Wednesday, February 24, 2016

When A Cash Offer Isn't A Cash Deal.

Dallas has become wild west in terms of housing.  People are moving in from all over and scrambling to find a place to live. In recent months, folks have gone so far as to camp out for an opportunity to purchase a lot to build on, and I frequently experience lines of real estate brokers and their clients waiting in front of listings (even in the rain) for their turn to get a peek inside.

Multiple offers have become the norm. Well-informed buyers, whether they are investors or owner-occupants, know they must make an offer fast, and those offers typically include an expiration date so they can move on to the next property if their offer is rejected.

When a seller sits down to quickly decide which offer to accept, he or she must consider offer deadlines, terms, and contingencies as well as the price.  This is when cash offers move up to the top of the pile.

If an offer to purchase a home includes financing, the transaction is a bit more involved. A mortgage lender will require an appraisal. If the home doesn't appraise for the contract amount, or if the appraiser identifies major repairs needed (think foundation or roof), complications and renegotiations ensue.  Additionally, the mortgage underwriting process typically takes 30 days or longer, and delays beyond that are always a possibility.

With a cash offer, an appraisal isn't necessary. There is no loan, so underwriting is not an issue. The transaction can close quickly and without complication...usually.

Some experienced buyers (often investors in my experience) know that sellers are more likely to accept a cash offer.  Some will use that advantage to submit an offer for cash, assuming that the seller is more likely to accept it because it has fewer contingencies.  But...sometimes, after the buyer and seller execute the contract for a cash sale, the buyer then informs the seller that he/she has decided to finance the purchase.  This is the old Bait and Switch.  It's perfectly legal, but it's frustrating for sellers and for buyers who disclosed up front that they would have financed the purchase.

All of a sudden, that cash offer isn't a cash deal. What's a seller to do?  It might be a week or longer in the sale process when the buyer pulls the Bait and Switch. Does the seller insist the buyer to perform under the original terms of the contract or take the chance that the buyer's lender will be able to close the loan on time?

This is where a good broker's experience, knowledge, and negotiating strength comes in when considering offers.  The purchase contract and third party financing addendum contain specific language about financing. Although we are not attorneys, brokers can suggest specific requirements for option periods/fees, earnest money, and which items to check (or not) on the contract for financing contingencies, etc. to protect our client's best interests. One thing to look for as a clue on a cash offer:  A closing date of 30+ days out.  Cash sales don't need 30+ days to close!

A good broker will also know what key questions to ask the buyer's lender to determine the legitimacy of the buyer's creditworthiness and the underwriting procedures at the lending institution. This information will help the seller make an intelligent decision on whether allowing the switch to financing makes sense.

A broker should advise their sellers to insist that all cash offers be accompanied by Proof of Funds and should verify that information to be accurate before their client executes the offer.  The seller should be prepared to deny a switch to a financed transaction, if it is not in his or her best interest. Just because the buyer asks to change the original terms of the contract doesn't mean the seller has to agree.

 

Wednesday, February 17, 2016

Home Buyers Are Feeling the Pressure


First-time buyers are typically nervous and excited about purchasing their first home.  They have much to consider for example, such as neighborhoods, schools, taxes, maintenance, HOA fees, insurance, and mortgage payments.  The current shortage of homes at affordable prices adds fuel to that fire, but main concerns hear from clients are the competition from cash investors and multiple offers.

Cash Buyers
Cash rich investors are snapping up properties to flip or rent at staggering rates.   The National Association of REALTORS chief economist, Lawrence Yun, states that "home supply is diminishing, but investor demand is not going away."  I see this increasingly in the $200,000 and under price range in the Dallas area.  Investors will make offers on homes in almost any condition.

According to today's Wall Street Journal, many investors are taking advantage of the demand for rentals, which has "boomed."  Rental vacancies nationally were down to near record lows, and median rent was up 11% over the past year.  

Many investors are buying homes sight unseen. In just the past week, I have personally dealt with three out-of-state investors who are willing to pay cash for properties in just about any condition, with  no desire to see the property before making an offer.  

When a buyer (first time or otherwise) finances a purchase, there are contingencies that could delay or stop closing the transaction, which can include appraisals, lender-required repairs, or delays in the lender underwriting process.  When selling to a cash buyer, sellers have no need to worry about such contingencies.  This is why sellers will typically accept a cash offer over a financed offer, even if the cash offer is slightly lower.  Cash transactions are simply quicker and less stress for sellers.

Multiple Offers
Multiple offers and sale prices above list price are the new norm.  Larger earnest money deposits, shorter option periods, and fewer seller concessions are all typical.  Although everything is negotiable, sellers now frequently outline what minimum earnest money and option fees are expected in the multiple listing service data for their property. 

When a new listing becomes available, there is a mad dash of showings within the first few days.  Brokers and their clients are constantly on the look out for new listings so that they can get there before other buyers.  I've shown homes recently where there was a line of agents and clients three deep to tour homes at 10 am Sunday morning.  Buyers simply have to be available in a moment's notice to access to the newest properties for sale.  It's important to work with a broker who knows what homes are "coming soon" and those that are for sale but not on MLS (known as "hip pockets).

Bottom line?  
Now, more than ever, buyers should use an experienced broker who is available on short notice to view new listings and who knows how  to structure a fair offer while looking out for his/her client's best interests, home buying can still be a pleasurable experience, even for first timers.