No Financing Contingency Offer: A Way To Pay All Cash For A Property Without Having The Cash

Park ViewIt’s official. I lost my first overbid in this crazy San Francisco property market.

The property was a single family house, 3/3, on a small lot, overlooking a park asking $1.299 million (picture). I’ve known the listing agent for a while and she mentioned that $1.35 million would get it done, but I was thinking $1.2 million instead. She had two other over-asking offers, but I couldn’t muster up the courage to bid more than $1.315 million.

It wasn’t a big loss because the property didn’t tug at my heart. I figure, if I’m going to be spending more than a million bucks on a property, I better be excited, or else why bother. Yes, property prices are crazy out here in San Francisco, but this price point is actually relatively good value.

I’ve been agonizing over paying down my existing rental property mortgages or leveraging up to buy more property. The jury is still out, but I’m willing to at least prospect around to see if there’s anything I like before making a decision. Besides, I figure this latest house hunting experience will provide good educational content for other folks looking to buy in a hot property market.

THE FEAR OF A FINANCING CONTINGENCY

As a negotiations samurai, the number one thing you need to care about is what the opposing side cares about. I’ve asked 10 listing agents what is their seller’s #1 concern and they all said: financing contingencies and whether the buyer will be able to get a loan. Don’t listen to reports by the media on the return of loose credit standards. Credit is SUPER tight e.g. contracting income doesn’t count, only counting 75% of my rental income, assigning only a 1% return on my CDs for asset based underwriting even though they are returning 3-4.2%, etc. I definitely recommend shopping around.

A typical, strong property offer includes a 14-day financing contingency, and a 30 day close. The 14-day financing contingency is to protect the buyer from losing their 3% downpayment of purchase price just in case he loses his job or can’t get a loan. The reality is, the financing contingency is often used as an escape hatch for any excuse, not just a financing one. For example, the buyer may have found another property during this time period, or is simply experiencing buyer’s remorse. The second escape hatch is the inspection contingency.

When you hear about properties receiving “all cash offers,” not all the buyers really have all cash. Instead, some of the buyers go the no financing contingency route to equate their offer as all cash. If you’re confused, think about the situation from the seller’s perspective.

If the buyer does have $1 million bucks cash to pay for your $1 million house, he’ll go through the process of putting down the 3% deposit, go through an inspection, increase the deposit further by a certain amount in escrow, and then finally pay for the entire property when legal documents and title are signed and exchanged. During this process, the buyer can pull out at any time. S/he would just forfeit the deposits made along the way. Even the deposits can be fought over if the buyer wants to really get contentious.

If another buyer has a no financing contingency offer, that means the bank has already approved the loan in full and the seller doesn’t have to fear the buyer not getting a loan because the bank’s underwriter already deems the buyer and such a property worthy. A no financing contingency offer is clearly stated by the bank via a letter.

Whether the buyer pays all cash or the bank pays all cash is the same to the seller. Think of the no financing contingency offer as your bank willing to buy the property itself. The buyer and the bank have a financing arrangement after close that is none of anybody else’s business.

SO HOW DO YOU PAY ALL CASH FOR A PROPERTY WITHOUT HAVING ALL CASH?

If you don’t have all cash in the form of savings and/or liquid securities, you are still eligible to pay all cash in the seller’s eyes. The bank just needs to do its due diligence on you before the offer, which is why it helps if you’ve been a long-term client with the mortgage institution. Due diligence includes the last two years of W2s, last two pay stubs, all brokerage accounts, all CDs and savings accounts, understanding all liabilities and assets, your credit score and credit history, the likelihood that you will continue to remain employed or receive income after financing, and financial track record with the institution.

Banks want to continuously make money through an interest rate spread, and offering a no financing contingency option helps them win business, especially with the refinancing market down over 75% YoY.

To get no financing contingency follow these steps:

1) Ask your mortgage lender whether they do no financing contingency offers. Larger banks with wealth management departments should be able to help more easily.

