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WHEN IS BUYER “APPROVED”?

I received an offer on one of my listings recently, and when I presented the offer to my client, they asked why there was a financial contingency in the contract if the buyer was already “approved” for their loan? I explained that there are different types of approvals, and different levels within each type. I don’t have space to go into all of them, but I wanted to cover the most common misunderstanding about an “approved” buyer.

 

When a lender issues a pre-approval letter for a buyer, there will almost always be some conditions to the approval. These conditions can may be really basic and easy to meet. For example, let’s say the buyer has submitted all their bank statements and paystubs, but they will receive new ones within a week, and the lender wants to see those when they are printed and confirm there are no big changes. Or the conditions could be more difficult to meet. For example, let’s say a buyer’s credit report shows a bunch of old unpaid accounts from various sources. The buyer believes they were all paid off years ago, or that some are not their accounts. In that case the buyer needs to find the proof they were paid, or verify somehow that the information in the credit report is incorrect.

 

Depending on the buyer’s and lender’s confidence to clear these conditions, they may say that the buyer is “approved” and the buyer may even remove their loan contingency when the time comes. But the loan won’t fund and we can’t close the escrow until all the conditions are met. There have been situations in the past where a buyer had a super-clean, full loan commitment from a lender, but then the buyer lost their job before closing. Continued employment would be a “condition” of that approval.

REAL ESTATE AUCTIONS

We are seeing auctions again in real estate, but they are mostly online, so it’s more like eBay.

 

Usually the opening bid is quite low compared to the market value. This is what usually attracts buyers to auctions as they think they may be able to get a “deal.” What most people don’t know is that there is often an undisclosed reserve price. So let’s say a home worth $500,000 has an opening bid of $300,000, and the highest bid is $400,000 when the auction ends. But it’s possible the owner of the property had put a reserve price of $475,000, which means the auction is just cancelled in this case. Auctions with NO reserve are preferred by buyers, but feared by sellers.

 

You can usually view the properties before bidding and it’s common to have normal loan and inspection contingencies. This means you normally don’t HAVE to pay 100% cash. You generally can be represented by an agent if you choose. Either you or your agent can register and bid for you. You will usually need to register and give your credit card information. This is so if you are the winning bidder, they can collect the deposit. This is also an attempt to make sure you are a real bidder. Although, we have heard several reports where the home’s owner logged in and created a fake account to try to bid the price up.

 

There will be a deadline for offers, but if an offer comes in within the last few minutes, they will usually automatically extend the deadline another 5-10 minutes.

 

Another oddity of auctions is something called a “Buyer’s Premium.” This is a fee that is paid by the buyer at close of escrow. I’ve seen them as low as 1% and as high as 10%. So it’s important to read EVERYTHING prior to bidding!

BUYER LETTER WARNING

Let’s say you are non-contingent, pre-approved, putting a large amount of money down, and you are willing to pay over the list price. Even then, it may not be a slam-dunk to have your offer accepted on the hottest properties that are attracting multiple offers. What else can be done? Many buyers are writing personal letters (even videos) to the sellers as a way to make their offers stand out.

 

I think this can be a good idea to personalize your offer. Normally it won’t make the seller take your offer if another offer is thousands of dollars more in sales price, or they are willing to waive the appraisal contingency and you aren’t. But at least it may nudge the seller into giving your offer a second look and maybe give you a chance to match that other offer’s terms. I had two situations recently where it turned out that the seller (or seller’s adult children) knew the buyer very well and they did take a few thousand less than another offer just because of that connection.

 

But I think buyers need to be careful to not overdo it. I’ve seen some letters come in on my listings where the buyer gushes about how long they’ve been looking, how desperate they are, and how they love this home so much and that this is the ONLY home in the world for them, etc. This definitely swings the negotiating pendulum over to the seller’s side, either when negotiating the price, or negotiating repairs or appraisal challenges later. So tell them who you are and that you will be able to perform per the contract if your offer is selected. But keep it from sounding desperate unless you absolutely, positively have to have that home and are willing to give up some negotiating power.

 

USE THE RIGHT TYPE OF AGENT

When you are experiencing an important medical situation, you will normally wind up with a specialist of some kind. The same goes for real estate.

 

A California real estate license allows us to transact business across a wide range of activities. What usually comes to mind is that we can represent sellers or buyers in a residential resale transaction of a single-family home. But our license also allows us to do leases, property management, bare land, commercial transactions, business opportunities, mobile homes, mortgages (with some extra requirements), and more. Each of these transactions can be very different and have their own pitfalls and steep learning curves. When someone takes the required courses and then passes the real estate test, they may be licensed to perform all these transactions, but they likely don’t know everything about all these different type of transactions. Personally, I’ve focused almost exclusively on representing sellers of residential homes, and after almost 20 years I feel like I’m still learning something new all the time!

