Home Buyers with Loans vs. Cash Offers with NerdWallet Expert


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The housing market has never been so competitive. Buyers are going head to head in bidding wars and trying to out-do one another with concessions. But when it comes to buyers that need financing and ones who offer cash, sellers often choose cash because it's quick and easy. In this episode, you'll hear from NerdWallet's Holden Lewis who talks about what borrowers can do to give themselves a fighting chance against cash buyers.

Holden has reported on mortgages since 2001, working through a housing boom, the Great Recession, and the long recovery. He's also NerdWallet's authority on mortgages and real estate, and the former president of the National Association of Real Estate Editors. He's won various writing awards, and is rehabbing his Mom's house! He'll share some of his tips for people with loans and what they can do to make their offers more attractive to sellers.

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Rich Fettke: [00:00:00] You're listening to The Real Wealth Show with Kathy Fettke, the real estate investor's resource.

Kathy Fettke: The US housing market may never have been quite as competitive as it is today. Buyers are going head to head in bidding wars and trying to outdo one another with concessions, but when it comes to a buyer that needs financing and those who offer cash, sellers often choose cash because it's quick and easy. In this episode of The Real Wealth Show, you'll hear from NerdWallet's Holden Lewis, who talks about what borrowers can do to give themselves a fighting chance against cash buyers. I'm Kathy Fettke and welcome to The Real Wealth Show.

Holden has reported on mortgages since 2001, working through a housing boom, the great recession, and the long recovery. He's also NerdWallet's authority on mortgages and real estate. On today's show, he's going to share some of his tips for people with loans and what they can do to make their offers more attractive to sellers. Holden, welcome to The Real Wealth Show.

Holden Lewis: Hey, nice to be here.

Kathy: I think we've heard your company's name in the news quite a lot, so it's really an honor to have you here. Let's talk a little bit about the, first of all, what your company does. What is NerdWallet?

Holden: NerdWallet, well, it's a financial marketplace where you can go to find mortgages, credit cards, that kind of thing, plus lots and lots of personal finance information from dozens of reporters. I'm one of them.

Kathy: Okay, wonderful. It's interesting because there's a lot of talk about not going into debt. There are authorities out there, Dave Ramsey for one, that says don't go in debt. What are your thoughts on that?

Holden: There are some kinds of debt that are just perfectly fine to go into. Student loans, mortgages, I think that those are fine. I think a lot of times credit cards are [00:02:00] a perfectly good way to spend your money. I think about when I was in my early 20s and if I had an $800 car repair, I didn't have that kind of cash. I had to put it on a credit card. Well, there's nothing wrong with going into debt to fix your car so you can drive it to work. I think there's a lot of places where debt has a place.

Kathy: Sure. I know I lived in Switzerland as an exchange student when I was, oh my goodness, 17 years old. My Swiss mom basically said, oh, no, we never use debt. We just save for everything. If we're going to buy a new car, we just save now and buy it with all cash. It's a little bit of a different mentality maybe today in Switzerland, but certainly in the US that if you can borrow at low-interest rates, it might make more sense, especially if whatever it is you're buying, can you money. Let's take that example. Let's say you get a car loan and buy a car, but you use that car for work. Maybe you're even an Uber driver or something and you make more money than the payment. Well, then that's a positive cash flow, right?

Holden: That's right. That's right, and you can expand that to all sorts of things. When people have the opportunity to pay off their mortgage quickly, like make double payments or something like that, one of the things that they have to consider is this, like what if they're paying 3% interest on that mortgage and they can invest the money and make say, a 5% return. That's not a whole lot more than that 3% they're paying on the mortgage. Well, maybe you don't want to make extra payments on your mortgage if, instead of getting that 3% return forgetting taxes, on paying your mortgage early, you can make a 5% return on an investment. [00:04:00]

Kathy: I just saw a Facebook post, somebody saying, "I'm so proud of myself, I just finally paid off my home," and I understand that's a great feeling I'm sure for people to feel like I live in this home, I have no payments. I basically live here for free besides taxes and insurance and repairs which are still costly, right? It still costs to live in a home even if you've got it paid off, but let's say that home is $200,000. That's $200,000 that could be borrowed against at super-low interest rates and reinvested for more. Some people, again, possibly Dave Ramsey, would say that that would be irresponsible to get a loan against your primary. Again, that would be, if you're going to just go spend it on non-assets, on a vacation, or something, but if you're investing it for more than you're paying to borrow it, it could accelerate the payoff in a way, right?

