All offers are not created equally.
It cannot be stated enough just how important it is to choose the right offer, not just the one with the highest price. The right offer is one that actually closes and allows you to move on from the transaction. The wrong offer has an unexpected problem at the 11th hour that forces the deal to fall out, leaving you back at square one. In this post, we’ll cover the main contingencies lender-financed offers typically have, and what the main drawbacks of such offers are.
The most common contingency issue when dealing with “financed” buyers is getting final mortgage approval with the buyer’s lender. Although the process has greatly improved over the last decade, there are still many hoops to jump through to get to the closing table. A full priced offer with a 60-day mortgage contingency sounds attractive on the surface, but this may not always be the case. Here are five potential drawbacks of a lender financed offer.
- Closing period. Regardless of how qualified a buyer may be, they still need lender approval to purchase your property. Getting from the loan application to closing has multiple steps including the appraisal, application review, title search, homeowner’s insurance, condition review and closing document distribution. Just one snag at any one of these checkpoints can tack on days (if not weeks) to the closing. While your financed-buyer is going through this process, you’re still expected to pay your mortgage, taxes, insurance and utilities for the property until the deed is transferred. These can often expenses that are not budgeted for and can eat into your available funds for the transition to your next property.
- Financing obstacles. We touched on this in the previous section, but getting a loan to closing can be a real challenge. Lenders were hit hard during the mortgage crisis and only want to take on solid applications. Every item in the loan application is scrutinized and reviewed with a fine-tooth comb. It is not uncommon for a lender to ask for withdrawals or deposits on a bank statement to be reviewed, documented and verified. Just when you think you are out of the woods an underwriter may come back asking for additional documentation and, thus, requiring more time. Lenders are no longer leaving any doubt with any documents in the loan file. There is truly no such thing as an easy loan application, regardless of credit score, down payment or assets. There are too many horror stories of loans getting rejected weeks into the process because of the appraisal, title or something in the tax return. Every lender financed offer carries at least some level of this type of risk.
- Inspections. A typical first step once a financed offer is accepted is the home inspection. Buyers want to know exactly what they are getting into with regards to the physical condition of their next home – a home inspection offers a detailed breakdown of the condition of a home. Most inspectors are very skilled at what they do and offer a great service for buyers. They often find dings and damage in the property that the seller never knew existed. If these items come at a significant price tag, the buyer may get shaky and feel like they are overpaying for the property. Buyers can use these findings to justify a credit and, depending on the severity of the repairs needed, certain lenders may only approve their financing until a repairs are completed. Either way, an inspection report that comes back with a concerning feedback puts the seller at risk of wasting significant time and spending money on repairs in the following ways….
- Repair and/or Credit requests. An inspection filled with negative items produces multiple problems. The first, as we stated, is a potential reduction in price. This stings even more when you weren’t aware of the issue and didn’t budget for it accordingly. The second arises when a buyer issues a request for repairs to be completed before COE. As the seller in this scenario, not only do you have to find a contractor that can do the work but you need to find one that can do it on your timeline. Not all good contractors are able adjust their schedule to accommodate a request for repairs per transaction timelines. In addition to this, lenders can even ask for inspection items to be repaired and reviewed by the appraiser or inspection prior to approval. Once your contractor completes the work, you’d then need to get the appraiser and/or home inspector back to the property to document the work and for lender sign-off. Needless to say, executing a request for repairs to satisfy a buyer and/or their lender can be a logistical challenge that can add days or weeks to a transactin.
- Buyer finding a better option In hot markets it is not uncommon for buyers to submit offers on multiple properties at the same time. They can “Shop around” until one their offers is accepted and if more than one of their offers is accepted, they’re forced to decide which property they want to move forward with. This decision can come days or even weeks after being in escrow. If you’re on the flip-side selling to a buyer like this who cancels escrow after finding a better option, you may be out of luck.
It is a delicate balance knowing when to accept to a lower cash offer with less contingencies or a higher offer pending mortgage approval. As a seller you need to consider your financial situation, property goals and timeline in relation to the property. Just know that every offer with a financing contingency has some level of risk that must be taken into consideration.