 

It’s one thing to ask an agent, “Can you help me buy/sell/lease this home/mobile home/commercial building?” They can honestly answer, “Yes,” since our license is so broad. But the better question to ask is, “Have you done this type of transaction before? How many times?” Ask them for a list of their transactions for the last few years. Even if they HAVE done many transactions of that type, do they usually represent buyers or sellers? If you are selling a custom home on 10 acres with a well and septic and your agent usually only sells tract homes in town, that could pose challenges. If your situation is a divorce, have they dealt with divorces before? Probate? Short sale? If they haven’t, make sure they have a mentor to rely on.

APPRAISAL WOES

Over the last 30 days, I’ve had challenges on several transactions due to appraisals coming in low. I believe I’m being objective when I say they came in “low” because they were not in contract for tremendously higher than what the recent solds were. The appraisers seemed to be making overly negative adjustments and/or were just flat-out ignoring major positive attributes to our subject property. I’ve checked with other local agents and many of them are reporting similar challenges. This is NOT on every transaction, and most appraisers do a great job, but it’s happening on enough transactions that it’s becoming a common issue.

 

It’s possible that some appraisers think our market is getting over-heated again beyond the fundamentals, and that it’s their job to slow things down by putting their “thumb on the scale” a little bit. I had a situation recently where the same home was appraised by two different appraisers less than two weeks of each other and it came in $25K higher the second time.

 

So what does this mean if you are in the real estate market right now? If you are a seller, you may look more favorably at offers where the buyer is willing to waive some or all of the appraisal contingency. Sometimes the highest offer is not the best offer. If you are the buyer, don’t be surprised if the seller asks you to waive some or all of the appraisal contingency. If you are willing to do that, it helps if you can provide proof of liquid funds with your offer to show that you can pay the difference if needed. In the SF/Silicon Valley, it’s almost expected that the buyer waive the appraisal contingency. We aren’t there yet out here, but it may be moving in that direction.

THE BIG NO-NO

So here is an agent’s nightmare: I’ll have an appointment with a client to sign the final closing papers on their new home, and they drive up in a brand spankin’ new car. My clients usually want me to compliment them on their new “ride” when I instead blurt out, “Does your lender know about this?” Hopefully, they say “yes.” If not, we might have a big problem.

 

When you apply for a loan, you are providing a snapshot of your financial picture, with so much income to support so much in payment obligations. Then the lender takes out your old home payment, and inserts your new home payment. As long as that ratio (your debt ratio) is under that lender’s acceptable range, you are OK. However, if you incur any new payments before you buy the home, the lender will have to recalculate your debt ratio to make sure you still meet their criteria. If that new payment takes you over their limit, your loan could be turned down, or they could raise your points and/or interest rate.

 

And just how will they find out about it? Well, first, you are supposed to tell them. You usually sign something when you first applied for your loan that you would alert them to significant changes in your financial picture. Even if you don’t tell them, many lenders run another credit report right before close of escrow, and your new car payment may show up. At the very least the inquiry will show up, which will raise a red flag to your lender as to why an auto financing company is asking for a copy of your credit report.

 

So, put the Tesla brochure down, and step away from the dealership… It’s for your own good!

MOVING OUT WARNINGS

Moving can be stressful. So many things to do, so many loose ends. The last week or two is the worst because the deadline of moving day is approaching. Here are some items that are easy to miss in the hustle and bustle but can cause MAJOR headaches if not handled correctly:

 

REFRIGERATOR AND LAUNDRY HOOK-UPS. Your washer and possibly your refrigerator have water line hookups on the back. If you are taking either of these with you, you need to really monitor the shut-off valves. These valves don’t get used except once or twice every few years so they OFTEN don’t shut off all the way. Or they appear to shut off, but then develop a small leak hours later. I’ve walked into several vacant homes with water damage because of this very issue. Your best bet is to turn the main water valve off to the house to avoid leaks until the new owner can set up their appliances.

 

THIEVES. They are watching you. They notice when you start moving out but know it can take several trips. This can make you a prime target and unfortunately, I’ve had clients experience thefts during this time period. One client actually had their whole moving truck stolen full of their belongings! Other times the house was broken into when it was obvious no one was home but there were still items inside. Do your best to avoid telegraphing that the house is vacant. Put lights on timers, play music, ask a neighbor to park a car in the driveway, etc. Also communicate with your neighbors and ask them to be aware. The thieves are banking on your neighbors not being suspicious when a strange car or person shows up, even at odd hours, and not calling the police.