Holden: That's exactly right. I think about what happened in the run-up to the housing crisis in my neighborhood, there were people who kept refinancing their homes and borrowing more and more and more and buying. Like I had a neighbor who bought a Volkswagen Tiguan and a Harley Davidson. Well, neither one of those is really going to appreciate value. If you're using your home equity to pay for those things and the price of the house is inflated and eventually falls, you're in real trouble if you lose your job. The way I look at it is this, there's a psychological wage to being in debt. When you can pay off [00:06:00] your student loans and your mortgage and your car loan, and it just makes you sleep better at night.

Perhaps it's worth it, perhaps it's better to just not have those debts rather than say, get a HELOC and invest the proceeds of the HELOC. You might feel like you're walking on a tight rope when you do something like that and you just want to maybe simplify. I totally understand. There's a lot of things I disagree with Dave Ramsey on, but sometimes I end up in the same place where he is when I just think in terms of peace of mind. Not having debt gives you peace of mind.

Kathy: Sure, sure. The bottom line is if you know how to invest and you're savvy at it, and you could get a loan for 3% and you are 99.9% sure that you can get an 8% return elsewhere or 10% or 15% or 20% then, by all means, you would get that money and borrow as much as you could. You would borrow millions upon millions upon millions beyond your home. You'd use credit cards and so forth because you would know how to make a nice return on that money.

It's like if you didn't know how to do that, then it would be like the idea of walking into a casino and saying, okay, I've got a $100. I'm going to gamble and maybe I will make another $100 and keep the $100 I started with and only play with the house money, but what if you don't? What if you lose $100 completely? It doesn't work. If you're going to gamble, you need to know how. You need to know that you're going to walk out of that casino winning. With real estate or with other investments that you understand, It's not so risky if you really get it, if you really understand it.

If you know how to buy a house, understand what it [00:08:00] takes to renovate that house, what the after repair value will be, what the market is asking for, and the demand, and if you've done it before or working with someone who has, you have a pretty good chance of making that work. If somebody wanted to pay off their debts or just be sitting in cash, what advantage do they have as a cash buyer?

Holden: There's a lot of advantages to being a cash buyer and really, first, you have to think in terms of the mentality of the seller. Why would the seller want to sell to a cash buyer? Among those things are as a seller, you don't have to wait for the buyer's mortgage lenders' approval or their timing. You don't have to worry about the appraisal, and you're just simply more likely to go to closing. When you turn that around, you think, okay, as a cash buyer, those are some of my advantages. It's a more sure closing because as a cash buyer, I'm not having to depend upon a mortgage lender's approval or quirks of timing where suddenly, oh, they have to put the closing off for a week. Don't need an appraisal and you're just simply more likely to go to closing.

Kathy: That happened to us with our daughter when she was 24 and she had had a two-year work experience so she could qualify for a loan. I've talked about this before on the show. She was going to go buy a car because she finally had good credit. Well, she had great credit and showing income. I said, no, no, no, before you get that payment and throw off [00:10:00] your debt to income ratios, look at buying a house first. She was like, a house, how can I do that? How can I afford that? Just talk to a lender and find out if you can qualify. It turns out she could qualify for about a $300,000 house. She lived in Chico, California where $300,000 houses were actually available. It's pretty tough to do-

Holden: Oh, really?

