buyer pays all of own costs

Stronger offers: more than 25% down, small  loan

Strongest offer: all cash

You may not be able to do much about some of these terms. In that case, to strengthen your offer, you may consider improving your price or sweeting the pot by making other terms – non-financial ones – more attractive.

Next in the series: more contract terms that can make your bid more competitive with multiple offers.

Please note: This is the third part in a series of homebuyer tips for writing a competitive offer when dealing with a multiple offer situation in Silicon Valley. Please seek professional, individual guidance from your own full time, experienced Realtor since that will best assist you with your particular needs and circumstances.