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Competing against a “cash offer”

Many home buyers today are finding that the highly competitive market makes it nearly impossible for their mortgage-contingent offers to be accepted. They bemoan having to compete against “cash offers”. While it is certainly true that some buyers are going to make a purchase without using a mortgage, the term “cash offer” is often misused/misunderstood. Most people use the term to describe an offer that is not contingent on getting a mortgage. Note that its not being contingent on a mortgage does not mean that the buyer won’t be using a mortgage. Again, just because the offer is not contingent on the buyer obtaining mortgage financing does not mean the buyer cannot choose to get a mortgage. I know it seems to make no sense, but keep reading.

How can my offer not be contingent if I need a mortgage?

In order to understand how (if you can only afford the house with a mortgage) could write an offer that is not contingent on a mortgage, you need to learn a little bit more about the offer document. The PAR form we, in PA, use for offers on homes has a box to check stating whether the offer is or is not contingent on the buyer receiving a mortgage. Among many other boxes to check and fill-in-the-blanks is a section that states the amount of deposit money that is due from the buyer.

Consider an offer written for a buyer who is not using a mortgage (a true cash offer). Once the deposit has been received, assuming there are no other contingencies (like an inspection–read here why sellers strongly avoid inspection-contingent offers), if that buyer decides to not consummate the transaction, the seller can keep the deposit. Let’s say the buyer decides not to move after all, or to choose a different house. The seller can’t force the buyer to follow through on the transaction, but the contract does enable the seller to keep the buyer’s deposit.

Now, let’s consider an offer written by someone who does need the mortgage (and can’t afford the house without it). If that person also waives the mortgage contingency (meaning the offer is NOT contingent on a mortgage), what would happen if the buyer doesn’t get the mortgage? Exactly what would happen in the previous scenario with the cash buyer: the seller would get to keep the deposit. Therefore, when you waive the mortage contingency, to the seller, you are a “cash buyer”. (Note: While the idea of a small deposit may pop into your head as a sort of risk-reduction measure, recognize that the seller will be less impressed by your offer if he recognizes you aren’t risking much if you find yourself unable to come to the settlement table. So you’ll want to put the largest amount on deposit your risk-meter can tolerate, understanding you could lose it if you don’t get the mortgage.)

What’s the difference? The difference is that the second buyer has the additional risk of not getting the necessary mortgage. For buyers who are very confident that, after being pre-approved, they will, indeed get the mortgage, writing an offer and waiving the mortgage contingency can be a good strategy for competing with a true cash buyer. There are lenders who will go a step beyond a pre-approval or pre-quaification and send an application through underwriting even before an offer has been submitted. While not completely iron-clad, this extra step takes makes it nearly impossible for the applicant to end up not qualifying for the loan.

So, if you want to be able to write as competitive an offer as possible, even though you need a mortgage, you might consider waiving the mortgage contingency. Obviously, you’ll want to discuss this option at length with the lender to ensure you understand the level of risk. Also, take into consideration that someone’s risk-tolerance may change depending on how imperative it becomes to find a house, how many someone has bid on and lost  as well as other factors.Things you were not willing to do at the beginning of your search three months ago might not sound as out of the question now. One last thing: if you want to better understand why sellers are so much more inclined to prefer offers that are not contingent on mortgages, click here.

If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973

But I’m pre-qualified!

Some buyers don’t understand why, when they are submitting a bona fide pre-qualification or pre-approval from a mortgage company, sellers still seem gun-shy. The buyers may feel that if the lender has agreed to lend to them, there’s nothing for the seller to worry about. It’s a bit more complicated than that. First, it’s vital to realize that whatever the lender offers as a pre-qualification or a pre-approval is based on a surface-level conversation or questionnaire. The lender does a much more in-depth investigation of your finances only after you are under contract to purchase a house. As a result, even if you’ve been pre-approved, down the road, the lender could deny the loan–and most sellers know this is a possibility, or are made aware of it by their agents.

Mortgage-contingent offers provide “outs” for the buyer

If your offer is contingent on a mortage, your offer will have a check mark in the “contingent on obtaining mortgage financing” box. While, above, I explained that, even with a pre-qualification/approval, you might still end up being denied, there are a couple of other “outs” that the mortgage contingency paragraph provides for the buyer’s protection. For example, there is a blank line where the buyer agent fills in the interest rate cap. This number represents the highest rate the buyer is agreeing to pay without additonal negotiation. For example, if the interest rate cap is 6.5%, it means that, if the best rate the buyer can get by settlement is  6.75%, the buyer can terminate and have all deposit monies returned. (A buyer with a mortgage contingency who is trying to appease the seller might put a very high number in as a cap or even leave it blank, meaning that, regardless of the rate available at closing, the buyer wouldn’t be entitled to return of deposit monies if she terminated due to a high interest rate.)

Probably the most concerning loophole that the mortgage contingency paragraph creates for the seller has to do with the appraisal. The boiler plate language is designed, if filled in properly, to protect the buyer from having to complete the transaction in the event of a low appraisal (meaning below the purchase price agreed to in the contract). Why? because if the buyer is expecting, for example, an $800,000 loan on a $1,000,000 purchase (an 80% loan), but the appraisal comes in below $1,000,000, the bank now would only be required to lend them 80% of whatever the appraised value is (even if it’s lower by a dollar). So that buyer needs to figure out how to bridge the gap to find that extra money. (Buyers may choose to fill out this section in a way that will completely or partially mitigate this appraisal issue for the seller (for more on appraisal gap coverage, read here).

