The Dream
You’re ready to buy a house. You worked hard to improve your credit score, saved money for a down payment and closing costs, found a property that’s perfect for your family and did your due diligence. This is The One.
You’ve also sat with a lender (whom you’ve carefully selected and vetted, of course) to discuss mortgage terms. To no one’s surprise, you’ve been given a glowing pre-approval letter that more than covers the price of your dream castle.
Your real estate agent is cunning, shrewd and persistent—the kind you want on your side of the negotiating table. He researches comps, you reach an accord on strategy and Mr. Killer Agent presents your offer, a very good one by any measure.
The Reality
As you’re waiting for The Decision from the seller, mentally arranging the furniture in your new family room and hanging wall art in the foyer, the phone rings. It’s Mr. Killer, with some deadly news: “The sellers are going with another offer. I’ll start searching in the MLS again.”
“Why??” you almost shout. “We did everything right, including waiving the appraisal and inspection and offering the standard 2021 rate of $50,000 over the asking price!”
“Sorry.” Killer seems upset, but you’re not sure with whom. “The other offer is somewhat lower, but they’re putting down 50% to your 5%.”
The Logic
You’re upset. Deflated. Discouraged. And more than a bit confused. “What possible difference does that make? At the closing table the seller will get a certified check from a certified bank! I highly doubt if the other buyers will arrive with a bodyguard wearing shades and packing heat, carrying a briefcase filled with unmarked C-notes. You’re telling me the seller prefers to get less for his house because we’re not putting down enough money to employ Louie the Gouger to carry our freshly-laundered greenbacks in his meaty mitts?”
That’s become an increasingly common reaction from my disappointed buyer clients, but without the Runyonesque embellishments. Their financial reasoning isn’t wrong—putting down less, mortgaging more and leaving enough in the bank to feather their new nest or get Invisaligns for little Courtney sounds like a well-thought-out family plan. But it runs straight into the gaping maw of Reality. And as we all know, reality is not always fair, but it’s always reality.
The Reason
Why do sellers prefer cash offers, or at least offers with the highest down payments? It comes down to no trust and even less trust. If buyers are “only” putting down 5%, never mind getting a 3.5% FHA or 0% VA loan, the seller starts to wonder about their financial ability to close the deal. Maybe they won’t get approved for a loan. Maybe they’re short on liquid assets and will nickel-and-dime the seller during home inspection negotiations. Dealing with someone who is scraping by just enough to buy a $750,000 house (Toto, we’re not in 1971 anymore) is not as desirable as dealing with someone else whose Tesla battery costs as much as an entry-level Mini Cooper.
There’s another reason for putting one’s money on more money down. Buyers get cold feet. They get buyer’s remorse, which is, after all, named after them. They don’t stop going to open houses just because they’re in attorney review, because there’s always a prettier girl hiding in the back of the gym on prom night.
If buyers bail during attorney review (and it does happen), the seller hopefully still has backup offers, the ones with only 30% down or even (gasp!) 5%. But if buyers hit the Emergency Stop button once the transaction is already under contract, that’s a whole different ballgame.
So the seller’s reasoning is this: If the buyers are footing a 50% down payment, they probably put at least the traditional 5% of the home’s price, often much more, into the escrow account of one of the attorneys. That’s a good chunk of change in the hands of a stranger tasked with following contract law to the letter. But buyers with 5% down have a much smaller amount in escrow jail, certainly not the entire 5%. If the deal goes south, who then stands to lose more and therefore more likely to play nice with the seller?
Conversely, if the buyers and seller get into a hissy fit over inspection items, or a buyer spots the prettiest girl in the back of the gym and decides he wants her more than the not-quite-as-winsome young lady he’s promised to marry, who is more likely to cut their losses and walk out on the transaction?
The belief drilled into every seller’s head is that if buyers cancel a contract without good cause, their entire escrow deposit will be confiscated and gifted to the seller like the Mother of all COVID Stimulus Checks (*cough* never happened, never will *cough*). Blithely ignoring another Reality that with lawyers involved nothing is certain, they choose to cast their lot with fifty-percenters, following the sage advice of the late sports writer Hugh Keough, who paraphrased Ecclesiastes 9:11 thusly: “The race is not always to the swift, nor the battle to the strong; but that is the way to bet.”
The Fact
Sellers naturally go with what appears to give them better odds to close. Cash offers are pretty good odds. 50% is not too shabby either.
But 5%? Ha. Move over for a suitor with deeper pockets. You’ll be lucky to pick up one of the Mean Girls at the prom if that’s all you’ve got in your wallet.
