I didn't get the house…WHY?

When there are multiple bids, and the price of the property is bidding up over the asking price, the amount of downpayment is sometimes the reason why your offer is not accepted.

Let’s say a property is put on the market at $275,000 and the highest offer is $315,000. There is an offer of $310,000 with 50% down and an offer of $315,000 with zero down. Usually the seller’s agent will advise the seller not to take the $315,000 offer, because she does not expect the property to appraise. While one can buy a house with zero down, that does not mean that the seller is willing to take the risks associated with a zero down buyer.

It is the seller’s agent’s job to know not only what they can get in the open market for a property, but also what obstacles might get in the way of the sale closing. These days, when an agent lists a property at $275,000, it is likely a price higher than the last few sales in the area and a price that will appraise, with some effort. When it bids up over that amount, the seller’s agent must be ready for what will happen if and when it does not appraise. Often that means that zero down buyers will not get the house, if there are other offers with larger downpayments, even if the other offers are for less money. A common result will be that the seller will counter the 20% down buyer with the highest price offered, regardless of escalator clause considerations.

This points back to my post noting that the appraisal is done for the lender. If the property appraises at $300,000 and the sale price is $315,000, the lender does not participate in the shortage. If it is a zero down loan and the buyer has no cash, the buyer will need the seller to reduce the price down to $300,000 for the transaction to close. The lender will only give the buyer 100% of the appraised value, without regard to the agreed upon sale price. If the buyer is a cash buyer, often there is no appraisal at all, since the appraisal is ordered by the lender.

This issue has come up in the last two offers I have presented. In fact, I lost a client who did not get the property because another offer at 20% down trumped her zero down offer. When she asked me to be more aggressive in getting her offer accepted, I explained that the seller’s agent made it clear that the 20% down buyer was going to get the property because they had 20% down and the agent knew the property would not appraise. There was just no way to get the seller to accept a zero down offer, with the costs included in the price, no matter what I did.

Buying your first property with zero down and the seller paying the closings costs is clearly possible, and is done every day. But often the zero down buyer, with no cash to pay their own closing costs, is excluded from purchasing the most popular house in the most popular neighborhood that has multiple offers.

Offering the highest price is of no consequence to the seller, if you can’t close.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: ardelld@gmail.com cell: 206-910-1000

20 thoughts on “I didn't get the house…WHY?

  1. I think it’s important to know you motivations as well. I just lost out on a home yesterday listed at $300,000 — I dropped out when it went over $365K and they wanted me to drop my appraisal contingency (cash backed offer not dependent on a loan, but required that it would appraise for one) . For me, it was an investment and I’m simply not going to get into a property that doesn’t appraise. When it’s an emotionaly driven decision for your personal residence, there are obviously some buyers in the current market willing to pay way beyond a rational price point — and with a cash position to go there.

  2. My partner and I were just discussing the multiple offer situations he has had with investors. The “must appraise” clause is not likely the best way to go there, as you may miss out on the best properties that way. Do the “Donald Trump” offer. Do your numbers and cap your price, period! Your cap may and will likely exceed appraised value, but that is not what is important. What is important is the fact that your numbers work when the dust settles.

    Insisting on a must appraise will lose you the property, even when it WOULD HAVE appraised. There are other ways to protect yourself regarding the appraised value. Not getting the property at all, doesn’t serve any purpose.

    Don’t let the appraiser choose what a property is worth to you. That is no different for an investment purchase. You don’t even know the appraiser! Don’t give him that much control over your choices. Do your own valuations to your own purpose.

  3. OMG Robert! I didn’t know that was YOU! I almost said get “your agent” to assist you in determining the value rather than depending on the appraiser for this! LOL Sorry.

  4. Thanks for another very useful article, Ardell.

    (guess I can’t tell you to ‘try harder’ now if my offer isn’t accepted… darn)

  5. Hey Ardell — No Worries — good advise for the un-initiated. In this particular case (one would hope since I’m in this business) I knew where my top end was to make money on it. Dollar-for-dollar, there are other neighborhoods I’d rather invest in once it got over that point. I’m just hoping the winning buyers knows what they are getting into as the most recent comp sold for $309 in that same area. It’s a feeding frenzy out there now.

