Listing Agents and Pre-Approvals or Pre-Qualifications

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It has become very trendy to ask for pre-approvals on loans, because so many escrows are falling through. Unfortunately, as I have explained in the past, Loan Pre-Approval Means Nothing, and prequalification means even less. Both are literally wasted paper. As far as actually meaning anything you can hold someone to, they're useless. Worse than used toilet paper, which was actually put to some useful purpose once upon a time.



I never trust either a pre-qualification or pre-approval unless I did it. As I've said before, there is no accepted standard for either. Furthermore, I doubt there ever will be. Agents aren't asking for these pieces of waste paper because they're concerned about their listing clients. They're asking for them to cover their own backside so they don't get sued when the transaction falls apart.



Now there's no way on this earth that you can promise that owner that the transaction isn't going to fall apart. Accepting any offer always has some attached risk. If the buyer can't actually get the loan funded, the seller is out of luck as far as getting that purchase price for the property, and you'll have to go back to square one.



This isn't to say that the seller is out the whole amount. The buyer risked whatever good faith deposit, which should be at least enough to pay the costs of carrying the property for a month or two. This isn't to say that the seller is necessarily entitled to the deposit or that escrow will automatically remit it to them. There's rules about that. But the contract is very carefully written to limit the amount of time before the seller is entitled to the buyer's deposit. If you're concerned that the buyer may flake, or not be able to qualify, the correct thing to do is negotiate more of a deposit and more favorable terms for it to come to the seller in the purchase contract. If listing agents were really trying to protect their seller clients from failed transactions, they'd be focusing in on larger deposits and trying to get them paid to the seller while the property is still in escrow. That's real protection for the seller. Of course, many buyers will walk away from such terms, meaning that it goes from a possibility of that listing agent getting paid to no possibility of that listing agent getting paid.



Buyers understand the deposit in cash terms. They scraped and saved this money in real time, dollar by dollar. It's real to them, and they don't want to risk it. You've got a better chance of getting $10,000 more on the price with most buyers than of getting a $1000 higher deposit, or more favorable terms for forfeiture. Of course, a lot of buyers choose to go unrepresented or use the listing agent to represent them. Both are silly, when you understand what's really going on. But demanding a high deposit, or harsh terms of forfeiture, is a good way of scaring off potential buyers. Savvy buyer's agents understand that an increased deposit is a way to get a better price for their buyers. If you require a high deposit and harsh terms of forfeiture, you are discouraging certain buyers, shrinking the pool of potential purchasers, thereby lowering the likely eventual price.



Of course, being able to negotiate a good contract is a major part of what an agent's getting paid for. In some circumstances, high deposit will be appropriate. For instance, if the buyers are getting a really good price. If I'm getting a property $100,000 cheaper than comparables around it, I shouldn't mind putting up a bigger deposit, or agreeing to more stringent terms for forfeiture. On the other hand, if I'm paying top dollar for the property, I'm going to be a lot more guarded. Mind you, I don't make offers without evidence that my clients can qualify for the necessary loan, but I'm going to want that seller to assume more of the risk of the transaction falling through. If they're getting a good price, they should be willing to. If they're not so willing, they're basically saying that the transaction isn't worth the increased risk. Remarks about having your cake and eating it apply to this situation. I'm certainly willing to persuade my clients to offer a better deposit to get a lower overall price. But I'm also perfectly willing to tell an overaggressive seller to go jump in the lake if they want harsh terms for the deposit without my client getting something tangible in return. The reverse of each applies when I'm listing a property. If the buyer is offering - or willing to offer - a large deposit or terms that are generous to my client, I may counsel acceptance of such an offer where I wouldn't of an identical offer with a smaller deposit or less generous terms for its forfeiture. It tells me that the buyer is willing to risk something real if they can't qualify after tying up the property.



There is another alternative, if you are or have a loan officer that you trust. Get their credit information. After all, a buyer is in a position where the sellers are in fact considering extending credit. Income, FICO, credit score, other debts. Ask your loan person if they could do a loan for this buyer. Of course, if your loan officer is a bozo, or if the buyer's is, all bets are off under this option. Under RESPA, you can't make them so much as put in an application with any loan provider not of their choosing.



If the sellers are not concerned enough about the buyers' ability to qualify to be willing to accept a lowered sales price for better terms on the deposit, I'd say it's not very important to them. If they're not willing to keep looking for another buyer, they want to do business with this one, and they must be getting something worth their risk out of the prospective transaction.



I recently had an agent tell me that requiring a pre-approval was part of their due diligence. Nonsense. I'll go so far as to say it's preposterous. The deposit is real. Information on creditworthiness is real, if subject to more interpretation. Pre-Approvals and Pre-Qualifications are a waste of space in the file, approximately equivalent in worth to an attestation that there is indeed a screen door in this submarine. There is no rational reason to choose one buyer over another, or accept one offer and refuse another, that has its roots in the pre-qualification or pre-approval. There's nothing there that you can hold anyone responsible or accountable for if the buyer does not actually get the loan funded, and if there's nothing there you can hold anyone accountable for, it's not anything real. Which makes it purely a CYA on the part of agents. Some of them may think it means something real, but it doesn't. Those agents need to be educated.



I'll admit I hate being asked for pre-approvals, even though I should probably love it as the sign of an agent that doesn't know what they're doing. But all too many times in the current market, a listing agent that doesn't know what they're doing is a sign of not being in touch with the current market, that I'm spinning my wheels in any negotiations, because the listing agent has no idea what properties like this one are actually selling for. It feels like you're trying to get useful work done on a computer that's frozen up and gone to blue screen of death. Not useful, and not helpful to either my client or theirs. You do have the option of behaving like a recalcitrant mule. Nobody can make you stop, but it's not likely to be beneficial to your bottom line.



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This page contains a single entry by Dan Melson published on August 13, 2007 10:01 AM.

Negative Amortization Loans - Don't Panic! was the previous entry in this blog.

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