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Use This Little Known Trick to Make a Non-Contingent Offer!
If you haven’t noticed, we are in the middle of a very hot seller’s market. The 2020 pandemic caused thousands of home sellers to pull their home offers off the market, fearful of strangers entering their homes. At the start of the pandemic, 1.49 million existing homes were on the market for sale. A whole year later, that number dropped to just over 1 million. Combine the lack of homes with lower interest rates and a whole new perspective on what we want out of our living space, and the demand for housing went through the proverbial roof.
If you are just now dipping your toes into the homebuyer market, you most likely have no clue what to expect. You will not get your offer excepted unless you have a strategy in place. It’s why the most important thing you can do is get pre-approved by your lender (and I mean fully approved by an underwriter) and trust your real estate agent to advise you on current market conditions. If you take shortcuts, you will only end up wasting your time and will get your heart crushed when your offer is not even in the running.
Remember that sellers love clean offers with limited contingencies or none at all. And since contingent offers are usually a safeguard for buyers, they are not conducive in a hot seller’s market. In the eyes of the seller, one contingency that will most definitely disqualify a buyer’s offer is a Home Sale Contingency: when you tell a seller, you can only buy their home after you sell yours. Thus, making the purchase of their home contingent on selling your home first. They will quickly discount your offer and move on to the next. Secret tip of the day – RECASTING!
What Is Recasting?
Most buyers know they can make additional payments above their required monthly mortgage payment if they want to pay off their mortgage sooner. This is a common strategy to accelerate one’s freedom point or the moment they pay off their mortgage in full. Making an additional mortgage payment, say $250, will decrease your loan balance, but your monthly payment will stay the same. The term of your loan is reduced, but again, this does not affect your monthly payment.
Also, recasting is not something all banks will offer, so be sure to ask your lender if they provide this service. Recasting is also not a refinance as it will not change your loan terms or interest rate – instead, it will simply lower your monthly payment based on the newly reduced mortgage balance.
Let’s look at an example. Let’s assume that dream home of yours was just listed for $650,000, and you want to pounce. Figure you can sell your home and get $200,000 in net proceeds. But, you now understand your offer to buy that dream home of yours won’t happen if you make a contingent offer by telling the seller you have to sell your home first.
Your lender approves you with a $585,000 loan, putting 10% down on a 30 year fixed mortgage. Remember, you still must qualify to carry two mortgages; your current primary, if you have a mortgage in place, and the new mortgage. This is a short-term endeavor in this market, as you will sell your home right after you close on this dream home.
After you sell your home, you will take the $200,000 in proceeds and recast your new mortgage; thus, your $585,000 loan will be reduced by $200,000 to a new loan balance of $385,000. Your interest rate and term of the loan do not change, and your monthly payment is reduced based on the new, lower balance. This is not a refinance where you incur fees, and you can lower your monthly obligation to a more manageable place.
Key Take-aways:
- Recasting is just one of a few tactics to improve your chances of getting your offer accepted, and there are more, so please reach out to your trusted lender to learn more.
- Not all lenders offer to recast, so be sure to ask upfront before completing an application.
- Not all loan types are eligible for recasting, so be sure to ask your lender.
- Even if your mortgage is eligible to recast, it may still not be the best fit for your unique financial circumstances. For example, I had a client put 50% of their proceeds into the recasting process and split the rest between a reserve safety net account and paying off some high-interest debt.
- Refinancing might make sense. The main perk of recasting is to lower your monthly obligation; however, maybe your credit scores are better by the time you recast, and rates have come down. In this case, refinancing might make more sense.
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Dan Tharp – Branch Manager – 916-257-1470
2250 Del Paso Rd. #A, Sacramento, CA 95834
NMLS# 280913 | Company NMLS # 3274
Equal Housing Lender
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Not Every Sacramento Home Buyer is a Buyer
Every Sacramento home buyer should enjoy the luxury — and it is a luxury — of working with a buyer’s agent who will check out the property records before writing a purchase offer for that buyer. A Sacramento buyer’s agent at the very least should examine basic details but so many do not. When a buyer wants to write an offer, a lot of agents will just write it without giving much thought to the possible consequences for a buyer. I suppose they might think it’s not their job or maybe they don’t know how.
An agent has many sources at her or his disposal to find this data. At minimum, even if an agent doesn’t run the comparable sales for the Sacramento home buyer — which for my team members would be inexcusable — the agent should check to see who owns the property. Is it one person? Is it a trust? Does the owner’s address match the property address or are the owners living out of state? A quick call to the listing agent would confirm whether two people are on title or if one of them is deceased. You know, just stuff that makes the entire transaction run smoother and gives the buyer enough information to make an intelligent decision.
A potential Sacramento home buyer called yesterday about wanting to buy a home along the river that is a short sale. He asked if moi, his newly found Sacramento real estate agent, would be willing to write a purchase offer for him. As an experienced short sale agent, the first thing I did was look at the tax rolls. I see that this is an investment property for the seller. The second thing I notice is his second loan is a gigantic refinance for many thousands of dollars, and the lender is National City.
National City is now owned by PNC. This makes it a PNC short sale. A second loan held by PNC, especially a hard-money loan that carries recourse in California, is a difficult short sale to negotiate. That’s because PNC knows it can go after the seller personally and try to collect the full amount of the loan should the home go to foreclosure. When the security for that second loan is wiped out, because it’s a cash-out refinance, that lender, you can bet, will pursue it.
If the seller is not willing to negotiate with PNC upfront in this type of short sale, well, the odds are it will not get approved as a short sale. If PNC approved the short sale, by law it must release the seller from liability, but it is not required to approve a short sale.
Not only that, but there is a trustee’s sale pending shortly. It is very possible that a seller who waits until the last possible minute to put a home on the market as a short sale prior to a pending trustee’s sale is not a seller who is willing to negotiate upfront, but you never know. Weird things happen in real estate every day.
Armed with this information, the buyer chose to move forward and write an offer because he decided that he had little to lose. He was prepared to be disappointed. I asked a team member on the Elizabeth Weintraub Team to prepare an offer for him. My team member explained that we need a preapproval letter to accompany the offer because the way to postpone a trustee’s sale is to submit a purchase offer. The bank will not allow submission of a purchase offer without a preapproval letter. An offer without a preapproval letter is not an offer. It is an incomplete offer and considered insufficient to postpone a trustee’s auction.
The buyer could not produce a preapproval letter. He was irritated about my team member’s insistence on it, too. You see, he had sold his own home as a short sale a few months back.
The buyer said fine, he’d find another Sacramento real estate agent to write his purchase offer. That was actually a very good idea on his part, but a wasted effort.
