How to Compete Against an All Cash Offer
I often hear of buyers’ fears of competing against cash buyers. As a Bay Area native, I have witnessed many of my friends move away to more affordable cities, partly due to high real estate prices and the frustration of competing against cash buyers. The buyers I represent are often in technology or professional industries— individuals with great salaries but not necessarily a large amount of liquid assets. They are able to get loans with competitive interest rates through our preferred lenders, but oftentimes are forced to compete against all-cash offers. A recent survey of listing agents showed that approximately 33 percent of offers in Silicon Valley were cash offers—the highest in California, with San Francisco following closely behind at 30 percent.
The following are some strategies that I have used to get my buyers’ financed offers accepted when competing with cash offers.
Incorporate terms into the purchase contract to sweeten the deal. Since cash offers will not need financing or appraisal contingencies, a financed offer should come as close as possible to these terms. If you are working with a good lender, they should be able to vet your financial strength. Make sure you have provided accurate financial documents upfront to the lender so that your file is fully underwritten, making it easier to remove a financing contingency.
A good agent will know the neighborhoods and market trends, and will be able to do a proper comparable market analysis to come up with the fair market value of the home. Don’t get caught up in a bidding war; understand the fair market value of the home so there are no appraisal issues. If you must have either a financing or appraisal contingency, then choose one or the other, depending on your circumstances, and shorten the days of contingencies. An experienced agent and lender can work quickly to accommodate the schedule.
There are other ways to structure an offer to make it more attractive to the seller without adding undue risk to the buyer. However, these techniques require the agent to have a deep understanding of real estate law. Fortunately, DeLeon Realty provides free access to a real estate attorney.
“Love Letter” to the Sellers
Sellers rarely ever meet buyers, so one of the only chances for buyers to introduce themselves is through a letter. Introduce yourself and talk about why you like the home or location. Take a step further and do your due diligence on the sellers by finding a commonality as a talking point. For instance, if the seller is a philanthropist, then talk about your volunteer work in the community.
Just recently, one set of sellers accepted a lower offer because they liked our buyers’ letter. Although there were two offers that were higher (with the same terms), the sellers chose a financed offer that was almost $50,000 lower. The sellers made a connection with our buyers after reading their letter. The sellers were already making a lot of money on the home, but the emotional factor of being able to transfer their house to someone who treasured the home just as much as they did made a strong impact on them.
Consider going the extra mile to film a video introducing yourself to the sellers. A video enables your character to shine. At DeLeon Realty, we have a dedicated, professional film studio that our buyers often use to film great videos conveying their love of the home they are offering on. If a picture is worth a thousand words, then a video is priceless. In the end, if there is a tie-breaker and the sellers know more about you, your offer may eke out a close win.
Show Me the Money
If you have money in the bank, show the seller your strong finances. For example, if the down payment to purchase the home is $800,000, and you have $1,000,000 in equity, show them your entire net worth. Showing the seller that you are financially secure does not mean you have to overpay for the home. Sellers like to be reassured that in the event of any loan mishap, the buyers have enough finances to move forward with a deal.
Offering the Sellers a Rent-Back
Sellers are often trading up to another home and oftentimes need the funds from their home closing to purchase their next home. Buyers who have flexibility and can provide a rent-back (generally for two months) will be viewed more favorably than those who cannot. This rent-back period can be invaluable to the sellers as this gives them the time and flexibility to both find a home they like and not be rushed and forced to overpay. While negotiations such as price can be zero-sum (where the buyer agent wants to get the home for the lowest price possible but the listing agent and seller want the highest price), negotiating the rent-back can be a big win for all parties. Sellers greatly value this flexibility, and will reflect that in a lower purchase price or choosing the rent-back offer over a cash offer that could not provide a rent-back and instead required immediate occupancy.
Each buyer situation is different, and there are alternative creative solutions for every scenario. Cash is king, but that’s not to say that financing can’t win in our democracy.