2) If they say “yes,” ask yourself whether you really don’t want an escape clause because you are 200% certain you want the home. You do have the inspection contingency to fall back on as well, but this is another thing you might wave if the seller’s recently had an inspection done with a report from a reputable inspector. You will most likely lose the 3% deposit if you decide to back out from your offer after the initial signing.

3) Ask your mortgage lender what extra documents are required from the seller in order for them to do due diligence before the offer date. Sending the title is definitely one of the documents to ascertain current legal ownership of the property. Sending all other disclosure documents including the pest inspection, general inspection, agent’s inspection, and anything else is a good idea. The bank’s main concern is whether you are good for the loan, and then whether the property is worth its price.

4) Make sure all your finances are in order like you would for any mortgage loan. The mortgage application process is as stringent as ever. If you do not have any W2 income, you can basically kiss your ability to get a mortgage goodbye. The only saving grace is if you have a lot of assets. Banks will then use an asset-based income stream. For example, for every provable $1 million in liquid assets a bank might grant you $30,000 in income in their underwriting calculation. It depends from bank to bank.

5) Make absolutely sure you’ll have a job during the closing process, or a solid income stream for as far out as possible after closing. Nothing is worse than getting into huge debt and then finding out your main source of income disappears. Build multiple income streams!

NO CONTINGENCY FINANCING STRATEGY

I plan to use the no financing contingency strategy for properties I absolutely love that I could pay in cash by liquidating stock and bond holdings. Paying 100% in cash is a last resort because of the sub 3% financing I’m being offered. The other good strategy is just not even write no financing contingency in the offer, but to write “all cash,” and then get financing with the bank if you know they have agreed. I do not think tying up most of your liquidity in property is a good idea. Stay diversified!

From the bank’s point of view, I’m a riskier borrower as an entrepreneur compared to a W2 earner. But from my point of view as an entrepreneur, I’m less risky because I’m living in risk already and thriving. I can’t get fired unless I fire myself. Besides, my total compensation is structured so that I have a strong safety net because I have passive income, contracting income, deferred compensation in the form of W2 income, and entrepreneurial income. We all know that there’s no job security anymore anyway.

If you’re looking to buy a property in a hot market, don’t forget to remind yourself about the great housing crash of 2007-2010. If you’re buying in a non-prime location, far away from a major employment hub, then be prepared to lose 50%. If you’re buying in a prime location, then still be prepared to lose 25%. Getting in a bidding war based on emotional desire is a losing proposition. You must have a base line number where you are willing to walk away.

Over the long run, I think most property owners will be fine. It’s the short run which can really do a doozy on homeowners if they have to bail during a correction. I’m looking to buy a new home to live in and rent out my existing home to unlock some cash flow. If the properties appreciate in value – as I think they will over the next 10 years – I’ll be happy. If they don’t, then I’ll at least have created fond memories.

RECOMMENDATION FOR REAL ESTATE OWNERS/BUYERS

Shop around for a mortgage.¬†LendingTree Mortgage¬†offers some of the lowest refinance and new mortgage rates because they have a huge network of lenders to provide mortgage loans and home equity lines of credit. If you’re looking to buy a new home or refinance an existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter

Comments

  1. says

    We will be going to San Francisco soon and I can’t wait to see what all the fuss is about. To be offering over the asking at $1.3 million on a small house and being outbuid sounds nuts from where we sit. We’re visiting my wife’s brother and his wife before they move back to the east coast and they can’t wait to get outta there even though they like the SF area. Then again – they’re not working for Google or another hot company so it’s hard to afford the cost of living.

    • says

      I think you’ll be surprised.

      1) Only really attractive people live here who are really humble and friendly.

      2) Nobody ever cuts you off in traffic.

      3) Blue skies with parrots every day.

      4) Six figure jobs are a dime a dozen.

      5) Dolphins splashing in the water with the sea lions.

      6) Diversity and acceptance of everyone.

      7) Free full-body massages for every tax paying citizen once a month!

      Where are you coming in from again? I can help you prepare.