With prices often exceeding list price, the risk of a property not appraising at purchase price grows the higher the offer. So the possibility of a low appraisal is very real to sellers in today’s market. With lots of competition, most sellers would rather take a slightly lower offer that is not contingent on an appraisal than a higher one that is (or has limited appraisal gap coverage).

To boil it down

With a mortgage-contingent offer, while the buyer can choose to eliminate the interest rate gap and even any possible appraisal gap, it remains contingent on the lender approving a mortgage. Additionally, some people may still cap the interest rate, even if it’s higher than they think rates may go, and most offer a certain amount of appraisal gap coverage as opposed to waiving the appraisal altogether. With a cash offer, there is no appraisal at all. So when the seller receives a cash offer, she knows that the purchase price agreed upon is not going to change due to a low appraisal. Finally, just sorting through the mortgage contingency paragraph to understand exactly what the buyer is or is not offering can be stressful. A non-contingent offer is much more straightforward and loophole-free. It may be a little clearer now why sellers so strongly prefer non-contingent offers to those contingent on mortgage financing.

If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973

When you can’t see a house in person

Sometimes, prospective home buyers are interested in a house, but cannot tour it in person because of travel/distance or some other issue, like illness. For example, during COVID, it became somewhat common for prospective home buyers to have to tour properties remotely–the agent would go and facetime the client to show the house.

I’ve been selling real estate for 19 years and have concentrated heavily on helping people relocate to the greater Philadelphia area. As a result, the majority of my buyers have not been local. Between the cost of a last minute plane flight/lodging/car rental and the challenge of dropping everything (work, familial responsibilities), it is often impractical for an out of town buyer to be able to come in to see a house. This scenario is especially true in our market which, for the last several years, has suffered from low inventory–houses often go under contract just a few days after they are listed. So there is often no time for a buyer to make the trip before the house is gone.

How to reduce your risk when touring virtually

Buying without ever actually being in the house in person is an unsettling prospect. No doubt about it. I would certainly not recommend buying a home that way. However, there is often no choice. So, a buyer who accepts that reality needs to his or her best to reduce the likelihood of missing anything important. While certain kinds of research should be done regardless of whether a tour is virtual or in person (reviewing the Seller’s Disclosure, finding out about the community/neighborhood, understanding commuting distance, learning about local amenities, etc.), this post focuses on how, through a virtual showing, a buyer can minimize overlooking something vital. Here are some suggestions I have for touring a house. If you are not able to be there physically, you might want to keep this list handy and make sure your agent gets to each item.

1. Make sure your agent shows you the street view, not just the house. You want to see what the neighborhood is like. (Google street view can also be a great tool for this purpose.)
2. Ensure you see all of the exterior. Look at the siding or stone/brick, any wood (which is prone to rot) including window frames. Also look at the property–evaluate the landscaping, note whether the lot is level or whether there seem to be any swales that might flood, if it’s fenced, if you can hear highway noise, etc.  I also recommend asking your agent to walk to the farthest edge of the property lines and show you the views of the house from there.
3. Don’t forget you’ll want to see the basement/attic, as well as garage and any other outbuildings, like storage sheds. Does the basement seem damp? Are the ceilings high enough that you could finish that space? Is the garage big enough for your vehicles in (sometimes there is a pesky pole right in the middle and you can’t realistically open your car door!)?
4. Systems–the a/c, heater, water heater, windows and roof have to work properly and can be costly to repair. So while you may not be as knowledgeable as an inspector, and even though you’ll read the disclosure, it is still a good idea to see those items. Don’t forget the driveway and any pathways or patios/decks. Their condition is important.
5. Don’t forget to look at closets and other storage so you understand how much space there is.
6. Note the condition of floors, walls, updatedness of kitchens and baths, etc. so you can budget for improvements and/or decide if you can tolerate living in it “as-is”.
7. Pay attention to the room sizes and figure out if your furniture would fit. This detail is especially important in bedrooms where you may have radiators, windows, closet doors and other room characteristics to work around.
8. Note whether there is adequate lighting (both daylight and ceiling light). Obviously, time of day matters, but some houses just don’t get much natural light. Some homes may require a lot of lamps or the addition of recessed fixtures if they don’t have much overhead lighting.

Mechanics of a virtual showing

The above list is by no means complete; rather a jumping off place. And, again, I would encourage any buyer to check all of those things whether it’s an in person or a virtual showing.  About the virtual showing itself:

Please ask your agent to go slowly and hold the camera at eye level. Also make sure the agent pans frequently so you can see the other rooms and understand the layout/orientation. Ask your agent to get the wifi info from the listing agent, if possible. That will help with the connection, which can frequently fail otherwise (especially in the basement). The most valuable advice I have pertaining to the mechanics of a virtual showing is this:

Instead of FaceTiming with your agent, send the agent a Zoom link. That way, you can record the tour. Having a video you can review to remind yourself of the details is incredibly useful. Also, hearing the conversation will help, too. For example, when you hear your agent say, “it’s a little tight between the kitchen island and the refrigerator”, it will ensure you don’t forget to consider that detail.

If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973