SSP013 : Short Sale Help: Selecting the Best Buyer Part 3

The Short Sale Podcast for Real Estate Agents

During this episode you will learn which types of buyer financing are most favorable when it comes to getting your Short Sales approved by the seller’s lien holder.

Selecting the Best Buyer Part 3

During this episode you will learn which types of buyer financing are most favorable when it comes to getting your Short Sales approved by the seller’s lien holder.

Understand this about what we’re looking for in a buyer, there are three characteristics or components.

#1 We want a buyer that is getting a good enough deal that they’ll do what we tell them to do.

#2 We want a buyer that knows exactly what they’re getting into and willing to spend money to make sure.

#3 We want a buyer that has a degree of financial flexibility.

We’ve already gone over how the value of your buyer feeling that they’re getting a good deal, how important that is, and that they know what they’re getting into and willing to pay to find out. But what does financial flexibility really mean? It means that your buyer has the necessary resources, as well as willingness, to be able to come up with a little more cash than they expected without choking. Now I’m not saying that they’re going to go from paying $100,000 to paying $120,000. What I am saying, though, if your buyer, the one that wrote the offer of $100,000, remember it’s worth $150,000 if it was in tip-top condition, you listed it wholesale at $108,000, and they wrote an offer of $100,000.

Now, if they came back to you and said, “Well, we don’t have the money to do an inspection, don’t have the money to do an inspection, don’t have the money to pay to have an inspection done.” My recommendation is it would almost be a crime for you to continue with this buyer. Why? If they can’t come up with the money to do an inspection, then they are probably going to have a hard time coming up with the money. The best thing you can do is find a new buyer. No hard feelings. There’s a difference between them not being able to come up with the money and them not being willing to come up with the money. There’s a huge difference there. If they are not able to, that’s different.

Likewise, how the buyer plans to finance the purchase is really another entire landmine. Let’s say that they agree to the $100,000. But in order for them to purchase it they’re going to borrow money. Not just any money, but a federally guaranteed loan, an FHA loan, because they don’t have any money available. What’s wrong with this? Well, try to keep in mind that it is a short sale and it’s a house being bought in as-is condition. Do you really want to bet the next three months of your life on whether or not this buyer is going to be able to close the deal? Especially when they demand upfront that the seller pay their closing costs and cover their down payment?

This is the opposite of financial flexibility. That doesn’t mean that you can’t work a deal out with a buyer who wants to get an FHA loan, but my advice to you is this. There’s a huge difference between having no money and not wanting to use the money they have. Having no money, landmine. Avoid them. Discover it quick. Find a new buyer. Choosing not to use their money, that’s OK. We all do it. It’s like buying furniture when they say, “Look, would you like to pay us cash, or we’ll give you six months, no interest?” As long as you’re disciplined, why would you not take the six months, no interest? The choice of not using money they have available is different than not having money. That’s financial flexibility, as it has to do with financing.

If you were to go to all the lenders and get their criteria for approving short sales, as far as the type of funding I’m going to use a different word here, funding, meaning how did the buyer fund the purchase, the number one preference by lenders, and I’m talking about lenders approving short sales because remember, they want to make sure that the buyer is real and that it’s a fair price, and that you can prove that everything’s good. So what do the lenders look at as preferential funding?

This is the one that you’re probably not going to believe when I tell you. Number one, conventional loan. I don’t know that they’ve even said it this way, but our proof has been that these deals got through quicker, easier, cleaner when the buyer is buying and funding the purchase with a conventional loan. Yes, they actually prefer that over a cash buyer.

I get a lot of push back on this where agents tell me that a cash buyer is a better buyer. But over the years the preference by the lenders has changed, because there were so many misuses of the system that the lenders started flagging deals that were coming in all cash. They scrutinize them more, and all cash offers are more challenging. The number two preference is a government guaranteed loan. So a lender who is reviewing a short sale proposal, they’re going to prefer that that borrower, the buyer, is approved for a conventional loan, second to that, approved for a government guaranteed loan. Yeah, they prefer that over cash.

As a matter of fact, all cash purchases are their least preferred. It wasn’t like that all the time, but we went back and we tracked hundreds of approved deals. What we looked at is which ones were more likely to be rebutted, meaning that the lender came back and wanted to bump the price. We found that in all cases finance deals were approved, finance meaning that the buyer was funding the money with a conventional loan or a government guaranteed loan.

The sales that were financed were approved as fast or faster than cash deals, but, and this is the most interesting part that I found, cash deals were more likely to be countered at a higher price. 80% of the time cash deals came with the lender saying, “You’re going to have to bump the price.” That is why we started mandating to those students that we work with to negotiate their deals that all cash offers were to be replaced with conventional approval letters. Let me say this another way. If the buyer came to the table and said, “We want to buy it and we’re willing to pay all cash,” that’s fine. If the buyer’s offer was $100,000 and they wanted to pay all cash, remember I said that you can clean it up with a counter offer. We taught our students to counter it with keep the price the same, but go get an approval from a conventional lender that says you’re approved for a conventional loan.

Oddly enough, a lot of buyer’s agents said, “Well, that’s preposterous. Why would you do that? It’s a cash buyer. They’re the top of the top. They’re the best. They’ve got the money in the bank.” Great. Well, then go to the lender and tell them you’ll pledge the money that’s in the bank to get an approval for a loan. It doesn’t mean you have to borrow the money to close, you’re still given the option to pay cash at closing, but from a negotiating point-of-view, it made the negotiating a lot easier.

In summary, if you want to increase your odds of going from sold to closed, instead of sold to cancel, you’ve got to make sure that it’s a good enough deal for your buyer that they’ll do what you tell them to do. You’ve got to make sure that your buyer knows what they’re getting into and willing to spend the money to find out. That’s the inspections and the appraisals. You’ve got to make sure that your buyers are financially flexible. Stay away from buyers that don’t have any money. It’s OK if they don’t want to spend the money, but don’t deal with buyers that don’t have any money. Avoid the buyers that have no money. Remember, cash buyers may have been preferred in the past, but today, the lenders prefer, number one, conventional loan approvals, government insured loan approvals, and cash is third.

Of course, this isn’t to say that you can’t close a short sale that involves a buyer that has no money. It doesn’t say that you can’t close a deal, where the buyer asks the seller to pay for everything under the moon. It doesn’t say you can’t close a short sale that they’ve got to finance the purchase with a government insured loan with very little of their money. But if you plan to do a lot of short sales and you follow what I’ve taught you so far, that I’ve given you in this episode as well as the prior two episodes, number 11 and number 12, I hope that you see that you can increase your odds of going from listed short sale to sold short sale or to closed short sale as opposed to sold going to cancel. More importantly, you’ll stop wasting time on the wrong things and focus on spending your time on the right things, be able to close more deals, spend less time, have a better life.

Thanks for Listening and Happy Learning,

Scot Kenkel, Instructor

P.S. What do you think? Leave your comments below. Thanks.

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