THE “BEST” PRE-APPROVAL LETTER

When a buyer submits an offer on a home they want to buy, it’s expected that they will include a letter from their lender. There are several varieties of letters that a lender can provide with different levels of confidence behind them.

 

The least impressive letter is a “pre-qualification letter.” This usually means the lender spoke with the buyer in person or over the phone and asked them some basic questions about how much money do they make, what are their currently monthly obligations (car payment, student loans, etc.), what are their assets (liquid and non-liquid), and how is their credit. Based on the buyer’s answers, the lender will print out a pre-qualification letter.

 

The next step up would be a “pre-approval letter.” This is where the lender gets a full written application and then actually verifies the information and doesn’t just rely upon the buyer’s verbal representations. So they see copies of tax returns, paystubs, bank statements and runs their credit report.

 

In the prior two letters, the lender’s representative is pretty sure that an underwriter will approve the file once it’s submitted to them for their review. A higher-level letter would be one where it’s stated that an underwriter has actually reviewed the file. Either a flesh-and-blood person, or a computer underwriting system, usually called “Desktop Underwriting” or “DU” for short. The best letter is what’s called a “loan commitment” where the lender is saying they are truly ready to make that borrower a loan as soon as they identify a home. This means everything is verified, an underwriter has signed off on it, and the only missing piece is the house itself.

 

So if you are buyer wanting to make your offer stand out in multiple offer situations, see if your lender can provide this last kind of letter. This will take cooperation from you to get them absolutely every document they ask for. If you are a seller and you’ve received multiple offers on your property that are otherwise pretty similar, you may want to give extra consideration to offers with this last kind of letter versus the others.

TITLE CO. = NEUTRAL

From time to time, a real estate deal will fall apart. Sellers are usually pretty locked into selling as long as the buyer is performing. So most often it’s the buyer that can’t or won’t perform for some reason. In some rare occasions, the Buyer just freely admits that they are at fault, and they agree to give up their deposit. A form is drawn up, both Buyer and Seller sign it, which cancels the contract and releases the deposit, or most of it (depending on the negotiation process) to the Seller.

 

But what if the Buyer DOESN’T just agree to release their deposit? What if they have reasons to believe that they should get their deposit back? And what if the Seller is just as adamant that they should keep the deposit? I don’t have room to go into all the particulars of what happens next, but I did want to clarify the role of the title company in this situation. They are a neutral third-party to the transaction. They can only act when they receive identical instructions from BOTH parties.

 

What this means is that even if you have iron-clad proof that YOU should get the deposit, if the other side doesn’t sign that form, the title company will do nothing until it is resolved. You can scream at them all you want and ask to speak to the president of the company, but they will not release a deposit, or even change any of the terms of the deal, unless both parties give the same instructions.

 

If an impasse is reached, then Buyer and Seller will go to the dispute resolution options as called for in their purchase agreement. Once that process is taken to it’s final conclusion, only then will the deposit be released. But again, the title company is not the one that makes the final decision on this matter.

RENTERS BEWARE

Here is the latest scam I have to warn you about – homes for rent at “too good to be true” prices. The most common location for these scams are on Craigslist, but they can happen anywhere.

 

Here is how it works. You are looking for a home to rent, and come across one that looks great, and the price is even better. When you contact them, they tell you the owner has to leave the country unexpectedly, or got a sudden job transfer. They are willing to rent it for less than market rent just to get it over with. They will send you multiple interior photos, but make excuses why they can’t show it to you in person. When you express interest in renting the property, they will send you an application and an official-looking rental agreement. Once you give them your deposit and first month’s rent, they will send you a house key.

 

Here is the problem: They may not even own the property, so when you show up, your key doesn’t work. The real owner may meet you at the door and ask what you are doing on his front porch. When you try to reach the “owner” or “agent” you dealt with, they are long gone and so is your money.

 

These scam artists are “scraping” info and pictures of legitimate homes for rent from the Internet, then substituting their contact info to pretend to be either the owner or the owner’s agent. Some of them even target vacant bank-owned homes. They have the locks changed to make the scam look even more real by opening the home up for you in person.

 

You’ll want to verify three things – 1. The property. Drive by and see if there is a different for lease or for sale sign in front. 2. Is the owner real? Check the public records for who really owns the property. 3. Is the agent real? Go to www.bre.ca.gov to verify their license. But even these 3 items won’t 100% protect you if the scammer is sophisticated enough.

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