Let’s talk about real estate demand. In 2006, I saw a massive amount of relocation buyers move to Middle Tennessee from other states. I couldn’t imagine I would ever see more than what I was seeing at that time. However, within the last year, I have been proven wrong.
There are so many people fleeing certain states for many reasons and relocating to Tennessee. We have no state income tax, we have reputable schools, and we have not experienced the same types of COVID-19 lockdowns that some other states have experienced. Whether politics and policies are driving any of these reasons is not the issue; the reality is people are moving here in droves for whatever reasons. That is a fact.
The title of this article is “How much cash do you have?” Basically, how much liquidity do you have? Let me explain.
Almost every price range has a lack of inventory. When you couple local buyers with the current level of relocation buyers, many listings will receive multiple offers. Now, this is not always the case. But it is a general theme in our market right now. Multiple offers regularly turn into a competitive bidding war. There are many factors important to a seller, but for this conversation, we are focusing on price (and appraisal.)
With interest rates so low, buyers can buy more house than ever before. Buyers are very willing to pay higher prices. Buyers are willing to pay OVER list price to “win” the bidding war and secure a first position purchase and sale agreement. However, the appraisal issue often rears its head.
In order to be most competitive, many buyers will pay over list price AND waive the appraisal contingency. This means they are agreeing to move forward with their purchase regardless of the appraisal value for the home. This is a very important issue that directly relates to how much money a buyer will need for closing.
Here is a simple explanation:
Let’s say a buyer looks at, and wants to pursue, a home with a list price of $700,000. Now let’s say they are structuring their loan to put 20% down not including closing costs. The buyer will very likely have to pay $750,000 to win the bidding war in order to buy this home listed at $700,000.Please keep in mind that this is simply an example. Let’s assume this home appraises at the $700,000 list price. The buyer’s lender will loan 80% of $700,000 appraisal value ($560,000). This means the buyer will need $190,000 plus closing costs ($750,000-$560,000.) This $190,000 consists of 20% of $700,000 appraisal value PLUS $50,000 which is the amount above the appraisal value ($750,000 - $700,000.) Simple math shows the buyer will need quite a bit more than 20% of the $750,000 contract price. In my example, it is actually more than 25% plus closing costs. This is why I ask, “How much cash do you have?”
I cannot emphasize how important this topic is in our current market. Buyers are more than willing to pay more than list price. The question is, do they have the cash to do it? They will need more than the planned percentage down payment plus closing costs.
This can be a real challenge for buyers, especially if they are competing with other buyers from other states where they may have sold their home for a lot more. Many of these relocation buyers have the cash to pay above appraisal value. It becomes a real issue for buyers who only have the typical and very respectful 20% down ready.
So what can buyers do?
- Have a solid experienced real estate agent who understands the market.
- Be ready to act. It is remarkable the amount of showings that get set up on homes in a matter of minutes on the market. Time is of the essence.
- Have your lending in order or cash accessible if you are not getting a loan OR cash needed for down payment and closing costs.
- When making offers, put your maximum best foot forward. Understand your down payment and closing costs requirements. Understand there will not be a lot of negotiations. Make the best offer you can from the start and if you do not win, you can feel good knowing you put your best foot forward. Eventually you will win a multiple offer bidding.
- You and your agent should keep ears open for off market opportunities. If you hear of anything, notify your agent immediately and your agent will do the same in return.
- Lastly, remember the importance of liquid money for down payments.
Happy house hunting! And remember, the market will not be like this forever.
Chip Kerr is the founder and manager of Kerr & Co. Realty in Franklin, Tennessee. He is a Williamson County native and has been a licensed agent for almost 20 years.