REAL ESTATE UPDATE
BOB CURTIS
Despite national headlines, the Santa Barbara real estate market remains strong, and buyers are finding it quite competitive.
Forty-five percent of the homes sold along the South Coast in January sold at or above the list price. Generally, a home that sells above the list price did so because of multiple offers.
Right now, there is only a 1.9-month supply of homes. This means that if no new listings were to come on the market in the next 1.9 months, we would be out of homes to sell.
Because of the low supply of homes, buyers are often competing with other buyers for the same home. Recently one home in our area received 22 offers, which means 21 buyers lost out and are still in the market for a new home.
When evaluating multiple offers, sellers not only look at the offering price, but they also look at the terms of the offer. It doesn’t matter what the purchase price is if the buyer does not complete the transaction. One of the most important factors that a seller takes into consideration is the buyer’s ability to obtain financing.
The strongest offers are the ones where the buyer has cash and does not need to obtain a loan. These are known as “all-cash” offers. Approximately 25% of our transactions have had all-cash offers.
The question for potential buyers is, “How do they compete in this competitive market?” One of the answers is to line up their financing in advance of making an offer.
Almost all offers these days are accompanied by some sort of pre-qualification letter from the buyer’s lender that is used to assure a seller that the buyer will not cancel an escrow because they were not able to obtain financing. The purchase agreement that is used by almost all Realtors is produced by the California Association of Realtors and was revised in December.
The revised purchase agreement lists three types of pre-qualification:
— Pre-qualification letter:
Pre-qualification letters can be provided based on a phone conversation between the buyer and their lender. With a pre-qualification, income, credit and assets are not verified. A pre-qualification letter is much weaker in the eyes of a seller than a pre-approval letter.
— Pre-approval letter:
With a pre-approval letter, the lender has actually received a complete written application from the buyer and income, credit and assets have been documented and verified. A pre-approval is based on an analysis by the loan officer and while more reliable than a standard pre-qualification, it is less reliable than a fully underwritten pre-approval.
— Fully underwritten pre-approval:
A fully underwritten pre-approval is based on the same items as a pre-approval. However, instead of being solely analyzed by the loan office, it has been pre-approved by the underwriter, who is the person who will make the final decision as to whether the buyer obtains the loan.
The underwriter will initially review the file and will issue conditional loan approval subject to conditions that have to be met prior to the lender funding the loan.
With a fully underwritten pre-approval, these conditions have already been met, and the only items needed to fund the loan are a fully executed purchase agreement and preliminary title report. This is the strongest type of pre-approval as it gives the seller more assurance that the deal will close.
The other advantage is the lender has a complete package and has already gone through the approval process so the escrow can close much faster than one where the buyer has not been fully pre-approved.
To be competitive with all-cash offers, many buyers with fully underwritten pre-approval have been waiving their loan contingency when making an offer. There are risks to the buyer in doing this as they can still be turned down for the loan or the escrow can be delayed longer than the escrow period agreed to.
Both can jeopardize the buyer’s good faith deposit. A buyer should not do this until they have had a conversation with their lender and have a strong assurance that they will be able to obtain financing in time to close escrow as scheduled.
Typically, the most difficult and time-consuming part of purchasing a home is pulling together all the documents that are required by the lender.
By getting a fully underwritten pre-approval, a buyer can focus on the remaining aspects of the deal such as inspections, reviewing disclosures and other documents, obtaining insurance, and a host of other things that a buyer does during an escrow.
As an offer is only as strong as the buyer’s ability to close escrow, so it is important for a seller to understand the different levels of pre-qualification.
Generally, pre-qualification and pre-approval letters provided by the buyer’s lender indicate conditions that have been met and those that are still to be met.
When reviewing offers, a seller should look closely at these letters. It is also a good idea for the seller or their Realtor to speak with the lender for further assurance that the buyer will obtain financing to close on time.
Loan officers tend to be pretty forthcoming. If they say a buyer will have no trouble obtaining financing and then get turned down for the loan, it really affects the loan officer’s reputation and can jeopardize receiving future business and referrals from Realtors and their clients.
This allows Realtors to have some leverage over the loan officer as they represent repeat business. Listing agents consider a lender’s reputation when advising sellers when they are reviewing offers. Buyers who work with out-of-town lenders or those who don’t have a good reputation are usually at a disadvantage. With an out-of-town lender or an unreputable one, the agents involved generally represent a one-time deal and the lender does not worry about repeat business.
In summary, a buyer can do a lot to increase their chances of having an offer accepted and enjoy a much less stressful escrow by doing their homework and obtaining fully underwritten pre-approval prior to making offers.Bob Curtis is a licensed Realtor with Village Properties and has been selling homes in Santa Barbara for over 36 years. He is a past president and Realtor of the Year for the Santa Barbara Association of Realtors. He can be reached at 805-895-1951 or bob@villagesite.com.
