REALTORS work with all kinds of buyers. Some buyers get the deal almost every time. Other buyers submit offer after offer that never pass the first review. What is the difference, and how do you write a winning offer?
In this short article, we will review how to submit a winning offer and some of the do’s and dont’s toward negotiating a deal in Bakersfield, CA, in 2020.
Note: All statistics in this article are based on sales that completed between January 1, 2019 and December 22, 2019.
Different offer types
Offers vary based on the type of financing. The two extremes, by reputation, are FHA and Cash.
FHA offers are backed by a loan guarantee. Banks can take more risks for buyers who qualify for this loan guarantee, because if the buyer stops making payments, the bank receives 100% of the loaned funds back from the government. For this reason, most first-time home buyers use FHA-backed loans to buy their first homes, and FHA backed loans require the lowest down payments.
FHA loans make sellers worry. Because the FHA program guarantees every penny of the loan, the banks must be extra picky about the state of the home. If the loan is going to fail, they want it to be because the buyer failed and not because the home was in a risky condition at the time of sale. For this reason FHA can kill a lot of otherwise good deals.
(Fun tip, FHA does not mean “First-time Home-buyers Association.” This is a common mistake. FHA actually stands for “Federal Housing Administration.”)
Cash offers are the other end of the spectrum. What is appealing to sellers about all-cash offers is that there are no banks involved. If the buyer wants the house, the buyer gets the house. Even if the house is falling over, as long as the buyer says “I will take it,” there is not bank to say “no.” This means that cash offers are more likely to close and less likely to waste the seller’s time.
(Note: Cash offers are NOT the same as offers using private money loans. “Cash” means that you, the buyer, have all the cash you need and that no one else needs to be involved in the deal–No one at all!)
The FHA Offer Price
In 2019, 7,644 private residences sold through the Bakersfield Association of Realtors MLS. 2,393 of those deals were FHA. Of the FHA offers, 62% were over list price (1,499 houses). 78% of the offers were over 78% of the list price (1,873 houses). 94% of the sales were over 95% of the list price (2,244).
What this means is that, if you are making an FHA offer, you have a 62% chance of being rejected if your offer is less than list. You have a 95% chance of being rejected if your offer cuts off more than 5% of the asking price.
In other words, if you are offering on a house listed at $150,000, do not even think about offering less than $142,500 (a 5% reduction) if you actually want to have the deal accepted. If you want to write a winning offer, you should offer the full $150,000, because 62% of other buyers are going to offer $150,000 or more! (And the home sellers know this.)
Rule: Winning FHA offers set the price at or above list, and they never ask for more than a 5% reduction in price.
Asking for Closing Costs
The seller can pay for closing costs. If we reduce the sales price of the home by the amount the seller paid, we are able to see how to win at bids that ask for closing costs.
For example, if a home sold for $100,000, but the seller paid $5,000 in closing costs, then we could say that this is the same as if the home sold for $95,000 and the seller did not pay for any closing costs. In both cases, the seller gets $95,000 to pay for the seller’s costs. So, to the seller, both the $100,000 offer and the $95,000 offer are the same.
To the buyer, the difference in the offers above is just a $5,000 mortgage, which is a small monthly payment.
Winning Tip: If you want to win the deal, consider increasing your offer by the amount you need, because it takes away any effect that your needs have on the seller’s side of the deal, which makes your offer easier to accept. (Think win-win.)
So, if we adjust the sales prices for closing costs, what do we learn? Here are the statistics.
88% of all sales in 2019 were 95% or more of the list price when adjusted for closing costs.
70% of all FHA offers asked for closing costs. And the average deal agreed to 1.8% of the sale price as a contribution. In most offers that I write, I ask for “up to 3% of the sale price,” this is almost always countered or rejected. On average, sellers are willing to pay up to 2%, if they are willing to pay closing costs at all.
Interestingly, of the 1,687 deals that agreed to pay closing costs, the average offer price was 99.5% of the list price. What this means is that in almost every case, if you are asking for closing costs, then you MUST offer at or above list price! You cannot offer less than list and ask for closing costs in a winning offer.
This is important enough that I will say it again. If you are asking for closing costs, you MUST offer at or above the list price!
Rule: Winning FHA offers can ask for closing costs, BUT, if they ask for closing costs, they offer list price (or more).
If you do not offer at or above list price, your offer will NOT be accepted.
Some words about Winning Cash Offers
Cash is King, and if you want a deal, you need to be offering all-cash.
Of the 7,644 residential deals in 2019, 1,294 were “cash.” That’s 17% of all the transactions.
Surprisingly, only 710 accepted offers were less than 98% of list price. What this means is that even ALL-CASH offers are not seeing huge discounts on MLS properties.
If you want to see big discounts in a CASH transaction, you must make a deal with the seller before the seller lists with a REALTOR.
If you are a home-seller, and you want to get the best offer possible, you should list your home in the MLS as soon as possible to avoid loosing money to all-cash offers.
Rule: Winning offers do not ask for discounts, even if they are cash.
The average sale price for cash offers was 91% of the list price. If you are offering cash, you should not expect to walk away with the huge discounts that we have seen in previous years. Take a risk and offer low, but expect that first offer to be rejected, and then try again.
I exported all data for this article directly from the Multiple Listing Service run by the Bakersfield Association of Realtors. The Bakersfield Association of Realtors works hard to provide us a platform on which to share information about listings that are available and the results after the sale. I thank everyone who participates in that project for their efforts in ensuring the accuracy of the data there.