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Ask McEnearney: How do finance contingencies work in a competitive market?

This week’s Q&A column is written by Rebecca McCullough of McEnearney Associates Realtors®, the leading real estate firm in Alexandria. To learn more about this article and relevant Alexandria market news, contact Rebecca at 571-384-0941 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.

Question: How do finance contingencies work in a competitive market?

Answer: For the past several years we have been experiencing a seller’s market in residential real estate. Buyer demand exceeds the number of homes available for sale. There have been plenty of news articles over the past few months that appear to question that, but for a lot of buyers out there, that is what they are experiencing. Realistically, we can expect to experience a seller’s market for a long time coming.

In a seller’s market, buyers have to be aggressive to win against multiple offers, and this understandably can make many buyers very uncomfortable. So, what do I mean by aggressive? Largely that translates to removing contingencies and adding price escalations to contracts. There are two key contingencies that are often removed, and I will explain both.

The first contingency that might be removed is a home inspection. To be clear, an agent should never recommend waiving home inspection. However, the reality is that in a competitive situation, sellers do not want to see this contingency. A good practice would be to do a pre-inspection before an offer is written. That way, a buyer will be able to understand any potential issues before submitting an offer.

To learn more about home inspections please read my article from May 31, 2023 titled “What are home inspection deal breakers? And should they be?”.

The other major contingency is the “finance contingency.” This one can be tricky. There are a great many things to consider and to understand. I’d like to say that all agents are equally knowledgeable on the nuances of them, but truthfully, they are not. I’ve seen deals lost where the agents and the seller did not understand the financing, and sensational buyer offers are rejected.

Regular readers of Ask McEnearney are likely familiar with the three main types of mortgages: conventional, VA, and FHA. Put simply, VA mortgages are loans available to active and retired military. FHA loans are insured by the Federal Housing Administration and offer borrowers with limited resources or credit issues opportunities to purchase homes. Conventional loans are generally what everyone else will apply for. In each case, they can be offered by banks, credit unions and mortgage companies.

However, these are not the only types of lending opportunities. There are a few more that may not be as well known. First, it is possible the seller may offer financing. This means that the seller agrees to allow you to purchase the home and they will provide your financing and be your lender.

Another is a bridge loan, which is underwritten like a mortgage, but is short term and can be paid off when proceeds become available. This is a terrific option for those who can’t qualify for a new mortgage until they sell their current home. Not all financial companies offer this type of loan, but it can be worth researching companies that do to help you win an offer. One such company is Atlantic Coast Mortgage* (NMLS ID 643114). They’ve saved a few deals for McEnearney clients!

Another option is investor financing.

Let’s explore this last one. Why would someone go this route? There are many individuals who temporarily can’t get traditional financing, but don’t want to wait to buy. Here are some scenarios where investor financing might be employed:

  1. Buyers want to purchase before they sell but need the equity from their current home for a down payment on the new home.
  2. Buyers want to purchase before they sell but don’t qualify for the purchase without selling first.
  3. Buyers with insufficient credit or whose scores don’t meet conventional/FHA guidelines.
  4. Buyers are self-employed or commissioned, but don’t have the required history to meet conventional guidelines.
  5. Buyers are temporarily unemployed, or working part-time and will be securing a full-time salaried job in the near future.
  6. Buyers want to purchase a primary home but won’t be moving into the property within the requisite period of time, and don’t have the funds necessary to secure conventional second home or investment financing.
  7. Investors or builders looking for funds to flip a home.
  8. Buyers with debt-to-income ratios that exceed conventional guidelines, but are paying off debt, obtaining a new job, etc, in the near future which will allow them to qualify for a conventional refinance.
  9. Buyers want to make the equivalent of an all-cash offer and settle in a matter of days in order to be more attractive/competitive.
  10. Buyers looking for up to 100% financing.

You can have buyers with 800+ credit ratings that may fall under one of these scenarios. Investors realized that they could pool their money together and offer these individuals short term cash at a higher interest rate to help them meet their real estate goals, and the investor(s) can make a better return on their money.

This happens more often than people realize. In some cases, this is referred to as “hard money lending.” Sellers can consider this essentially as a cash offer. The investor has cash readily available in an account, has fully pre-approved the buyer, and will issue a check within days to settle a transaction. Once under contract, no further underwriting is necessary. The buyer will simply sign a note and deed of trust at settlement.

This option is a great opportunity to help a buyer win in a multiple-offer scenario. If they qualified to get a mortgage, but the seller wants a quick closing, they could go this route and get a mortgage post-closing. Another way we see this is when a family member or friend loans the cash temporarily to get the deal done.

If the seller or listing agents aren’t aware of this kind of lending, they can become suspicious and reject the offer, so awareness and education are key.

In summary, we remain in a very challenging market. For buyers, I encourage you to make sure that you know all of your lending options so that you can write an effective offer. Sellers, make sure you understand all the offers that are being presented to you! Hire an agent that really knows the nuances of the market to ensure the best outcome for you.

*My thanks to Carey Meushaw, Branch Manager & Sr. Loan Officer (NMLS ID 310813) at Atlantic Coast Mortgage for his contributions this week.

Rebecca McCullough has built a successful real estate business in Alexandria and Northern Virginia by providing excellent service to her clients. If you would like more information on selling or buying in today’s complex market, contact Rebecca today at 571-384-0941 or visit her website RebeccaMcCullough.com.

If you would like a question answered in our weekly column or to set up an appointment with one of our Associates, please email: [email protected] or call 703-549-9292.

McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria

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