The following guest post was written by Jackson Cooper of Jensen & Company.
All cash home sales comprised 37.9 percent of all closed deals in February, according to the most recent CoreLogic data. That is down from 40.6 percent the previous February.
Cash sales have dropped every month since January 2013, opening the door for finance buyers to be more competitive with cash home buyers. But there are still steps that must be taken to maximize your opportunities. Here are five tips to put yourselves in the best position to land your dream home.
Waive Contingency Clauses
Contingencies are clauses put in real estate contracts that protect the potential buyer in case they fail to secure financing in the agreed upon amount of time. Financing contingencies allow buyers to cancel the contract if they cannot secure sufficient funds for the property.
Waiving the contingency means you are not protected if financing falls through. In other words, you become just as attractive to a potential seller as a cash buyer. You will lose any earnest money (deposit) paid upfront. The seller can also choose to sue you for breach of contract. But waiving this contingency shows the seller you are serious and will take all necessary actions to secure financing.
Other contingencies, particularly inspection clauses, should remain intact. The language can be modified to cancel the contract only in extreme circumstances, such as major structural damage to the property or non-compliance to local building codes. Beyond that it is bad business to waive inspection clauses unless you are knowingly buying a property that needs work.
Take Year To Improve Credit
Those who choose to waive financing contingency clauses should first ensure their credit provides ample opportunities at securing the funds to close the deal.
A vast majority (67 percent) of closed mortgages in 2014 were from borrowers with credit scores of 700 or higher, according to mortgage software firm Ellie Mae. Granted that number is lower than the 73 percent of approved mortgages with 700 or higher credit scores in 2013. But it behooves those competing with cash buyers to get their score over that threshold.
FICO scores are calculated by crunching data from your open tradelines. The breakdown looks like this: 35 percent payment history, 30 percent balances owed, 15 percent length of credit, 10 percent new credit and 10 percent types of credit. Keep your credit card balances well below the credit limit and always pay more than the monthly minimum.
Pay off the oldest accounts first since they weigh more heavily on your score. Never close older account, as that can lower your score. Secure a small personal loan (new credit/new type of credit) and pay it off in six months. This helps your score on several fronts and could potentially increase it by upwards of 100 points once the loan is paid in full.
A 700-plus credit rating gives you the power to request a commitment letter from your lender. These are viewed as guaranteed money by sellers versus a pre-approval letter which is non-binding.
Avoid FHA Loans
Sellers looking for top dollar on their properties, via cash or financing, do their homework. Thus when potential buyers approach them with offers potentially funded by FHA loans, the caution lights instantly illuminate.
FHA loans are insured by the federal government and are typically an option for borrowers who cannot qualify for a conventional loan. The borrower already has a low credit score, and paid a down payment as low as 3.5 percent. These factors increase the potential to hit snags in the closing process. Sellers have been known to turn away higher offers from FHA borrowers because of the issues that come with them.
Brad Jensen, of Park City, Utah-based realtor Jensen & Company, said the guidelines to pass FHA home inspections are much more strict than those for conventional loans. Most foreclosed properties will not pass due to broken windows or some other minor safety issue which banks are unwilling to remedy to sell the property.
Increase Earnest Money Deposit
Earnest money works in much the same way bonds in court cases do. It ensures you are a serious buyer and protects the seller in case you back out of a deal for reasons not stipulated in the contract.
Earnest money deposits are typically 1-2 percent of the total selling price. Make your offer more appealing by increasing this amount. The check for the deposit is made out to the escrow agent in most cases, so the seller does not have instant access to the funds.
Once financing goes through, it is applied towards the balance. However if you fail to meet contractual obligations, you lose this money with no recourse.
Play Sentimental Role
Long-time homeowners have built memories in their houses. There are simply some people who would rather sell to someone who lives the same type of lifestyle they do and will take good care of their former home.
A personal letter to the seller could help in some cases. Cash buyers are typically impersonal property managers or house flippers looking to make money. But a new, young family could sway the heart of an older couple looking to sell their long-time home and retire in their RV.
Hand-write the letter and tell them your situation. Don’t get overly dramatic or mushy. Just stick to the facts as to why you want the house and how much you’re looking forward to being a homeowner. Let them know you’re willing to pay a 5 percent premium for a home you really want. Cash buyers typically expect a discount of that same amount or more, so upping your offer could be the deciding factor.
Competing with cash buyers means exercising due diligence and putting yourself in the best position to succeed. All the aforementioned levels the playing field.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email. Please be sure to verify your email address when you receive the verification notice.