Friday, 27th of February 2009 at 08:03:03 AMThis is one of those questions that comes up quite a bit and will eventually make it to a FAQ post that I will write one of these days.
The situation is pretty much, we found a house that my client wants to make an offer on, but the Loan Status Report (LSR), in Arizona that’s pretty close to a Pre-Qualification Letter, says more than what they want to make the offer to be. For example, Mr and Mrs Buyer have an LSR that states they are pre-qualified for $200,000, they find a home but only want to offer $100,000. So they ask me, should we get another LSR for $100,000?
The answer is “not really”. Let’s look at this from several different points of view and see if that helps. Let’s say I have $20.00 in my wallet, which means that I have $20 that I can spend right now, just about anywhere. Now, let’s say that I want to buy a soda (pop for those in the Midwest), chances are I’m not going to spend $20 on a soda. I would be pretty willing to spend $1, which is the going rate for soda where I am. Okay, so I offer to spend $1 on the soda and the clerk sees a $20 in my wallet. So they stop the transaction and say “I see you have the ability to spend $20, so the price of the soda is $20″ I don’t think so!
Then the question turns to, do you think they will use the LSR as a gauge of what to do a counteroff at? Well, that’s harder to say, I would certainly hope that their agent would discourage that piece of information from being used in the neogitating in any part but time. What I mean by that is if I represent the sellers and they counter with an offer that is higher than the LSR amount, I know that I should provide the buyers at least a business day to get a new LSR, that’s all. The LSR isn’t a factual statement that the amount there is all that they can get or will get, it is just a gauge based on some really, really high level discussions. It gives me an idea of how realistic the buyer is about loan terms in comparison to what is out there in the current mortgage market and how likely this client is in closing the deal.
An LSR is not a guarantee/warranty or any other promise of the person holding it getting a loan, read the fine print. All it really says is that the possible bower and the possible lender have had a discussion about what could be if the situation should arise. And in negotiating, that’s all the weight it should carry. That’s why when I get an offer when I represent the seller, I tend to grill the mortgage agent that signed it to gauge the potential of the buyer closing as promised.
Your use of the $1.00 price for the soda analogy is ?. When you picked up the can of soda and approached the clerk the price was fixed and posted and you knew it and it will be sold for that price. It is not customary here in the US to make an offer on the price of the soda in the example you used. No so with a home. The listed price is not a fixed price. Sellers list the price in anticipation of a lower offer, if not the listing agent is doing them a disfavor. Seller will soon realize this when they start receiving offers.
Regards, Robert
My analogy was meant as a basic example, unfortunately the sale and purchase of real estate is anything but basic. Market conditions do apply, as you pointed out, often sellers will price higher than what they expect knowing the sellers will offer less. In Phoenix, we typically see homes sell for 95% of list price, while Chicago, it’s more like 90%. But less than list price is not a general statement that I would make either. There are parts of Scottsdale and Paradise Valley that continue to close at higher than list price, a common condition we saw several years ago. This is where hiring the right professional will become important in getting the job done, they should be able to provide what the current market conditions are not for the city, but for the neighborhood you are either selling or buying in. Is there a discount rate or a premium going on. What other conditions and terms are in play on the offer? What are the goals of the sellers and the buyers? Can there be a meeting of the minds? The listing price is just a starting point in a negotiation, it gives the buyer the first glimpse of what the seller would like.
It is a false assumption that anyone would not use a LSR or Pre-qual to entice a higher offer or counteroffer. In fact I find it humorous that the AAR spent time and money to create a form that duplicates those by most lenders and has no bearing on whether or not a loan is approved.