  2. nbsdmp says

    There is no doubt San Fran area is awesome, I think a lot of the acceptance of the costs out there is by people that are from there or have come to grips with getting half for your money that you do in other great places. From an outsider it does seem like a house of cards…but I am pretty sure it is not…well of course as long as the fault line doesn’t open up and swallow the city again. Supply in demand is a great thing!

    I am sort of in a quandary right now about what I think about future real estate investments. Yes it is definitely going the right direction long term, but sometimes you have to take a little off the table. Seems to me it might be a good time to be a contrarian and move the opposite direction of the heard that has driven prices up so dramatically in the past couple years…but what the hell do I know, lol!

    • says

      Indeed. Wherever you live, if Godzilla doesn’t stomp your city, I think you guys will probably be safe too.

      It’s important to have a walk away price. I don’t have the sense of urgency to buy as 11 years ago now that I’m long property. Hence, I don’t have that anxiety or pressure anymore. But, I have all my ducks in a row, including a personalized letter, picture, and proof of cash purchase ability. Might as well give yourself the best options possible.

      • nbsdmp says

        Well I you are going to set up a home base SF about as good as it can get. If somebody put a gun to my head and said pick one spot to live the rest of your life, I’d probably go with a home on Lake Tahoe, or the Monterrey Peninsula.

        As far as buying property goes, I think you are doing the prudent and wise thing in your case. The only question I have is I had thought you were considering setting up shop in Hawaii since that is sort of home? A 25% dip could put a wrinkle in that plan with significant exposure…especially if the loans have recourse. BTW, there is a new Godzilla movie coming out…and SF is not that far from Japan, just saying you may want to see that first before pulling the trigger.

        • says

          Hawaii is definitely in the cards.

          One reason why I love Hawaii is because our house has a view of downtown and the water. That said, it’s hard for any individual to make more than around $60,000 a year in Hawaii if I were to go back to work or be a consultant.

          Through my consulting experience so far, higher salaries in SF are ubiquitous. It’s a nice safety buffer if I wanted to continue consulting.

          I found this amazing house in SF that has panoramic ocean views. If I can get that, I think I’ll stay in SF.

          • nbsdmp says

            Its funny that you mention the views of the water in both of your scenarios…you are like me, once you have it, you will not want to ever give it up! The whole job market thing really does help skew the equation towards SF…that is the nice thing about where I’m at in my line of work as well, sort of like shooting fish in a barrel.

  3. says

    You have slightly different processes than we do in Colorado. Usually the buyer gets a 30 day financing contingency here, which really allows them to back out until the very end and not lose their deposit. We normally see 1% earnest money deposit, not 3%, but that could be the lower price range too.

    I use financing all the time to buy properties, but almost always present them as cash. I have no financing contingencies, appraisals and many times no inspection contingency either.

    one thing people should be aware of is the appraisal. If they are getting financing and the bank requires an appraisal, they may have to bring a lot more to closing if that appraisal comes in low and they had no financing contingencies.

    • says

      Good to know. Also, the appraisal should buy some time too no? The appraiser could take time to set an appointment as an example

      I think the market is much stronger here in SF than CO.

      • says

        The appraiser can buy time if it is part of the contract. Like you mentioned financing is scary to sellers and if you have an appraisal condition in the contract it shows there is a loan and something to worry about.

        Our market is very strong here, but not like Cali. We had 1500 homes for sale in our town last year at this time and now we have 200 for sale. 100,000 people

  4. Jonathan says

    I am a commercial real estate attorney on the east coast. In my world– everyone makes “all cash ” offers. They play the game basically in the way you describe.

    In commercial real estate there is always a 30+ day “due diligence period”– which is the equivalent of a free inspection timeframe. There is usually an express termination right if the “inspection” discloses anything that the Buyer doesn’t like. And the deposit is not at risk until AFTER the inspection period expires. Compare this to the inspection contingency FS mentions.

    In a residential contract you can do pretty much the same thing as long as you have some time frame for a “free look” and can terminate for any reason at all for some period of time.
    The reality is that you should never buy any real estate without having an opportunity to have some pro’s look at the roof, structure and mechanical systems. There could be serious hidden or undisclosed damage or deferred maintenance issues.

