Multiple choice counter offers?

Question

I have had a couple of bad experiences with appraisals coming in very low with certain lenders and have taken the suggestion of some BP members to try to convince buyers to use my lender.

I have offered a variety of incentives, including paying for inspection, appraisal and closing costs if they use my lender and no incentives if they use their lender.  In each case, the buyer has walked.  I am wondering if this could be because the buyers feel that they are being forced to do something against their will and whether I should give them multiple choices to choose from.

Here's a an example from today.  The buyers offered $295K, I countered $315K and I pay closing costs if they go with my lender, and the buyer countered back that they are OK with the $315K but only with their lender and I should pay closing costs.  What do you guys think about a possible response as follows:

Seller would like buyer to choose from one of the three options below:

Option A
1.  Price is $314,900.  Buyer can use buyer's preferred lender.
2.  Seller will pay up to 3% towards buyer's costs.
3.  If lender's appraisal comes in below purchase price, seller will
reduce the closing cost contribution by the amount by which appraisal is less than purchase price.

Option B
1.  Price is $314,900.  Buyer uses seller's preferred FHA lender.
2.  Seller will pay up to 3% towards buyer's closing costs.
3.  If the appraisal comes in below purchase price, seller will reduce the closing cost contribution by half of the amount by which appraisal is less than purchase price.

Option C
1.  Price is $314,900.  Buyer uses seller's preferred conventional
lender's 5% down program.
2.  Seller will pay up to 3% towards buyer's closing costs.
3.  There will be no reduction in seller's closing cost contribution
based on the appraisal.

J Scott · Answer

I tend to tie whether I'll pay closing costs to whether the buyer will use my closing attorney (if they use my atty, I'll pay all their closing costs), as opposed to whether they'll use my lender.
          
          My reasoning being, the main reason I want the buyer to use my lender is so I can ensure a smooth closing with as little risk to me as possible.

So, if the buyer insists on using their own lender, the question to ask is, "How can I still ensure that the closing goes smoothly, with as little risk to me as possible?"
          
          The answers as I see them:
          
          - Short financing and appraisal contingency periods.  Generally, if the buyer uses their own lender, I give 10 days for appraisal contingency (no reason the first appraisal shouldn't be ordered within 1-3 days after the contract is signed) and no more than 14-21 days for the financing contingency (if the lender can't figure out if the buyer is qualified in 2-3 weeks, I don't want anything to do with that lender);
          
          - I ask that the closing date be set to 30 days after the contract is signed.  Most FHA lenders will say they can't hit that time frame these days, so I'll use this as an opportunity to reiterate that my lender can get it done this quickly, and if the buyer wants a quick close, this is an extra incentive for them to use my lender;
          
          - Also, I will reiterate that by using my lender, I'll pay for inspection and appraisal costs, and I'll make sure the entire process goes smoothly.
          
          At this point, if they choose to use their own lender under these terms, I'm okay with it, because my risk is now very low, which is my primary goal.

Ted Akers · Answer

Good suggestions by J Scott and Bryan.  In this market especially I think you want short and tight appraisal and loan approval deadlines.  When the HVCC was implemented lenders contracted with appraisal coordinating and outsourcing firms.  You can and do see differences with different lenders based on either who they contracted with, or (and this is just oppinion) based on the lenders instructions to that appraisal firm.  Some lenders have always been interested in obtaining a real value and some have always been more interested in seeing a conservative result.  Bigger banks have historically been in that more conservative mode.  There is a rationale for trying to steer your end buyer - not to try to get an inflated value, but to get an actual value.  Incentives to the buyer to get them to work with a reasonable lender are worth saving the grey hair.

Bryan Hancock · Answer

Ah...The genius agent!  The plot thickens!

J Scott's answer has a lot of good elements in it.  If their agent is being a PITA just shorten the financing contingency period.  Hold their feet to the fire at any stage of the process and be prepared to walk if they play games.

The agent most likely knows that it is very hard to sell houses right now.  If you show weakness right now in the negotiations my opinion is that the agent may be more of a pain on down the line.  Give a little and get a little and get the deal done.  Let them use their lender if they have earnest money hard OR have a short financing contingency period and solid approval from lenders.

I still think bribing them with a small haircut on the price is worth it if you know they will close with your lender.  Shave the price a bit or make options B and C the same for closing costs...unless there is a good reason to push them toward option C.

Vikram C. · Answer

Bryan, I tried the EMD going hard if they use their lender approach and they hated that even more.  So now I am trying to give positive incentives to go with my lenders.

