Why Your Offer Loses
Tired of getting your teeth kicked in by competing buyers on the homes you try to buy? Wonder what sellers are thinking when they reject your offer time after time?
You’ve landed on the right blog. Let’s take a quick look at a few critical components of an offer through a seller’s eyes to find out exactly what is keeping that elusive new home out of your reach.
This is a big one, particularly in a competitive situation in which the seller is entertaining multiple offers at the same time. Back in the day, virtually anyone with a pulse was a good bet to secure the necessary financing to complete a transaction due to lax qualifying standards. These days, the banks want a faxed copy of your baby as a pre-funding condition. As such, you are banging your head against the wall if you don’t have an iron-clad pre-qualification letter from your lender to present with your offer. And I’m not talking about a bare bones letter in which the qualification is based solely upon a conversation, you’re going to want to have the boxes checked that indicate your pre-qual (pre-approval is even better) is at minimum based upon a tri-merged credit report and review of recent bank statements. Got two years of tax returns and recent pay stubs to your lender already? Even better.
Don’t save the pre-qualification step for the last minute when you’re frantically trying to submit an offer on a hot, new listing. Taking the time to prepare a rock solid pre-qual in advance can be the difference between being a buyer and being a shopper.
- Financing Type
Most buyers are somewhat hamstrung on their financing options these days as down payment options tend to dictate the ultimate vehicle chosen. That said, it is important for you to know what the seller sees as a limitation of each loan type so as to find a way to overcome the likely objection(s) within the framework of your program.
FHA Loans – Dormant, by and large, during the boom when low (and even no) down payment options were plentiful in conventional financing, FHA loans have made a comeback in a big way in the Scottsdale market. Sellers will have two major concerns with your FHA offer.
First will be closing costs. As most people opt for FHA because it opens up the door to a 3.5% down payment, it is not uncommon for these buyers to have a little less saved up for the closing costs that piggyback a home purchase. If you are loading 1-3% of your costs onto the seller, be mindful that you are not actually offering the price you put on the first page of the contract. All that matters to the seller is the net. If you are trying to get your closing costs covered, you might have to boost your offer price commensurately.
For example, your 150k offer on a 150k listing is not truly full price if you are asking the seller to pay 5k in closing costs. To make your offer reflect an effective net full price, you’ll need to offer 155k.
And hope the appraisal can justify that amount.
Which leads us to the second major financing concern, the appraisal itself. Not only do FHA loans require FHA-certified appraisers who scrutinize the condition of the property for inhabitability (no exposed wires, utilities must be on and functional, etc), but sellers and their agents will expect the appraiser to be far more conservative with the ultimate evaluation due to the high loan to value ratio. The lower the down payment, the higher the risk to the bank. That tends to bring a little more heat down on the appraiser to bring in a value that will survive heightened scrutiny from a constipated underwriter.
VA Loans – VA loans are like their FHA cousins on steroids, at least from a seller’s perspective. We all love our troops … until they try to buy our homes. A seller sees your 100% financed loan and does not see an army of one, he sees an even more anal retentive appraiser and underwriter who would like nothing better than to blow up the sale of his home.
Peeling paint in a home built before 1978 (subject to lead)? He’s gonna have to scrape it and repaint.
Last good round of sales comps older than six months old? That’s bad enough on a conventional loan in which the bank is only investing 80% of the home’s value, but at 100%?
Sellers also expect to get stuck with buyer closing costs (sellers MUST pay certain costs with a VA loan), so it’s not the favored financing type for many.
Let us not forget about the time factor. Most lenders will want about 40-45 days to process both FHA and VA loans, due in large part to the red tape created by the government backed programs. For the seller who wants a more standard 30 day close, this is not as appealing. You might have to build in some additional incentive for the seller to select your offer with the longer close, such as additional earnest money at the midway point, slightly higher purchase price, etc.
Conventional Financing – Conforming to Fannie Mae guidelines, conventional loan programs typically require higher down payments (5-20%) than their kin. Sellers like this because it means you have more ‘skin in the game’. The appraisal is less of a white-knuckle experience given the lower LTV (loan to value ratio), and the seller expects you will be much more likely to ultimately secure the loan and close escrow. While certainly not outside the realm of possibility, a 20% down conventional buyer is less likely to ask a seller for closing cost assistance.
Outside of the cash offer, the granddaddy of them all, conventional financing is looked upon most favorably by most sellers.
- Down Payment
Touched on this above, but bears isolating for repeat. The more money you are showing as a down payment in your offer, the stronger I, as a seller, think you are and more likely to close. Your lender will not be as hypercritical in approving a loan with 60% LTV versus 95%. The appraisal will be less of a hurdle, and failing to hit the sales price won’t be insurmountable (you have the resources to pony up cash to bridge the shortfall). Further, I expect you have some leeway on potential inspection issues if you have deeper pockets. The guy putting everything he has in the world together to complete the purchase won’t have much room to make improvements/repairs after closing.
That scares me as I expect you are going to try to kick my ass for every loose screw and squeaky hinge in the inspection report.
- Earnest Money
One of the easiest places to score points with the seller is the bolstering of the ‘good faith’ money you place in escrow upon contract ratification. In our market, 1-3% would be considered a typical earnest deposit. The more you can put down, the more appealing to the seller. With several ‘outs’ along the way to reclaim this money in the event of a poor home inspection, loan denial, low appraisal, etc, the shrewd buyer will offer to place an eye-catching deposit in escrow. If the deal goes south, provided that it is not due to your own breach of contract, this money is recoverable. If the deal goes through to closing, it is applied to the total due at closing. It IS NOT an additional fee.
