Take a look at the homes for sale in many of the local markets and you’ll notice a common trend from city-to-city…a lack of active listings. This has led to many areas seeing intense competition for available properties resulting in multiple offers, increasing prices, and frustrated buyers. We have seen similar conditions in the past, such as when the $8,000 tax credit was close to expiring. There are steps that buyers can take to increase their odds for success.
While the cause for this environment is debated by many, one of the key reasons is the lack of bank-owned listings. Bank owned properties, aka “REOs” have long been a staple in the market the past 5 years. The banks slowed down foreclosures significantly last year as they dealt with class-action lawsuits and government intervention. While many of those barriers have passed, banks have yet to start pushing their REO into the market. This makes the market comprised predominately of short sales with a few standard listings sprinkled in. This environment will likely run into the busy summer buying season, ratcheting up competition as the number of new buyers outpaces the number of new listings.
What can a buyer do? The most important step for a buyer to make is to secure solid financing. A large percentage of loans recently originated have been FHA loans. These loans have been very popular because they allow buyers to purchase a home with 3.5% down payments. Unfortunately, in April HUD raised the mortgage insurance requirements on these loans to 1.25% monthly and 1.75% upfront. These high MI rates have prompted up to seek lower cost options. A 5% down payment conventional loan has a monthly MI rate of .60-.72% with no upfront charge saving the borrower a considerable amount of money.
Why would a seller care what kind of loan a buyer gets? Seller’s agents are often biased against FHA loans for a variety of reasons. FHA loans are often perceived as loan for weaker buyers that don’t have the finances to secure a “regular” loan. Also, the appraisal required for FHA financing is stricter and can potentially cause issues midway through an escrow. In addition, FHA will not allow a buyer to pay more than the appraised value. In an increasing market, this sometimes causes a problem. For example, a seller’s bank might approve a short sale for $300k. They buyer’s appraisal might come in at $290k. The buyer may be willing and able to pay the extra $10k in cash, but FHA will not allow it. Sellers are aware of all the above, so when they have 6 similar offers on the table, they are going to select the offer that has the most flexible terms.
If the types of financing had to be ranked as seller-friendly, the list might look like this: 20% or higher down payment conventional financing (best), 5-15% down payment conventional financing, FHA financing, VA financing (worst). Cash isn’t necessarily king. It generally matters not to the seller’s bank how they get their money…they just want as much as possible. Lowballing listings with cash offers simply isn’t going to be productive in today’s market. Cash will be useful when the seller is against a tight deadline, or there are significant repairs to be made on the property.
If you have the ability to move your financing up the ranking level, then you should do so. If you need a specific type of loan, then you need to make sure you put your best foot forward. This means making sure your offer is complete to include your loan approval, asset and income information, FICOs, and proof of your down payment funds source. When I am placing offers for my clients I make sure I contact the listing agent to get a feel of what they’d like to see and I send a complete offer package with a cover letter outlining buyer’s strengths. There are also several behind-the-scenes “tricks” that we can use to increase the odds your offer is the one that gets accepted. Your agent plays a critical role in making sure your offer shines. If you feel you’re not getting the results you deserve, then feel free to contact me at john@inlandfinancial.net.
