When prospective buyers decide to make an offer for a home, they predominantly focus on the price they will offer, and often think about the other terms as something that will get worked out later.
In my local market, that has led to some very surprised rejections, even in this economy. Any offer that doesn’t come with a pre-approval letter from a reliable lender is not considered worthy. Having an offer that’s contingent on a property to sell is also a non-starter to most sellers. The closing date can also be a critical factor. That much is pretty well travelled ground. Is there more?
In the areas I focus, 454 homes closed since 9/1. Of those, we have data on 312 of them (come on guys, update the MLS), so we’ll just look at sales we have data for.
For homes under $300K, 48% were financed through conventional loans, 24% were financed through VHA loans, and 28% were paid cash (In our system cash means that the mortgage contingency was either waived or the home was purchased in cash). This means the buyers had the means to close without a mortgage, whether they used one or not, and made the purchase on that basis, making for a much stronger statement to a seller.
In this range, one quarter of the purchases fell into this category. If a buyer were using an FHA loan (with 3% down) and competing with another offer that was effectively a cash deal, we see that from a terms standpoint, the FHA offer would be blown out of the water, even if it was a little higher.
Between $500K-$600K, the number of deals classified as cash drop to 5%. FHA loans are 10% and conventional loans are 85%. Since the majority of buyers fell into the ‘conventional loan’ category, then other terms could become more important, such as the size of downpayment. We don’t have numbers to support that self evident truth, but we do know many agents discourage offers with lower down payments because they recognize the risk of having a home not appraise for the borrowed amount, which effectively kills the deal.
In the $900K-$1MM range, 24% were classified as cash. A full one quarter of them either waived their mortgage contingency or paid cash altogether. We saw a surprising amount of multiple offers and bidding rounds in this range and its fair to say that in this economy perfectly good buyers lost homes to stronger terms. We’re not privy to the prices each offer submitted, but we can guess that the cash deal was not necessarily the highest price.
Up to $300K terms could make a huge difference in determining if an offer was accepted. Between $500K-$600K perhaps not as much, between $900K-$1MM it could make the difference again between getting your offer accepted or not. Analyzing specific markets, towns, and price ranges can reveal very different things going on. Don’t generalize!
Make sure you understand the dynamics around the particular purchase you’re considering so that you can make an offer that will give you the strongest chance of moving into your new home!
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