Something kind of strange happened a couple years ago. Colorado, which historically had been a fairly balanced market, almost overnight it seemed became a very strong seller’s market. The cause of this is varied but a few of the reasons were historically low interest rates brought on by the government’s bond buying program, lack of new construction as builders slowed new construction projects during the housing crisis and then lagged when it came time to ramp back up, a lot of people making a lot of money on the stock market in the years prior and looking for diversification and an improving job market.
A lack of inventory and an increase in qualified buyers with few new builds to compete with put sellers in a situation that in Colorado was a bit foreign. Houses that used to sit on the market for multiple weeks now had multiple offers within just a day or two. Because of this buyers have had to adjust their strategy. A contingent offer (when the purchase of the new property was contingent on the sale of their current residence) used to be pretty common. When it was the only offer it didn’t really even matter. Now a contingent offer gets hardly a glance. It used to be a buyer could have the seller pay for their closing costs (known as seller concessions). Now an offer with seller concessions comes with the assumption that the buyer can’t pay their own costs and may not have enough funds for closing, whether accurate or not. All things that used to be common practice disappeared almost overnight. Read a previous LRA blog on this topic here.
Another thing we started to see in real estate a couple years back as the market shifted from a balanced market to a seller’s was agents deleting or omitting deadlines. Colorado's Contract to Buy and Sell Residential Real Estate has been very buyer friendly for as long as I can remember. It has been very easy as a buyer to cancel a contract and have their earnest money returned without delay. You don’t like your inspection results? You can cancel the contract due to the Inspection Objection Deadline. You don’t like the HOA documents or the insurance quote you got? You can cancel due to Association Documents Objection Deadline or Property Insurance Objection Deadline. Arguably the most buyer friendly deadline is the Loan Objection Deadline which per the Colorado Purchase Contract, the Buyer has the right to terminate “…if the New Loan is not satisfactory to Buyer, in Buyer’s sole subjective discretion". So the term "subjective discretion" means buyers don’t have to provide a reason. You don’t like your loan for any reason, you can cancel and have your earnest money refunded. Well a couple years ago as buyers became more and more desperate to compete with cash offers, many of which were coming in over asking price, buyers began to delete or exclude deadlines from the contract. Now we started seeing financed transactions where inspection, appraisal and loan objection deadlines were all waived. Doing this while elevating the competitiveness of the offer also opens up the buyer to more risk.
So, how does a buyer compete in this market? Here are some ideas to think about:
- Get yourself a good real estate agent and a good lender. Every little bit helps. A responsive lender who follows up with the listing agent once a pre-approval letter is submitted may be just the edge you need.
- Get creative! Perhaps instead of making an offer contingent, you sell your property and rent it back from the new owners. Fannie Mae and Freddie Mac allow a 60 day rent back on owner occupied properties.
- Perhaps you can qualify to carry both properties. Seems crazy, but the guidelines have eased up as of late and now we can use a rental appraisal to help offset the debt on your current house.
- Seller unwilling to pay your closing costs and pre-paid expenses? Chat with your lender! Most of the time lenders can increase the rate slightly and pay for some or perhaps all of the costs.
- Having trouble competing with cash offers? Eliminating deadlines from the contract is one way to compete. Another is to adjust the purpose of the deadline. Instead of waiving Inspection Objection completely perhaps add language that outlines what it will be used for (health and safety concerns only etc.).
- Instead of waiving Appraisal Objection completely perhaps add language that deals with the possibility of a low appraisal in advance and addresses how much you’d bring over the appraisal value in such a case. This eases everybody’s concern as a "Plan B" is already formulated. Instead of waiving loan objection perhaps just move it up so that this contingency is earlier in the process. A lender with local underwriting and processing should be able to accommodate such a request.
Where there’s a will there’s a way. Experienced lenders and real estate agents can help advise you as to how to best compete in this unusual market.
Author's Bio: Aaron Staufer is a Mortgage Loan Officer at Elevations Credit Union and has been involved in real estate transactions since 2006, first on the real estate side and more recently on the home financing side. Aaron has seen both sides of the home-financing process and therefore is able to assist members in a unique way. He received his Bachelor’s degree in Philosophy with a Minor in Ecological and Evolutionary Biology from the University of Colorado Boulder in 2008. Aaron has lived in Colorado for over 19 years and is a volunteer diver at the Denver Aquarium on the weekends. Aaron can be reached at 720.652.7108 or email him at Aaron.Staufer@ElevationsCU.com.
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