Can Mortgage Borrowers Compete With Cash Offers?
Around one in four homebuyers makes pure cash offers in today's real estate market.
These cash offers offer safe money and quick deals – both of which can be tempting to avid sellers.
Unfortunately, not everyone can afford to cough up hundreds of thousands in cash in advance. The majority of buyers (especially first-time home buyers) rely on mortgages to finance their home purchase.
But when you're in that boat, there are still opportunities to compete – even with most buyers. Here is how.
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7 tips to compete on an all-cash offer
It's no secret that the housing market is on fire. In fact, according to real estate agent Redfin, a whopping three quarters of buyers are facing a bidding war these days.
To stand out from the crowd, many buyers (actually 25%) make cash offers.
Offering all of the cash can definitely grab sellers' attention, but there are other ways to sweeten the deal when using a mortgage.
Here are just a few that can help you beat the competition:
1. Get approved for your mortgage
Before attempting a quote on a home, pre-approval for a mortgage is a must.
Many mortgage lenders offer fully signed pre-approvals, which means your creditworthiness and finances have been checked. It's basically an "all clear" for your mortgage loan, except that you haven't found a home yet.
These types of pre-approvals can help you give confidence to sellers. Even with funding risk in your contract, they know you are a safe bet buying their home and pulling through.
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2. Avoid contingencies
The easier you can make it for the seller, the better. And waiving contingencies? That's one of the best ways to do this.
This can mean that you do not need to:
Financing failure: If you forego this option, you will not be able to back out of business if your mortgage loan failsInspection option: So you can have the house inspected before buying itSales contingency: This is reserved for existing homeowners and stipulates that you must sell your existing home before making the purchase. (It's also one of the least attractive contingencies for sellers)Evaluation contingency: That way, if your rating is low, you can resign or renegotiate
Remember that foregoing contingencies is risky.
Waiving the inspection could mean the property is missing underlying problems or repairs, while waiving your valuation contingency could mean paying a lot out of pocket if the home is not valued highly enough.
Make sure you speak to your agent about the risks and benefits of contingency waiver if you are considering doing so.
3. Increase your cash deposit
Earned money is essentially a good faith deposit. It reserves the right to buy the house and if you withdraw from your contract without giving a reason, the seller is allowed to keep it.
If you really want to get noticed, increasing your deposit is a great way to do it. It shows the seller that you are serious about buying their home and that you are ready to put your hard earned money into it.
4. Offer above the offer price
Often times, cash buyers come with offers that are lower than the asking price, primarily because of the ease with which their transactions are associated. When you're dealing with a cash buyer keeping the seller down, it can be a way to go above listing price to stand out.
You can also think about an escalation clause that will automatically increase your offer if someone outbids you (up to a certain threshold, of course).
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5. Add a valuation gap guarantee
In today's hot market, it's pretty common for ratings to be low. This, of course, worries the sellers (they don't want you to get out of the business if the house is valued low).
To allay those fears, you can consider adding a valuation gap guarantee to your listing. This tells the seller that you are covering any discrepancy between the bid and the appraised value.
This is usually only an option if you've saved some extra cash outside of your down payment. Closing a valuation gap would mean paying on top of the money you put with your lender.
6. Get personal
You can also write a personalized offer letter to the sellers describing what you love about the house and why it is a perfect fit for your family. Some buyers even include photos of their children or pets with them.
It's a nice way to stand out from other buyers and draw sellers' hearts.
7. Consider an alternative to the cash offer
There are some companies that offer cash shopping solutions that do not require upfront cash.
With Ribbon, for example, you can pay 1% of the home price (so $ 2,000 for a $ 200,000 home) and then back up your offer with cash.
There are other similar options too, including Accept.inc, Homeward, and more. Big brands like Opendoor and Homelight even have cash offering programs.
The bottom line
Cash buyers are a common sight in today's housing market, but they are by no means invincible.
Talk to your broker, get a signed pre-approval from a mortgage lender, and go into the apartment hunt to be competitive.
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