  6. How long has it been such an extream sellers market out there? Its reversed here in California. We were seeing that kind of frenzy starting about 2002 up to about 6 months ago. It was musical houses. It seemed like the cash down buyers were taking a big risk by getting a max loan and buying above appraisal, but they ended up making it back rather quickly through apprecation in the next year and then some. If the market out there is anything like it was in the end of 2001 in Tracy, Ca I would get myself into anything I could.

  7. Robert, good for you. You knew when to walk. Although you are a licensee, you are also a consumer. Like all of us.

    I find it peculiar when we hear from time to time about the ho-hum relevance of appraisals and that they will invariably ‘come-to-value’ in a sale. Mostly that’s the case, but not always. And yet, you were astute and informed enough to know that the home may not come to value (appraised value) based upon your own research.

    An appraisal rescued me from a potential $45,000 mistake a year ago. Prior to that, in mid 2004, as a consumer armed with sold data, we also walked away from a home in a multiple offer situation that sold just 5 wks earlier. The listed price at the time of our offer was such that it just covered the sellers closing costs to the tune of approx. $40K (commissions, title, excise, etc..) This is the artificial appreciation that you speak of. Like you, I wondered if the prevailing party knew that the home sold for roughly $40K less a few weeks earlier. In fact, I felt a little guilty knowing that because of our competing offer, and knowing it’s sales history, it forced two other parties to jack up the eventual sold price.

    To Brian from California:

    If the agents here in our market could experience what you and fellow colleagues are in California, seeing the shift going on outside our state lines, it makes you wonder. I just got back from San Diego a week ago. You wouldn’t believe the amount of housing inventory increase,particularly in condos. Browsing through the Sunday paper ads from builders– giving “$25,000 off this weekend only”, among other incentives, I just shook my head. It is a very different market in the Puget Sound region.

    This past Sunday morning at a small four home development, I struck up a conversation with a nice couple from Orange County who were looking for a home in the Snohomish area. They are relocating here to take a position at Boeing. Said the two markets are night and day. They said our average home for $400K would be like a million plus in OC.

    PS. had a transaction fall through a few weeks ago because a client’s home in San Diego (ironically) did not close due to, get this…. the buyer of their place got cold feet and refused to sign the day prior to closing. They did lose earnest money, but evidently thought it was a small price to pay vs. overpaying. The moral of the story is that markets outside our state can influence buying here.

    Pss. We’ve recently just got slammed with work over the past couple weeks. Any local agents seeing an uptick in sales activity in their offices, regardless of their own production?

  8. Huge demand in the under $500,000 market. Sure some stuff just sits, but anything new on market that’s decent gets jumped on. And yes, business is picking up, I’ve written three offers since Sunday…what day is it? They are starting to run together.

    Business is picking up because inventory is finally starting to come out to play. As I said on Monday…Spring has Sprung!

    I laugh when someone aks “Did you have a nice weekend?” What weekend!?

    Brian, Business was hotter than this when I worked the Beach Cities of the South Bay. Maybe the frenzy follows me 😉 LOL.

  9. Legacy Escrows, thanks I went to your blog and educated myself to your market. I really enjoyed going gangbusters. I can tell you know what your doing.

    You are right about the market in California. San Joaquin County is a little better then the San Jose and L.A. I guess because our median price is still affordable. On the selling side it actually takes skill to sell a home. We take a lot of expired listings from discount brokers. Most builders are offering 3%-6% to sell there homes. here’s a few examples from my blog I am selling a lot of new home standing inventory because they are willing to slash the prices, pay closing costs or other incentives for a qualified buyer.Also there are a lot of affordable but nice condo conversions that are popping up that I have been getting buyers into you just don’t see that kind of stuff in a sellers market. A lot of my sellers are moving or planning on moving out of state, mostly Texas.

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