The Hierarchy of Buyers

For buyers navigating the current market conditions for East Bay and Pleasanton homes for sale, it is important to understand your position in the market.  This is especially true in multiple offer situations where you may be up against other buyers.  Here is a guide to the “Hierarchy of Buyers” as currently perceived in the market, from the perceived strongest to weakest.  As a buyer, where do you fit in this hierarchy?  What can you do to strengthen your position? Remember as a general rule, certainty sells.  The more certainty you bring to the table in the form of short or even waived contingencies, the stronger your offer is.  Of course, you need to discuss the risks associated with waiving contingencies with your real estate agent and/or attorney.

#1 – All Cash.  In many facets of life, cash is king.  And this generally applies to offers as well.  In most cases cash offers are hard to compete with, especially if the price is compelling.

Strengths:  No contingencies or hang ups with buyer getting a loan or selling a home.  Can close quickly.  Lots of certainty.

Weaknesses:  Cash buyers can be demanding, and often expect a discount on the price since they are cash.  If there are multiple offers, the seller will have to decide how much if any discount getting their cash quickly is worth.  Sometimes not much at all.  It depends on the seller’s situation.  Cash buyers may still have an inspection contingency, which is basically gives them the right to cancel the transaction, so that is a key variable that helps determine the strength of the offer.  And if some or all of the downpayment funds are coming from overseas, it may be less attractive to savvy sellers depending on the country the funds are coming from.

#2 – Non-contingent Financed Buyer.  A buyer who has the downpayment funds in the bank and does not need to close on another home to purchase is the next strongest buyer in the pecking order.  This buyer will still have a hard time competing against a cash offer due to the uncertainties of the loan and appraisal process, but they are still considered strong buyers.  A huge factor is how much the buyer is putting down.  Rightly or wrongly, the bigger the buyer’s downpayment, the stronger the buyer is generally perceived to be.

Strengths:  Downpayment funds are liquid and available.  Buyer is generally pre-approved.  No waiting for a home to sell or close.

Weaknesses:  Potential issues with appraisals and with loan contingencies.  Buyers can counteract this with shortened or even waived loan and/or appraisal contingencies.  If the buyer waives the appraisal contingency, they will generally have to demonstrate that they have the funds available to make up any shortfall.  Even a financed offer with no loan or appraisal contingency is generally not as strong as a cash offer, because the buyer has to go through the loan and appraisal contingency and can’t close as quickly as a cash offer.

#3 – Contingent on Close.  Same as a Financed Buyer, except part or all of the downpayment funds are coming from another property that has not closed.  Even then it is still not perceived to be as strong as an offer with no contingency on the close of the buyer’s property if all other things are equal.

Strengths:   At least the buyer does not have to sell their property first.  The key factor here is where the buyer’s property is in the escrow process.  If it just went into escrow and their buyer still needs to get through inspections and contingencies, it is less desirable to sellers than a non-contingent offer (if all other terms are similar).  However, if the buyer’s property is ready to close with all contingencies removed, the offer will be more attractive.

Weaknesses:  It still adds uncertainty to the equation for sellers, which generally has a negative impact.

#4 – Contingent on Sale.  The weakest of all buyers, as they need to sell and close on another home to purchase your property.  Buyers in this position typically will not have much success in a multiple offer situation, and limited success even if there are no competing offers.

Strengths:  There are only 2 things a buyer in this position can entice the seller with.  One is a higher price than non-contingent buyers may be willing to pay. The other is time.  If the seller is not in a hurry, unmotivated, or stuck on a particular price, this buyer might be the ticket.

Weaknesses:  Where to begin… there is a lot of uncertainty here.  Will the house sell?  What will the buyer price it at?  What guarantee does the seller have that the buyer will accept an offer? Are there any inspection issues with the house that could trip it up?  For the buyer, they may have to entice the seller with a very high price to get them to take the risk of the buyer’s house selling.  There are other modifications that can be made to the offer to help transfer some of the risk in this type of offer to the buyer, but that is a topic for another day.  In general, a contingent buyer needs to wait 3 or 4 weeks for a house to sit on the market, at which point they may become at least a viable option for the seller who is not in a hurry.  To have the best shot at getting a seller to accept the contingent offer, it is essential that the buyer’s agent provide strong evidence to the seller that it is a high probability that the buyer’s home will sell quickly.  Any way you cut it you are asking the seller to absorb the risk that your home will sell.  The more information you can provide in this situation the better.

What strategy is best for you?  As always, it depends on your circumstances, and your tolerance for risk.  Discuss your options with your agent so you have a clear understanding of the potential risks and rewards.  Happy hunting!