The problem I have with them going with their lender is that there are really two types of lenders here.  The big banks and the scrappy mortgage firms.

The big banks typically take several weeks (one of them took one month) to get the appraisal and then it usually comes about 10% to 15% below market.  That's pretty much the entire margin in this business so I may as well not sell to such buyers - I would rather have them walk than sell to them.  The reason those appraisers come in so low is that they seem to do a weighted average value for a home.  For example, if half the homes in an area are short sales and half are retail, they appraise my home in the middle although my properties are beautifully rehabbed and definitely not in the middle.

My lenders are investor-friendly and their appraisers do a much better job with the appraisals.  I actually think these appraisers are fair and are not trying to use inflated values - it is the other appraisers who are using unrealistically low values.  (I typically get multiple offers within a day or two of listing, which is further evidence that my lenders' appraisers are not being unrealistically high.)

Account Closed · Answer

Sniff test says too much hard sell is a trap.

I suggest that all you do is write down the contact information for the lender. Hand that to the buyers and tell them that you've had good luck with that lender getting mortgages done.

Suggest that while they are shopping for a mortgage that they get in touch with him and see what he can do for them. Mention briefly and just in passing that mortgages are harder to get and that your guy seems to be able to deliver.

Then shut up about it.  They will mull it over and either call your guy or not.

Many people who are house shopping have already established a relationship with a lender and they are going to get their backs up if they think you are suggesting that they made a mistake in their choice of lender.

Dale Osborn · Answer

Some of the housing market problems were caused by some teams that put together their own criteria. The team appraiser would appraise the property high, the lender would loan against the higher appraisal and then when needing to refinance they found out they were underwater. It is better to not get caught up in something like this where it appears that you have formed a team with others and might still be using some of these old tactics. Guilt by association??

Vikram C. · Answer

That's a good idea, to try the price reduction instead of closing costs.  Easier to get it appraised as well.  I wish buyers had plentiful cash and did not need the closing cost help.

Vikram C. · Answer

Great ideas.  Thanks for the feedback.

One concern I have is that we sometimes get a selling agent (buyer's agent) who becomes the main impediment to a deal.  Once in a while, she (or he) will have a negative opinion about what we are trying to do and get in the way of the whole thing.  When that happens, I have actually made counter offers where I explain my entire "sales pitch" about why the buyers should go with my lender and I have found that it sometimes works because the agent has to forward it to her clients.

Has anyone else tried this approach to get around the buyer's agent being a bottleneck?  Any other ideas about how to handle an intransigent buyer's agent?

Bryan Hancock · Answer

It seems B3 should be the same as C3 then...right?  Or are you trying to give them an extra incentive to go with option C because you know the appraisal will come in higher with that lender?

From the offer and counter it seems like maybe you should just come off your price a bit in trade for them using your lender...no?

Are you working on 15% gross margins?  Or is that net?

Or you could try coming off the price a bit in trade for hard earnest money if you are worried about carrying costs or deflating your equity returns by taking a financing contingency.

How solid are the buyers?  Have you seen a preapproval letter, their credit report, evidence of down payment, DTI calculations, etc.?  I would be worried about giving them a financing contingency with appraisers weighting short sale comps in with your high-end ones.

The trade seems to be:

1.  Lower price for an equivalent amount of earnest money...or some scaled scenario like that that is hopefully in your favor

2.  Lower price for requiring them to use your lender with no hard money and a financing contingency.  I would still want to see evidence they could close before you give them the financing contingency though.  Incentives are nice, but they mean nothing if the buyer can't close...I am quite certain you have this covered, but I don't know the details

They either need skin in the game for the contract or to use your lender.  Absent this the contract seems one-sided when you know the appraisal will come in low and blow out the deal.

Bryan Hancock · Answer

Those sound logical on paper to a rational investor, but I could see the buyers just saying they want to use their own lender.  When we bought our primary residence and the builder tried to give us incentives to use his lender we told him to stuff it.

I think there are built-in trust issues when you try to get buyers to use your lender.  They are worried you are trying to pull some investor fast talk to get them to overpay for things.

What is it that you are trying to immunize yourself against?  Can you just have some of the earnest money go hard instead and use that as another option to use your lender?

Do you have Jimmy The Stretch piped to your preferred lenders somehow?  I thought that the banks weren't allowed to pick their favorite appraiser now so this shouldn't be an advantage...right?

Multiple choice counter offers?

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