Kathy: -out in California, but she could. She started shopping and was able to find houses that were three-bedroom homes that were cheaper than the apartment she was renting that was a two-bedroom with no yard. The light bulb went on and she got it. She found a really good deal on a beautiful house next to Bidwell Park, looking over the park and just riding bike distance to downtown and to her job. It was a former rehab that the person couldn't finish, so one of the bathrooms wasn't done and a bank wouldn't lend on it. The only people who could buy that property would have to come in with cash. Well, that obviously lowers the value.

We said, fine, you can borrow from our retirement savings, it's going to cost you 6%. Then you can refi, we'll buy it all cash and then you fixed the bathroom and refi, that's what she did. That was an example of why having cash or someone who has cash can really help you get a great deal. She got that property for at least $50,000 under market because of the unfinished bathroom. She fixed the bathroom for about $5,000 and lived in that property for a couple of years, just sold it, and after paying us back and all the interest, she made over $100,000. That's pretty good to live for free basically as a 24-year-old and make money at it at the same time.

Holden: That's a happy story for her. It sounds like a horror story for that seller. It's like, all they had to do was [00:12:00] invest $5,000 to essentially get a $50,000 return and they didn't do it.

Kathy: They didn't do it. Oh, that is a really good point I hadn't thought about that. This was somebody who just, maybe hadn't calculated the cost of repairs and literally spent all their money and didn't finish the project. This is not uncommon and that's why, when you try to do a flip, you better make sure you know the cost and have reserves in place because there's always surprises with old properties. There could be things that you can't see until you start digging into that property and making those changes. Unfortunately, I do believe they just ran out of money because they had spent everything they had trying to do the repairs and probably couldn't get any loans. They did walk away from that probably at a big loss. Very, very important.

The same thing I've seen that even with big syndications where you could syndicate, expect that the repairs on the apartment will be say $500,000, it's a much bigger deal. What if there's more to it and you need an extra million or something. If you're syndicating something big, you sure better have big reserves. You can always give investors their money back if those reserves aren't needed, but make sure you have it so you're not in a situation like that where you can't finish the renovation. With the crazy market out there, there's still a lot of people coming in with cash. What are some of the best ways to win that bid?

Holden: All right. Let's say you need to get a mortgage and you're competing with these cash buyers. That can be really intimidating. Really one of the first things to do is in that intimidating situation is to present yourself as a really easygoing person, to be a not intimidating buyer. Someone who's a pleasure to work with, [00:14:00] someone whose offer is easy to accept. That's the number one thing, and then there's like elements of that. For example, when you say, make the offer easy to accept, what I mean is, keep it short and sweet and simple. Don't have a bunch of clauses in there like escalator clauses, just make it really short. Don't demand a response like within two hours, that just makes you seem like, oh, okay this person's going to be a real hard to deal with. Really just keep things really simple.

Another thing is just make your best price offer right off the bat. Don't be counting on some back and forth where you're eventually going to pay more than your offer price. If it looks like there's a lot of competition for the house, you're going to have to get a mortgage, you think that there's going to be people offering cash, just make your best offer right then. Because one of the reasons is a lot of cash buyers, if they are looking to buy it as an investment to rent out, they might have a top price that is below what you're willing to pay for it if you want to live in that house.

You can waive the appraisal contingency if you have enough money in reserve to pay the difference between the prices you're going to pay and the appraised value. Sometimes if you're going to get to mortgage, you can have some more flexibility, you can offer the seller a rent back. This is an important thing in today's market because it's really easy to sell a house, it's quick to sell a house. It's hard to find a house to buy [00:16:00] when you have all this competition. What happens is, people can sell a house quickly and then they might want to continue living in that house for a while while they're waiting to make an offer or close on another house. If you can offer to let them rent that house back for up to 60 days, that really might give you an edge.

