A conversation I have frequently is with buyers who have been unsuccessful in purchasing a property (or multiple properties) and are becoming quite desperate to get ahead of the game. Often there is a common theme to this unfortunate cycle, which is the way in which they are making their offer on the property, or rather, the hierarchy within which a seller will prioritise them as buyers for their home. Here’s what the real estate agent can’t always share with you on why you missed out….
Position 1. Cash is King
This is a very fortunate position that some buyers are in, where they are able to put a cash offer down for a property. That is, cold hard cash that is sitting in a bank account as surplus funds (ie. not a loan), a shiny black briefcase or under a ratty old mattress somewhere. The benefits to the buyer are that they present the least risk to a seller, and there can also be an element of leverage on the asking price if they are presenting cash. Bidding at auction is also very straightforward.
This is ideal situation for a seller, as there is no risk of finance not being approved, the turnaround on being paid is usually pretty fast, and as a result they are usually more agreeable to accepting a slightly lower offer due to these conveniences.
Position 2. Subject to Finance
The need to borrow a percentage of the sale price is typically next in line in terms of preference for sellers, but seems to create the most confusion for buyers. There are 2 ways that a subject to finance offer can be presented: pre-approved or not.
Pre-approval of finance provides the intending buyer an indication that the lender is willing to approve their loan once they have successfully located a suitable property.
It is best that buyers seek to have a pre-approval in place before they start their search for suitable properties. The requirements of a pre-approval are the same as those for an unconditional approval: the financial institution will require financials and a completed loan application form to consider pre-approval of finance.
Pre-approvals are typically valid for 60 to 90 days and if a property is purchased within this time-frame, then apart from other specific conditions set by the lender, the main requirement is for a valuation of the property by the bank’s panel valuer to confirm the market value of the property. Once the valuation report and market value of the property has been confirmed to be acceptable to the bank, it can proceed to organise loan offer and mortgage documents for signing. The buyer is therefore able to meet “subject to finance” undertakings noted in the contract of sale within a shorter time-frame.
Benefits of Pre-Approval
Although not a formal or unconditional approval, a pre-approval provides the buyer with an accurate idea of their borrowing power and any conditions that would be imposed by the lender. By knowing their price range, buyers can spend time looking at suitable properties. If there are multiple offers on a property, having a pre-approval can provide a buyer with an advantage when the vendor is reviewing the various offers.
As per cash buyers, in some cases if the vendor is aware that the buyer has pre-approved finance, they may be willing to take the property off the market or accept lower than the asking price, knowing that the sale can be finalised in a quicker timeframe.
Position 3. Subject to Sale
This is generally the least desirable situation for a seller, as it relies on a dependency of a another sale in order for the sale of their property to go ahead. Although is has its place in the food chain of property selling, it presents the highest risk to the seller, usually the longest turnaround time and therefore the least appeal. In a competitive market or for a popular property, it’s unlikely that these buyers would even be considered at all. They will often need to pitch at a higher price level on a property in order for their offer to be relevant, and in the event that the seller insists on a protective clause that allows them to continue to market the property, the buyer could go down an exhausting and disappointing path and still end up without a new home.
*The bizarre side of Position 3 is, it is often the subject to sale buyers who eventually become the cash buyers. The sheer logistics and disappointment of the subject to sale process mean that buyers end up deciding to sell their home, rent for a period of time, and sit on their cash until the moment to strike presents itself… And there you have it, you’re now in Position 1 securing your dream home! 🙂
Happy house hunting!
Erynne Campbell 