Cash is King, but Maybe It Shouldn’t Be

cash-offerWith the recent, and drastic, heating up of the real estate market in the Boston area, buyers in multiple bid situations are again making “cash” offers. Just recently, I had a couple make a very strong offer on a fantastic single family home in Lexington. Like most nice homes in good suburbs, it had just gone on the market and there were multiple offers. My buyers ultimately lost out to other buyers who submitted a “cash” offer. In practical terms, the winning bidders made an offer with no mortgage contingency. It doesn’t necessarily mean that those buyers had ready access to all the funds necessary to close on the property without a mortgage. It only means that they were willing to risk their deposit if they couldn’t come up with the funds at closing. My experience is that even buyers who forgo mortgage contingencies still plan to get a mortgage. Rates are at historic lows and the interest, up to a mortgage of $1.1M, is tax-deductible. In addition, I believe that most buyers who have easy access to that much cash are probably buying more expensive property. So where does this leave responsible buyers (and their agents) who don’t want to take the risk of losing a significant deposit?

I think the phenomenon is simply an expression of buyer desperation. Buyers that waive the mortgage contingency may have lost several bidding wars, and are looking for an advantage. I assert, however, that an offer from a pre-qualified buyer who is also “well-qualified” is not significantly better than a “cash” offer.  Sellers should only prefer the cash offer if the price and other terms are also better than an offer from a strong buyer with a mortgage contingency. Cash offers are genuinely stronger in transactions where getting financing is actually difficult, like commercial properties and multi-unit investment properties. Standard single family homes and condos are simply not that hard to finance.* Buyers with good credit, nothing to sell, and a job are going to get financing. The seller should focus more on the offering price and possible inspection issues. Deals fall apart over inspection issues when buyers are not properly prepared for an inspection and then get scared off by something major that they weren’t aware of before they bid on the property. Deals rarely fall apart after a purchase and sale agreement is signed and the buyers then fail to get financing.

Buyer should never waive a mortgage contingency unless they are really prepared to pay cash. It is simply too big a price to pay even for a small risk. At the same time, I would recommend that sellers only place a very small value on the lack of a mortgage contingency. At the closing, the money is green no matter where it comes from and the goal is to sell the property, not keep the deposit.

Next Up: what buyers can do with regards to the other terms to make an offer as attractive as possible.

*It may be important to inquire as to a buyer’s ability and willingness to put down more money in the event the property does not appraise at the selling price.  This is a real risk in the current market of quickly increasing prices.

What Condo Association Budget?

condo-budgetCondominium association budgets come in all shapes and sizes. If, like me, you live in a very small association with 2 or 3 units, it may be questionable whether an actual written budget even exists. Large associations, made up of hundreds of units, often have detailed budgets prepared by professionals. In either case, when you went to sell your condo in the past, only the prospective buyer cared about and reviewed the budget. In today’s lending climate, it is standard practice for the buyer’s lender to review the budget. Fannie Mae, the quasi-public company through which most mortgages pass, does not require a written budget for 2–4 unit associations, but does require it on associations of 5 or more units. Many lenders also have an “overlay,” which is essentially an additional requirement that 2–4 unit associations have a written budget. The bottom line is that it is a good idea to have an actual written budget, because it is likely that the lender will ask for it when someone goes to sell a unit in the association.

The lender reviewing the budget will want to see a line item for a 10% reserve. 90% of the annually collected fees must account for all of the regular recurring expenses, and 10% must be saved as reserves. According to the lenders I work with, it is unnecessary to have a separate reserve account. Be careful, however, as buyers looking to get mortgages guaranteed by the Federal Housing Administration (known as FHA mortgages) require condominiums associations to meet stricter requirements.

Most condominium budgets can be set up to show a 10% reserve. All obviously recurring expenses, like insurance, water and sewer, the common electric bill, and all clearly recurring maintenance (snow removal, for example) must be budgeted for in a line item. I also recommend some money be put in a line item labeled “maintenance,” because not having any money for general maintenance is not realistic or credible. Expenses that do not come up every year do not have to be budgeted for in advance and can come out of reserves. For example, if your association plans to spend $10,000 in the upcoming year on a new walkway, the budget can still show a 10% reserve for the year that you build the new walkway. The following year, when you produce a “budget vs. actual” report, you would show that you spent the money out of reserves.  As a matter of fiscal prudence, your association may still want to raise fees or collect money via a special assessment, but that is a different conversation.

I always enjoy a good conversation about condominium association budgets, so please don’t hesitate to contact me or write a comment and tell us about your condo association budget.

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