If you want to pay all cash for a property but don't have all cash, one way is through a no-financing contingency offer. A no-financing contingency offer is a way to pay all cash for a property without actually having all cash.
From the buyer's point of view, making a no-financing contingency offer is like getting an all cash offer, but from the bank. The bank has already agreed to provide the loan after a very thorough underwriting process.
This post will go through my experience trying to bid on a hot property in the past. If I had used a no financing contingency offer, maybe I would have won.
Post pandemic, the housing market still remains stubbornly strong, despite so many rate hikes since 2022. So chances are, you may have to entire into a competitive bidding situation if you want to buy a dream home in this low inventory environment.
Paying all cash or making a no contingency offer could be your best bet in a competitive housing market.
The Power Of A No-Financing Contingency Offer
Years ago, I lost in a property bidding war despite bidding more than asking. If I had paid all cash, I might have won. At the time, I didn't understand the power of a no financing contingency offer.
The property was a single family house, 3/3, on a small lot, overlooking a park asking $1.299 million. I've known the listing agent for a while and she mentioned that $1.35 million would get it done.
However, I was thinking of offering $1.3 million instead. She had two other over-asking offers, but I couldn't muster up the courage to bid $1.35 million. So I offered $1.325 million and lost.
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.
If only I was one of the ~34% of homebuyers who pay all cash for a property! I would have won the deal and made a lot more money. Oh well. The next best thing is a no-financing contingency offer.
No-Financing Contingency Is Most Attractive For A Seller
With a no-financing contingency offer, to the seller, it would have been the same as paying all cash for the house. If I was able to do a no financing contingency offer for $1.25 million, I think I could have bought the property.
Today, this property Is worth about $2.3 million according to Redfin and Zillow. Damn, what a missed opportunity.
Currently, 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.
Sellers Fear A Financing Contingency
As a Financial 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 still tight, especially with higher rates.
For example, freelance income doesn't count. Lenders only counting 75% of my rental income. Lenders assigning only a 1% return on my CDs for asset based underwriting even though they are returning 3-4.2%, etc.
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.
A Financing Contingency Lets Buyers Escape
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 home 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. However, if the buyer pulls out after releasing contingencies, he will forfeit the 3% earnest money deposit. The deposits can be fought over if the buyer wants to really get contentious.
No-Financing Contingency Offer Is More Competitive
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.
In general, I recommend all buyers submit an offer with contingencies to protect themselves. Buying a home is likely the most expensive purchase of your life. You want to be as thorough as possible with your home inspection.
If you need more time to close once you get into contract, here are strategies for delaying the close of escrow without losing the home. The longer you can be in escrow, the more money you'll make and save. ONce you close escrow, you have to pay the mortgage, property taxes, insurance, maintenance costs, and more.
How To Pay All Cash For A Property Without Having All The 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. Offering a no financing contingency option helps them win business.
Get a no financing contingency by following these steps:
1) Ask your lender.
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) Ask yourself whether removing your financing contingency is right.
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 about the right documents needed.
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. The second concern is whether the property is worth its price.
4) Your finances must be in tip top shape to proceed.
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) Hold onto your job or make sure your cash flow is secure.
Make 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 to get better deals. In real estate, money is made on the purchase not on the sale. I absolutely love that I could pay in cash by liquidating stock and bond holdings. Paying 100% in cash is a last resort. The reason why is because I can get a low mortgage rate.
The other good strategy is just not even write no financing contingency in the offer. Instead, 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.
Real Estate Price Appreciation Is Not Guaranteed
If you're looking to buy a property in a hot market, don't forget about the Global Financial Crisis. Buying in a non-prime location is not the best choice during a downturn.
Even if you're buying in a prime location, then still be prepared to lose 25% in a downturn. 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 that can put homeowners at risk.
I'm looking to buy a new home to live in and rent out my existing home. This way, I can unlock some cash flow and generate even more passive income. Rental properties are the most attractive asset class post pandemic.
Everybody is spending more time at home, therefore, the intrinsic value of real estate has permanently increased.
Real Estate Recommendations
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Fundrise enables you to be more flexible in your real estate investments. You can invest beyond just where you live for the best returns possible. With Fundrise's funds, you can easily gain commercial real estate exposure across the country. Heartland real estate is my favorite.
Another excellent platform, but for accredited investors only, is CrowdStreet. CrowdStreet focuses primarily on individual real estate opportunities in 18-hour cities. 18-hour cities trade at lower valuations, have higher cap rates, and higher growth rates. I've met a bunch of the CrowdStreet folks in Palo Alto, and I was impressed with their offering.
I've personally invested $953,000 in real estate crowdfunding to diversify and earn income passively. So far, I've received over $624,000 in real estate distributions and counting.
Shop For A Lower Mortgage Rate
Check out the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free quotes you can get, the better. This way, you know you're getting the lowest rate possible with the lowest fees.
Being able to offer a no financing contingency offer is one of the best ways to beat out the competition. Good luck! Just don't go overboard when bidding. Emotions can get the best of people.
No Financing Contingency Offer is a Financial Samurai original post.