    With that escape hatch– commercial buyers simply get their financing during the inspection period. If they cannot obtain it that fast — (i) they kickout or ask for an extension or (ii) they actually do pay cash and quickly put a loan on the property after the fact.

    • says

      Thanks for sharing Jonathan.

      If the seller used a well-known and reputable inspector recently, can one just trust and call up that inspector instead of getting a second opinion?

      The inspector can’t be shady, for fear of tremendous reputation risk. Yelp, for example, could clearly ruin the inspector’s rep.

      • Jonathan says

        You could use the same inspector BUT I would not simply rely on the report contracted for by the seller—I would definitely have that inspector certify that they agree you can rely on sellers report or have them reissue the report to you as a client. That way you have a contractual relationship with the inspection company, they are bound to YOU as a client, and you can sue them if it turns out they were negligent in their findings or knowingly misrepresented he facts.

        If their reputation is ruined per Yelp— that may make you smile but it does not give you recourse against them.

        You probably will have to pay them their typical inspection fee to get them to do that– but its worth it.

        • says

          Good points and good recommendation. What’s $500 bucks anyway? Like insurance, which is better value for more expensive properties.

          I’m going back to this one property for the 4th time today with handyman to see what else I might have missed.

  5. says

    Good article. I did not know banks offered this. I agree not to tie up too much cash in a property. With the inspection clause you should be able to get out without losing your deposit. I see a lot of people pay cash and then refinance later but your method is safer if they qualify since you don’t have to initially put up the cash.

    Commercial financing is also an option if you have a hard time qualifying for residential mortgages.

    A free massage per month??

  6. says

    Very interesting. I didn’t realize that there were two escape hatches for the buyers to bail. It must be challenging for those selling the homes to stay confident that everything will go through. How do you get that loan guaranteed prior to starting the process? It sounds like that would give everyone more confidence, at least at that part of the game.

  7. says

    Good stuff, Sam. If you had to put a value on a no-financing contingency or a cash offer, what do you think a seller would discount the price by for such an offer? 5%? 10%?

    • says

      Good question. If I was a seller, I’d be willing to accept up to a $25,000 discount or 3% discount, whichever is lower if someone offered a CASH offer vs. a contingency offer. The worst is to have a buyer flake, and the listing becomes stalefish. Lots of time wasted and the value of the property will be hit b/c other buyers will woner what’s wrong.

  8. says

    I always hate a buyer’s market where you have to bid on property for more than the listing price. $1.2 mm is downsizing? I think you should look for a fixer. The best offers satisfy what the seller wants which may mean no contingency or something else. Your broker needs to find that out.

  9. says

    Sorry to hear that this didn’t work out for you. I can’t imagine spending that kind of money – especially on a property that you don’t love. I don’t have any plans to get into real estate again any time soon, but when I do, I’ll have a better idea of what to expect.
    Hopefully you have better luck in the future.

  10. says

    Living in Silicon Valley rather than SF gives me a slightly skewed perspective on city life.

    I don’t know the property, looks like the Sunset district offhand, but $1.2M for a single family house in SF with an ocean view is market. It’s crazy from an outsider perspective, but if you want to own your home in the city, you’re talking astronomical costs.

    I’m happy with my condo in the valley for now, especially given the constant market whipsaws. From my perspective, I’d rather lose half of $400K for a condo than half of $1M for a standalone house.

    • says

      The ocean view SFH will probably go closer to $1.5 million.

      Haven’t seen a $400,000 condo this year in SF. If much rather make 50% on a $1.5 million place than 50% from a $400,000 place.

  11. Chris says

    I’m a TX resident, but am out in the bay area all the time for work. I’m writing this in Belmont right now. I’m also a budding RE investor, but am completely amazed at prices out here. It’s a complete speculation game as far as I’m concerned. A quick rentometer.com check for SF put the median rent on a 3 bedroom unit at $3800. Let’s assume this is a top 10% that it puts at $4500.