If you can afford to do so, go outside the box a little with your earnest deposit when you know you are competing against other buyers. It doesn’t end up costing you anything more unless you breach the terms of the deal.
Don’t do that.
If you reflected, say, $500-1000 in earnest money on your last stab at a $200,000 house, you limped in with your offer, regardless of the accompanying terms. Show weakness in the good faith money you show me, and I think you are either a) not committed to the deal, b) broke or c) both.
Believe it or not, sellers pay attention to those little throwaway items in the contract outside of price and ability to close.
That home warranty policy you want the seller to pay? That’s $350-550 off the bottom line. While a typical buyer request, you need to be cognizant of circumstance before automatically checking the ‘seller’ box in the contract. Is it a bank property? Are there other offers on the table (or likely to be due to the great value, time on market, etc)? Might want to rethink its inclusion in some cases.
Likewise, don’t check the boxes in the HOA addendum (if applicable) loading all transfer cost onto the seller without some thought. If it comes down to you and another comparable offer, don’t be the guy that sabotages himself over a couple hundred bucks.
The inclusion of personal property in your offer can be a mistake in a competitive market. Sure, those Maytag Neptunes are great, but do you really want to scuttle your chances of getting the house over the washer and dryer? You can ask for the fridge if there are no other offers at play. Deal?
Writing your offer subject to the sale of a current residence? That’s a huge no-no in a competitive situation. As a listing agent, I tell my seller that there is still a property that needs to sell for the deal to work, so you are no closer to the closing table. Worse, you now have no control over the property being sold. Banks and short sale sellers feel the same way. Get your home sold before approaching sellers if you want to stand a chance in a competitive arena.
Give the seller his/her preferred title company. This one is easy. As long as the company is reputable, it’s easy to score points with the other party by acquiescing on items that don’t cost you anything. A pre-requisite of purchasing a bank property to accept the seller’s choice of title company, it’s not a bad idea to include the question of “Does the seller have a title preference?” in the conversation with the listing agent that precedes your offer on a mom & pop resale, too. You know, the same conversation in which you ask about preferred closing dates and such?
Purchasing ‘As Is’ is fairly common in the current market as few sellers have the equitable wherewithal to actually make repairs. If you are looking at short sales and foreclosures, it is a given. You can sweeten the deal for a resale seller and differentiate your offer from competing ones by making your offer ‘As Is’ for his property as well. If framed properly, you will still maintain your full rights to a property inspection, with the ability to cancel the transaction if the home’s deficiencies are too numerous/costly. You alleviate the seller’s obligation to repair broken items, but you are not obligated to complete the transaction if you are dissatisfied. Offering to purchase ‘As Is’ can be a good tie-breaker in a multiple offer scenario, but employ with caution.
And for Pete’s sake, don’t let your agent write a short story’s worth of verbiage into the constructive language section of the contract. Not only do agent’s get themselves and their clients into trouble by unwittingly practicing law through the amateur construction of legal terms, but filling this page up is the antithesis of a ‘clean’ offer. Keep it simple, and don’t scare the seller off with Perry Masonesque flair. Half the stuff that shows up here with regularity is already covered (more adequately at that) in the boilerplate.
Remember: The AAR contract is nine pages (plus addenda) of carefully crafted legal verbiage that was composed by attorneys smarter than you and your agent.
I saved this one for way down the page because it should be the most self-evident truth this side of pain hurts. You lose the privilege of complaining about non-accepted offers if you keep trying to negotiate more off the asking price than the market permits.
- The Listng Agent Never Received Your Offer
Your offer was good. Your offer was clean. The home will be yours by Halloween.
Or it would have been had the listing agent ever received it.
Sad but true fact, I have received numerous offers over the years without so much as a headsup call that one was on the way, let alone a followup call from the buyer’s agent to confirm that it actually arrived. For all you know, the offer you spent a day or two considering and several hours drafting might have ended up in a spam folder or faxed to Sri Lanka if that simple precautionary step is not taken.
Inconceivable? It happens all the time.
Further, if you don’t let the listing agent know an offer is en route, you risk the possibility of the seller accepting another offer in the interim.
Don’t let your agent be lax. Make sure your offer gets where it’s going.
Sidenote: When I receive an emailed/faxed offer that is not preceded by so much as a phone call from the buyer’s agent, I know it’s going to suck. Food for thought.
- You Are Competing for the Wrong Properties
Allow me to move from the seller’s side of the table back to yours, doffing my cap as your friendly buyer’s agent. If you keep losing properties despite gussying your offers up in accordance with the advice herein to make them as attractive as possible to unimpressed sellers, it is quite likely that you have simply set your self up for failure by targeting the wrong homes. This phenomenon is most prevalent in the lower price ranges where investors and second home buyers make it difficult for cash-strapped, first-time buyer to compete. Competing against cash or high down payment conventional financing, the poor SOB writing clean, full-price FHA offers doesn’t stand much of a chance.
Stop throwing your hat in the ring on properties you won’t get unless you really don’t care for your hat. Cause it’s gonna get trampled.
You will have much better chances for success by targeting homes priced a little higher and negotiating down rather than starting at the basement where the Daddy Warbucks of the world are busy chasing the prices up.
Go find the lonely seller who is priced just above the scrum.
Getting drubbed in the bidding wars at 150k? Look at the inventory for comparable properties at 175k. Odds are, despite the discrepancy in list prices, the ultimate selling prices won’t end up that far apart.
Bolster the weak points in your offers, isolate the right properties and you, too, can have success in this market.
Now get back out there and make someone an offer they can’t refuse.