Pat Hune, Broker, 1st Southwest Realty, and Various Sources, February 2020
The Greater Phoenix real estate market is on fire. Multiple offers, offers above asking price, seller’s refusing to pay concessions, seller’s refusing to do repairs regardless of whether or not they have agreed to them and offers contingent on the sale of the buyer’s home being rejected are just a few of the issues facing buyers. How do buyers compete in this market?
- Get pre-approved not pre-qualified – A pre-approval means the lender has pulled the buyer’s credit to determine the credit score and verified the source of income. This is a good start but there is still a long way to go. A pre-qualification means the lender has reviewed bank statements, tax returns and other financial documentation. The lender should provide a preliminary estimate of the payments and interest rate. The most important thing to do before making an offer on a home is to work with an experienced lender. Recently one of my clients was told he was pre-approved and his loan had been through underwriting. The buyer made several offers before realizing the lender was using the wrong information. This drastically changed the loan amount and the buyer could not qualify for the house he wanted.
- Prepare to waive appraisal and put down a lot of earnest money – Appraisals are done to protect the mortgage companies, as they do not want to lend more than the value of the property. In a sellers market the prices will increase faster than comparable sales. A bidding war may push the price even higher. This becomes a challenge for the appraiser as appraisers live in the past. They look at recent sales and if they cannot justify the contract price there may be a gap. When a property does not appraise the buyer has a few choices. He or she can ask the seller to reduce the price, which in a seller’s market is not likely. He or she can ask the seller to meet them half way, which again is unlikely. Or the buyer can make up the difference between the appraised price and contract price if they have the cash to do so. However if the buyer has waived appraisal then they have waived the right to cancel the contract and get the earnest money back. This could be a significant amount of money because the sellers may ask buyers for a lot of earnest money or the buyers may offer more earnest money to make the offer more attractive to the seller. It would be good to have cash reserves to cover the value shortage. You also need to have money to cover the closings costs which are typically around $5,000 to $6,000. Sellers are not agreeing to pay the buyer’s closing costs because they don’t have to in order to get the house sold.
- Try not to write a purchase contingent on the sale of current home – This one is very tricky in any market but especially in a seller’s market. If the seller receives offers that are not contingent it is unlikely the contingent buyer’s offer will be accepted. To make it more complicated if the buyer has their house under contract and cannot find another house to buy they may end up being homeless. Yikes! Buyers may think selling to an iBuyer will solve all their problems. iBuyers will allow the seller to stay in the home until they find a house to buy. Of course there are very high fees attached to this option. Plus there are many ways an iBuyer can screw up the purchase. In one case the seller was told the amount she would net from the sale of her home to the iBuyer. She applied for a mortgage with 20% down. When the iBuyer finalized the sale the seller received 10% less than promised. This completely messed up her loan and increased her payments. The interest rate was higher and mortgage insurance was added to the monthly payment. Sellers should get a second opinion because typically selecting any other option will net the seller more money than the iBuyer offer. (Editor’s note – Again my opinion is free and can potentially save you thousands of dollars.) Buyers who have a house to sell should look for a short-term rental or move in with relatives so they can sell their current home for the maximum value and be in a stronger position to buy.