    Even if every cent of that $4500 was cashflow (I’d estimate half without knowing more), we’re talking $54,000 / year and thus a cap rate of 54000 / 1300000 = 4%. Again, reality is probably half that.

    For the wealthy, OK, big deal if you’re buying this in cash. But, for any random Joe reading this and thinking a mortgage might be a good idea here, please understand what a huge risk this would be. All the profit is made assuming a “greater fool”. This is speculation, pure and simple.

    Thanks!

    Chris

  12. Jon says

    At the first of this year I listed a rental for sale. It’s a manufactured home on small acreage. (Double-wide mobile home) On January 7, I got an offer from an FHA buyer with a mortgage pre-approval letter. The first week of February, their mortgage company “realized” the home was manufactured and they would not finance it. I have an engineers report showing the house has a permanent foundation an meets FHA criteria.

    The buyer’s agent quickly found another mortgage broker who said they would do the loan. Closing set for the first week in March. When closing came, the buyer asked for an extension of a week because the mortgage company was backed up and the loan was still waiting for underwriting. Then they asked for twomore weeks. I called the mortgage company and asked what the deal was. They said, yes they were behind and it was about to go through underwriting. The closing date passed. I called the agent. “Any day now,” he said.

    A few days later the agent texted “call me.” I did. He said they were terminating the contract. They did not qualify. He said their credit had dropped in the nearly 3 months we were under contract. They forfeited their earnest money.

    So I put the house back on the market. Within a week I got another offer. Lower, but all cash. Sounded great after the first “buyer.” A week later this cash buyer terminated within their option period. No reason given by the agent. By the way, the home shows well and has no problems.

    Back on the market again. The middle of last week I got another all cash offer. No inspection, 7 day option period. We are supposed to close the end of this week. We’ll see.

    • says

      Jon,

      That sounds like a nightmare. Did you not get to keep the earnest money deposit from the second offer too?

      As a seller, what else would you like to see the buyer do to bring you comfort during the process?

  13. Josh says

    Very informative article. I guess these high prices are the reason why 2/3 of SF people rent and many still live with roommates even in their 30s. However, enough people like you have “made it” financially in order for the common middle class working folks to keep chasing their dreams in this expensive city. Good for you for taking the right steps in your 20s and early 30s. Good luck on your house search.

  14. Matt says

    SF real estate is just cra-cra to a poor Midwesterner like me. I can’t get over the idea of bidding above listing. Do you also buy stocks above market price? Pay a little extra for your groceries? Decide the gas station isn’t getting enough, and up the price for them? Pay above sticker for your car?

    I am not getting into the relative prices, but the process boggles my mind. Anyone from either coast buying property in a flyover state looks like a fool, because the process is entirely different. It seems like lots of people could use a negotiation seminar.

      • Matt says

        I can see that point, I guess–that is a common auction strategy, where you expect to have enough potential buyers exposed to the property that you will spark a bidding war.

        I can clearly recall a discussion in Indianapolis between a new immigrant from California and a friend of mine who does real estate development. She leaned over, seeking local advice, and asked “how much over listing should I start my bid?” He looked at her as if she were speaking a foreign language. (and this guy is usually on the buy side–broke through his poker face)

        It could just be a case of culture shock, but I imagine that the markets must be quite volatile where the two approaches intersect: Idaho, Utah, Nevada? Pennsylvania? It’s hard two imagine how those two approaches would interact with each other, on either side of a transaction: shock (positive or negative) or insult.

  15. Francois says

    Would you mind listing (or PMing me) any banks that will do the financing as described? I’m going through this right now and plan to make an offer by the end of the week. Also, any idea how long it took for the bank to pre-finance (?) the loan?

    I also live in San Francisco and am having the same exact problem. Can’t seem to compete with these cash offers. In recent months I’ve bid higher (and lost) to other cash offers. Today I actually spoke to a couple mortgage lenders and they didn’t mention anything about the strategy described. The only strategy we discussed was removing the financial contingency and guaranteeing close of contract within a shorter duration (from 30 to 17 days).

Leave a Reply

Your email address will not be published. Required fields are marked *