You can offer to buy as is and you can still have the house inspected, but you can tell the seller, look, this inspection, I'm not going to ask you to pay for anything. I'm not going to ask you to allow workers into your home to repair things and supervise them. I'm only getting an inspection to give me a yes or no, a go or no go thing. If the inspection uncovers problems that I don't want to deal with, then we'll just cancel the whole contract. If it uncovers problems that I'm willing to deal with, then we'll proceed and I'm not going to ask you to lower your price. Those are some of the strategies that mortgage borrowers can use to compete against cash buyers.

Kathy: That's good information. I've read that maybe these multiple offers and multiple bids are slowing down, but I would say it's just slowing down, they're not gone and it certainly depends on the market. It's still really important to know that you're working with the right agent and that you are making the right offer because there's probably going to be some other good ones right alongside yours. Very good, all right. Any other tips in the time that you've been reporting on mortgages since 2001? Obviously mortgages are really, really cheap, right now it's cheap money. Do you see that changing?

Holden: Well, they're going to continue to be low. My guess [00:18:00] is that mortgage rates are going to go up from here on. I would say, look, when you look at mortgage rates and when you make a prediction, you can predict that they're going to go up, they're going to stay about the same, or you can go down. If you can predict better than 33% of the time, you're doing pretty well and I'd say, I probably am right half the time. How sure am I that mortgage rates are going to be higher at the end of this year than they are now? Not really positive about that, but I think that that is the direction that we're going to see.

The thing that could knock mortgage rates down or just keep them the same would be if the pandemic gets even worse and really drags down the economy domestically and internationally. If it's affecting supply chains even worse than they are now and shipping, you could see mortgage rates go down, I just have a hunch that that's not going to happen. That mortgage rates are going to rise but not by much. They're a little bit under 3% right now. I don't think they're going to be above 3.25% at the end of this year.

I just think it's really fascinating is appraisal gaps. I mention that in passing but it's really a problem that a lot of people are dealing with, people getting mortgages. Essentially, let's say you offer $110,000 for a house and the appraiser says it's worth $100,000. Well, if you're going to buy 95% of the value of the house, suddenly you can only borrow $95,000. Instead out of putting 5% down on a $110,000 [00:20:00] house which should be $5,500, now, you're faced with putting $15,000 down.

I'm throwing numbers around that might sound really confusing. Essentially, with the appraisal gap, you have to come up with cash to make up the difference between the price you're paying and the appraised value. In a normal market, what often happens is, if the appraisal comes in for less than you've offered to pay, then you'll negotiate with the seller to get a lower price.

In today's market, that's just not happening. You're paying that price that you offered to pay, and you're going to somehow have to come up with that difference in cash. When you're making an offer and you need to get a mortgage, it really does help, especially if you want to waive the appraisal contingency, to have plenty of cash in reserve or easily liquidatable assets in reserve to make up that difference.

Kathy: Yes. That's the challenge in a bidding war scenario. Yes, the price is going to be higher than what it would appraise for and most people who are overbidding have that cash set aside, which makes it harder for people who don't.

Holden: That's right, and if you're going to waive that appraisal contingency to actually show some bank records and some brokerage records saying, look, I really can make up a difference of say $20,000 easily, if the appraisal falls short. Then just to let that seller know that, yes, you're not just blowing smoke, you really, really can make up that difference.

Kathy: Yes. [00:22:00] All right. Anything else you want to let our listeners know?

Holden: I think that's about all. Just to reiterate, the appraisal, not the appraisal, the flexibility about the closing date I think is really a key thing in today's market where there's just a lot of sellers out there who need to hang out in that house a little longer so they can close on the house that they're buying.


Kathy: Yes. Great advice. All right, Holden Lewis, thank you so much for joining me here on The Real Wealth Show and sharing your knowledge.

Holden: All right, thank you.

Kathy: Thank you for joining me here on The Real Wealth Show. If you'd like to get access to more free education just go to realwealthshow.com.

Rich Fettke: The views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to realwealthshow.com.

[00:23:06] [END OF AUDIO]

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