Negotiating the sales price for a house that you own is not always as simple as it sounds. Sometimes it is easier to have an experienced third party insulate the process as it provides two things; 1) a pause in the negotiation if needed and 2) an independent sounding board where pricing strategy can be discussed without the buyer present. It can be a real advantage in getting what you want.
For the most part I don’t use the services of a real estate agent as a seller because I like to negotiate directly with buyers and buyers agents, but unless you are experienced at it or laser focused on the numbers it can be a good idea to be able to pause negotiations at one point or another.
I remember I had just finished the rehab, remodel and addition on one of my houses and placed the house on the MLS the previous night. Activity was really good for a Friday evening. I had three or four buyers walking through the house and I was already looking at two offers.
And then a buyer came in and without even looking at the entire house she said, “If I make an all cash offer what kind of discount can I get?” I thought about it for a moment and my response was simple. I said, “it really doesn’t matter to me whether it’s cash or not because when the transaction closes I am going to get the cash either way.” But how much are you offering?”
I wasn’t sure that what I had said was going to create the offer I wanted, but I wasn’t going to start negotiating against myself either so by answering a question with a question put the ball back in her court.
Of course, I wasn’t expecting a full price offer; she had already taken the shot over the bow when she said ‘discount’. I liked it. This was some great interaction and what I love about my business and interaction with buyers and sellers.
Remember, if all things are equal, the best offer is a cash offer at full asking price with no contingencies and closing in two weeks.
But most of the time all things are not equal and this buyer walked in off the street and was not represented by a real estate agent. I knew that my $195,000 asking price was a little high and I also knew that minus the 3% – 6% sales commission, I could accept less than a full asking price because of the savings on commission alone. There are other factors too like holding cost. Most people look at the big number and forget about the many little ones that tend to add quickly. Always remember that you have holding cost.
It really makes you stop and think. “Is Cash King”? At what point am I not willing to accept an all cash offer over an offer with financing?
In this article, I will discuss the pros and cons of each and how they relate to most real estate transactions.
According to research by Realty Trac in 2014, over 40 percent of all home sales were from all-cash buyers. For people selling a home, this sounds like excellent news, but there is always a caveat. Most home sellers will never see an all cash offer simply because houses that have been purchased with cash are by investors purchasing foreclosures from banks or other distressed properties from homeowners.
In most cases, cash is considered the best bet, and you don’t have to take your chances with a buyer who needs to jump through hoops to get a mortgage loan to buy your property. But is the cash offer always the right answer for your home sale?
The Advantage of Cash
We’ve all heard that ‘cash is king’, but in any real estate transaction, you need to determine the context of the offer and the ability of the home buyer to actually close. As a rule, a cash offer should always be considered, because a failure to obtain financing is the main reason why most home sales fail to close. In fact, according to Zillow, 1 in 3 mortgages fell out of escrow due to financing in 2014. In the new era of Dodd Frank and strict lending criteria, the addition of TRID some buyers no longer qualify for a mortgage. In other scenarios, lenders won’t approve financing because the appraisal comes in lower than the purchase price. Keep in mind that with a cash offer there is no lender and there are generally no appraisals, so both of these risks are usually eliminated.
Not all Houses are Created Equal
Most home Sellers don’t ever see a cash offer because most home sellers who have homes that are in market ready condition, can pass multiple inspections, have minimal appraisal issues (if priced right) and are represented by a real estate agent willing to list it. This is the “sweet spot” for both the home seller and the real estate agent. 98% of the offers received on this type of house will include bank financing. It is rare for these home sellers to ever see a cash offer.
So what happens when the house in question has so many issues of deferred maintenance, title issues or code violations that can’t be financed by any bank? What is a home seller supposed to do?
The answer is really simple: When the asset becomes a liability and starts to slowly drain your other assets it’s just time to sell. Forget about losing value; I am talking about a house that will never be worth more than it is right now. Ask yourself the hard questions am I ever going to be able to afford to fix it up? Am I ever going to see a profit? Unfortunately, most people don’t realize that an asset that continues to deteriorate and becomes a burden is no longer an asset. It’s time to sell. Read more about trying to sell an ‘ugly house’.
The Cash Discount
As I stated above, most home sellers do not ever see a cash offer because most cash buyers are investors looking for a discount. According to recent research by Goldman Sachs, investors offers almost always come at a discount. You can take the all-cash offer, and it’s a safe bet that you’ll get your cash at the end of the day when the transaction closes, but that cash offer may be considerably lower than your home’s market value; by 20 percent or more in some cases. The trade-off, however, is that investors will usually buy a house in its current as is condition, without contingencies, without inspections and without appraisals. Imagine not having to pay for any repairs, complying with codes for unpermitted work or even cleaning up. Most investors even pay the closing cost.
How Big a Risk is the Financed Buyer?
Many buyers come to the table prequalified for a loan. But prequalification letters are not created equal. Some lenders will take the time to verify the borrower’s financial picture; others will take a few details over the phone and make a decision. These Buyers are NOT Pre-Approved and pose a risk. But preapproved buyers have passed the bank’s first extensive financial checks, including checks on credit ratings, earnings, and debt-to-income ratio, but the early approvals are still not final approvals. Based on these checks, the lender makes a review credit decision – which means that the borrower, in theory, is good for the money he is borrowing. It’s not cash, and in today’s real estate market, they can still fail the final underwriter’s approval.
Choosing the Best Deal
Like I said, the best offer is a cash offer at full asking price with no contingencies and closing in two weeks. Not surprisingly, these offers don’t come along very often. But when they do, the seller must choose between a discounted cash offer and a higher financed offer.
The buyer must also weigh in the cost of sales commission to a real estate broker (usually 6%) and closing costs. Which one is better depends on a host of factors: whether the financed buyer is preapproved, the contingencies required, how quickly the buyer can close and whether there are other incentives on the table, such as the buyer picking up your closing costs. View the offers carefully because there’s a lot more to it than the asking price. Either way, don’t be pressured by your agent or anyone else into choosing any offer. You have the final say and should take the time to choose the offer you prefer.
Sometimes the certainty of closing is enough for people to want to go ahead with a cash offer, even if it’s lower than a conventional offer. To others, it doesn’t matter if their property falls out of escrow because of financing, as they are just waiting for the best possible deal.
In any case take your time, review the numbers and if you are diligent you can close with an offer that you are happy with.
My name is Peter Westbrook and I am a real estate investor with “Westbrook REI” and “We Buy Houses in any condition in Sacramento, Stockton, Lodi, Modesto, Manteca and its surrounding areas”. We are the best at what we do because we work at it every day. We have years of experience and a plan that we follow. We are a real company with real people that are committed to helping you achieve your goals.
If you need to sell your house fast call us at (209)481-7780… we’d love to make you a fair no-obligation no-hassle cash offer. You’ve got nothing to lose, but we’d love to earn your business.