Greg: Welcome to this edition of the Louisville Luxury Homes Podcast Series brought to you by Jon Mand with Lenihan Sotheby’s International Realty. Jon, good to see you. How are you today?
Jon: I’m doing great, Greg. Good to see you.
Greg: I want to talk today, and I hope you’re up for it, about a subject that comes up, I guess, with almost every property purchase, how someone’s going to finance it and some of the options that are available to them and especially in the high-end segment that you work a lot in.
Jon: Absolutely. Yeah.
Greg: I guess a lot of people get confused by cash purchases versus a mortgage purchase and whether or not they should talk to a bank or a broker. Can you walk us through some of the decisions that should be made and some of the pros and cons of each approach?
Jon: Yeah, absolutely. Let’s start with the cash purchase. That’s something that we obviously see a lot more of at our end of the market than you may in the lower-price points. At the high-end, we obviously have a lot of affluent clients, and so cash offers are pretty common in our segment.
Greg: You said obviously. I think for a lot of people who have not worked in the high-end segment it’s not as obvious as you make it sound. I’ve heard from a lot of people who are moving up in segments, there are a lot of people who are coming to the market that they’re surprised by that.
Jon: You have people with more liquidity, more assets, savings that they’ve built up. A lot of our clientele are going to be self-employed professionals, doctors, attorneys, small business owners, executives, that sort of thing. These are people that have investment accounts and savings accounts and over the years have saved up some liquidity, so the cash offer is something that they often have the wherewithal to do. However, one thing I would say is that a cash offer doesn’t necessarily mean that they’re closing with cash.
Greg: I think there is that misconception that someone might show up with a duffel bag with $20’s or $50’s rolled up or something.
Cash Offers Allows Buyers to Strengthen Their Offer by Removing Contingencies.
Jon: Yeah. Unmarked bills, small bills. No, what we see often is that the cash offer, the primary purpose is to convey to the seller the strength of the individual, their financial wherewithal and ability to complete the purchase. Secondly, making a cash offer removes one of the contingencies that we often see in the contract. In Louisville, we typically see three primary contingencies in an offer. Those would be the inspection contingency, which we have talked about before, and then an appraisal contingency, and then kind of tied into that, a financing contingency.
By making a cash offer, you can remove the financing contingency from the contract, and then with a cash offer there’s also the ability, since you don’t necessarily have the lender involved, to remove the appraisal contingency if a buyer wanted to strengthen their offer even further with some of the non-cash terms of it. It can ultimately help the purchaser possibly drive the purchase price a little bit lower by making that cash offer, removing the financing contingency, and then associated with that, potentially the appraisal contingency as well, so that’s a big reason.
Greg: Do you find that a lot of people do remove the appraisal contingency? That would be two steps, right? They’re not necessarily connected, but you have the option to make a cash offer and then the buyer could have the appraisal or not have the appraisal, that’s their choice. Do you find that a lot of people if they make a cash offer decide to skip the appraisal?
Jon: They’ll often remove it as a contingency. They may still get an appraisal just to have it in the file, but if they’ve done their homework and their agent’s done their homework, obviously we can drill down on the values of these things pretty precisely as well. That’s going to depend client to client and kind of what it is that they’re purchasing and their comfort level with the market. The appraisal contingency is typically not as big of a concern in the seller’s mind as the financing contingency.
Cash Offers Can Still Close With Bank Financing.
Just being able to make that cash offer, remove that contingency is huge, but as I said before it doesn’t necessarily mean that they’re going to close with cash. Often, I’ll have clients make a cash offer, not contingent upon them getting financing, but they’ll often still close with a bank loan. That’s just a function of interest rates are so low, money is so cheap, that even if they have the cash sitting in the bank account to make the purchase, so long as it doesn’t negatively impact the seller’s side of the equation in that it doesn’t delay closing for them to go through this bank loan underwriting process, they’ll often still get a mortgage, still close with a mortgage. Their cash offer means that if the bank denied it or couldn’t get it done in time, etc., they have to go ahead and close it with cash.
Greg: I think that’s an important distinction. There is a paragraph or a sentence or two in the contract that we use typically that does say that the buyer has the right to change up the financing as long as it doesn’t negatively effect the seller, so either on time or fees or anything like that. That is an option that the buyer has that’s written into the contract?
Cash Deals Can Close Quickly, Further Strengthening a Buyer’s Offer.
Jon: Yeah. If you made a cash offer and said we’re going to close in two weeks and then tried to get a bank loan, that’s going to negatively impact the seller. The seller obviously in those situations, a quick closing without financing, they’ve probably traded the strength of that buyer’s wherewithal there by lowering the purchase price of the property. At the point you negotiate a deal like that and then say “Oh, by the way, we’re going to go get a bank loan,” that’s not going to fly. A bank loan’s going to take 30 to 45 days to close and that would negatively impact the seller’s position and they would have made some concessions on the price in order to get a quick, cash closing.
You can’t pull a bait and switch on them in that regard, but if you had a deal that had a 30-to-45 or a 60-day closing, you make the cash offer not contingent upon financing and then you go ahead and get a bank loan. So long as you’re not delaying the closing or negatively impacting that seller’s position in anyway, you certainly have the ability to do that.
Greg: Let me turn this around on you a little bit if I may. If you’re representing a seller, you’ve been talking so far this podcast about representing the buyer side, but if you’re a seller, and you do a lot of work in the high-end, and I’m guessing that at the higher end there generally isn’t a big bidding war for a lot of these properties, and so the offers come in one at a time, so what do you tell your client when they get a cash offer? How do you sort of approach that discussion with your seller? Why should they even consider it? What are the pros and cons from a seller’s point of view?
