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The home-sale market picked up recently following a hike in mortgage interest rates. This typically happens as buyers accelerate their home-buying activity in hopes of buying before rates climb further. Some sellers—in certain areas, and in certain price ranges—are receiving more than one offer. Multiple offers often result in higher prices. But, the highest priced offer is not always the best one.
Recently, sellers of an Oakland, Calif., home received several offers. Two offers, that were $10,000 apart, topped the others. The sellers decided to go with the higher of the two offers. Several weeks later, the buyers withdrew due to issues discovered during inspections.
In this case, the highest offer was clearly not the best offer because the deal never closed. Although these buyers were sincere in their desire to buy, there were indications when their offer was presented that they were only marginally qualified to buy the home in question. Their deposit amount was low for a house in the price range, and they made a minimal cash down payment.
It turns out that the buyers didn't have much cash of their own. They were borrowing from relatives for part of the down payment. And, they were raiding their 401K retirement plan for the balance.
The property they were hoping to buy was being sold "as is," and it needed work. The buyers didn't have the financial means to correct the property defects, so they had to withdraw.
HOME SELLER TIP:
It's tempting to choose the highest-priced offer. However, the buyers' financial capabilities are more important than the price they offer. Furthermore, a preapproval letter may not give you all the information you need to make an informed decision.
In competitive offer situations, most buyers are preapproved for the financing they need to complete the purchase. A preapproval letter from the buyer's lender or mortgage broker usually states that the buyers have been formally approved for a mortgage. It might also indicate that the buyer's funds necessary for the down payment and closing costs have been verified. But, the preapproval letter doesn't give you the nitty-gritty about how the buyers are going to come up with the cash.
It's always a good idea to ask where the buyer's money is coming from. If you have any concerns about the buyer's financial capability, include a short contingency—say five days—for the buyer to provide you with verification of the funds needed to close. This could take the form of a copy of a bank statement, or a letter from the buyer's banker indicating that there are sufficient funds on deposit in the buyer's account. It's understandable that buyers wouldn't want to reveal more than is necessary about their finances, nor should they have to. The point is to determine with certainty that the buyer has enough cash to close the deal.
Also be sure to carefully consider the buyers' financial capabilities relative to the condition of the property you're selling. Cash-strapped buyers making an offer to purchase a fixer with a 5 percent or 10 percent down payment is a red flag. Where do the buyers get the fix-up money? They may be hoping that you'll pay for it.
Another seller decided not to go with the highest offer because he was afraid that the property might not appraise for the inflated price. The buyer with the highest offer had only 10 percent cash to put down. If the property didn't appraise, the buyer could withdraw if he couldn't come up with more money.
THE CLOSING:
The seller wisely chose a slightly lower offer from a buyer with 40 percent cash down
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