How to beat out all cash offers on a house when financing: Win the bidding war!

[AJ Wong]

So you finally found the 'perfect' property!? Amazing..the challenge is that it's someone else's dream home or investment also..and for one reason or another, there are a lot of investors flush with cash! In fact, one article I read claimed that 1/3 of luxury purchases this year closed for cash..

It can be frustrating for a buyer to invest (usually months) scrolling real estate websites, (or weeks if you read our newsletter :) but in all seriousness I would say for every two offers made, one transaction ultimately closes. 

So what are some ways that buyers (and their brokers for that matter) can elevate their client(s) offers when they are competing on popular or HOT prospective properties against multiple and/or cash offers? We all know that just offering 'more' or chasing a property can be bad for business, and more importantly, not necessarily improve chances for executed agreement. 

One way to approach (often intense) negotiations and timelines is to consider the parties on the other side. Like buyers, sellers have a lot to consider, especially if they are getting bombarded with showings and offers. It's still not uncommon on the Oregon and California Coast's for highlight properties to have handfuls of showings and offers within days. 

Just recently a client made an offer on a new million dollar listing within 24 hours of it coming to market and there was a cash offer that was accepted at a lower price point the same day. Since the first position buyer was a neighbor and my client's offer was financed, it was difficult to compete, but there are some steps buyers and their brokers can take to outwork cash and other offers. 

- Position. Unless there is an offer deadline, I personally think order of offers has influence on sellers. All things being equal, the party that submitted first should theoretically have priority? This is debatable but has proven effective in my own business. 

- Reduced contingencies. Waiving the right to inspections can enhance the appeal of an offer but comes with a major risk to the buyer. Depending on the property type and terms this can be justifiable but usually reserved for those with ample experience and higher risk tolerance. 

- Higher and Hard Deposits. A larger deposit amount could have a positive effect on sellers. In Oregon the buyers deposit is generally fully refundable during the standard 10 business day contingency period (unless waived) and the difference in deposit could be interpreted as the level of commitment the buyer has towards the transaction, within reason. It is uncommon to see an initial escrow deposit of greater than $20-25k for most residential transactions.  A hard deposit could be an amount that a buyer is willing to walk away from for priority. A $1-2500 non refundable (hard) deposit shows a buyer is serious, without only relying on price as the differentiator. 

- Be receptive to sellers terms or conditions. If they have a timeline on moving, or needing a reasonable timeline to find a replacement property, try and be accommodating. 

- Love letter. Or a letter to the seller from the prospective buyer is still legal in Oregon. I don't generally recommend them, but in my younger days, I've written one for myself. Take that for what it's worth. lol 

- PreQualification TBD letter versus underwritten lender Pre Approval. In short, a pre qualification letter is typically provided post receipt of an application and credit pull. Based on the info provided, one can qualify for the proposed purchase or property. A PreApproval is there next tier, in that it also is reviewed by an underwriter for pre-approval of income, asset and credit documentation. 

A underwritten lender Pre Approval provide sellers with greater assurance that the borrower can close as well as an option for accelerated closing date timeline. Or in other words, they can close as reliably and quickly as a cash buyer. 

- The next tier of lender qualification is a formal loan commitment. Typically lenders require an executed contract on a specific property, but several I work with closely issue loan commitments (fully underwritten conditional loan approval) in as little as 24 hours post receipt of a contract and required documentation. These transactions can usually close rapidly, post receipt of title and an appraisal in 10-14 days. Speaking of appraisals..

Unless it is a very low LTV or unique program/borrower most lenders will require a third party assessment of valuation or appraisal prior to providing a mortgage. Most (but not all) cash offers waive the appraisal requirement, which reduces risk for sellers but enhances it for buyers. As a result many cash offers are often below (sometimes just below asking) price. This variance could be difference in the deal.

Many sellers will entertain a higher (or full priced) financed offer to purchase with a Pre Approval letter, since it alleviates some of the unknown variables. 

If buyers are financing with 10-20% down and hoping to secure a competitive property, I'll provide them an accurate competitive market analysis (CMA) and have my lender partner (or myself as a licensed NMLS mortgage broker) breakdown the differences in loan terms for an escalated at various price examples. The approach for a well valued home is to either offer a reasonable amount above asking, or an escalation clause of X amount above the next highest and verifiable written offer up to a maximum price.

My general approach on acquisitions is: A. Win the offer. B. Justify the terms of that offer during due diligence. 

A fully Pre Approved mortgage application and/or 24 hour loan commitment are two tools that buyers and investors can use to outbid cash offers on homes. A healthy habit is to have the lender contact and email the sellers broker upon submission of the offer to reinforce the client's qualifications, timeline and any lender tools that can help to expedite or simplify the transaction. 

Finally. Tenacity. Securing a premium investment or dream property is always going to take some work, effort and overcoming eventual disappoint. Preparation and perseverance is essential to successful real estate business or investment. It goes without saying that your real estate professional should be working hard (and smart) but the successful investor/buyer has to show up also. Early and on time. 

How do you help differentiate or outcompete cash offers for clients or as a buyer?