Jon: I’d say the biggest advantages is that at the high end of the market we have a lot of non-conforming properties, meaning that the properties aren’t going to fit kind of the typical underwriting guidelines. We have homes with excess acreage, secondary structures on the property. The values of these homes can be kind of outliers compared to the overall market. Those can all cause underwriting headaches at a bank.
Cash Offers Provide More Certainty of Closure For Non-Conforming Properties and Borrowers.
Not only do we have these non-conforming properties, we also have non-conforming borrowers. Even though they may be very wealthy, have phenomenal incomes and asset bases and things, the underwriting for the high net worth individuals can get a little messy. We have people with very complicated 1099 and K-1 structures where they report their income. Those can be huge headaches when we get into the underwriting process. I’d say particularly, it really depends on the lender, but particularly we see these issues crop up most commonly with the big, national banks.
They’ve got huge underwriting processes that they go through in their centralized locations, in Jacksonville or Oklahoma City, where every file for a mortgage application in Louisville is getting shipped off to some other market where they’re grinding away at it in the cubicle with no context of who this borrower is or what this property is. They’re just going down a checklist and there’s no common sense approach to the underwriting, particularly at the national lenders. The local and regional lenders do a great job with this.
Back to your question, why would a seller want a cash offer? It’s to hopefully avoid the process if somebody goes through a national lender who’s a self-employed business owner with a complicated income structure on a property that maybe is a little bit of an outlier or has things that the bank may flag in their underwriting process. I’ve seen these drag out with some of the big banks 60 days before they finally tell us “No, we can’t do it.”
Greg: That’s crushing.
Jon: Yes. By that time, everybody’s exhausted with the process. The buyer and seller both have deal fatigue. You step back and you look at it, you go “My gosh, this buyer may have a seven-figure income and they can’t buy this house. Are you kidding me?” It’s just the lack of common sense underwriting that some of the big national banks are constrained by makes it very difficult. Those smaller local or regional lenders, they’re fantastic to work with. We’ve got great relationships with that.
One Size Doesn’t Fit All for Mortgages.
I’d say that’s a big point of differentiation on who a buyer selects as an agent, making sure that you pair them up with a lender who’s going to get the job done for them and not drag them through a process that’s excruciating. They ask for everything, blood samples just about, in the underwriting process in this regulatory environment that we’re in. To take somebody through that only to tell them on day 45 or day 60 that “Sorry, we’re not going to be able to do this, and by the way your contract’s now void because you didn’t close in the time frame you wanted and you just lost the house that you were trying to purchase, etc., etc.”
It’s much better to have some foresight to structure these things appropriately on the front end, get them paired up with a lender that’s going to be able to parse through their complicated tax returns, and make sure that we get a quick underwriting “yes” or a quick underwriting “no”. I mean, if the answer’s no, we’d rather know it in the first week than after two months of being drug through the mud here.
Greg: We would skip some of that if it’s a cash offer? You’d just sort of cut that whole piece out? That’s what you’re saying, it’s sort of peace of mind.
Greg: Here’s one whole problem area that we’re going to escape.
Jon: Yeah. Yes. Exactly. From a seller’s perspective, absolutely. Even though the buyer may be fabulously wealthy, it doesn’t necessarily mean that they’re going to be …
Jon: … make it through the underwriting process at every lender that’s out there. The cash offer just takes that off the table, takes that uncertainty off the seller’s side and they can focus on the other terms of the contract.
Greg: On either side, how much right does the seller have to say prove it to me?
Trust, but Verify.
Jon: That depends on what they negotiate into the contract. I would say, again, when you’re representing the seller you absolutely want to make sure somebody makes a cash offer, require language, incorporate language into the response that says “Okay, we’re accepting your cash offer, but within 48 hours or 5 days or whatever time frame makes sense for that situation, we require written proof of funds from the bank, from somebody that’s managing those assets that are being used for this cash purchase.”
Greg: Would you tell your buyer or client to have that ready, that that might be something that they’ll need so not to surprise their bank and say “Oh, by the way, I put an offer in on a house. I need to get this.”
Greg: Maybe have that ready to go?
Jon: They need to have that ready to go. If I’m representing the buyer, I’ll often incorporate that in because, again, it further strengthens the appearance of the offer by saying it’s a cash offer, not a contingent on financing, and we’re going to have a written proof of funds within 48 hours, or maybe we provide the written proof of funds on the front end with the initial offer. Again, it’s just further documentation of the ability of the buyer, so very important there.
I would say on the seller’s side, again just kind of understanding the nuances of the contract. You can incorporate language that says you have to have that to me in 48 hours or the deal is automatically voided, or you can have it to where the contract becomes voidable. If the buyer doesn’t produce it within the 48-hour deadline, it’s up to the seller. They can give them another day, they can give them another week to come up with it, or they can cancel it at anytime if another offer comes in or they just kind of get tired of fooling with this person. Again, just kind of understanding what would work for the situation, but you can have a hard time frame that they have to have it in by that or the deal’s off or kind of a softer deadline that allows for some flexibility and puts the seller in a position of control over whether or not to terminate that contract.
Greg: All right. It sounds like you’ve got this subject down cold. If someone wants to talk to you about it, if they have a couple questions, if they’re interested in moving forward on a property, what’s the best way to find you?
Jon: Easy, jonmand.com or my cell phone, 502-417-2837. Anytime, 24/7.