Low Down Payment Buyers Getting Outgunned

The real estate market in Pleasanton, Dublin, San Ramon, and Danville continues to sizzle, especially in the lower price ranges. While this is good news for the local economy and home sellers, it has created difficult conditions for many buyers who have smaller down payments. Indeed, buyers who are looking to put 3.5% down (typical FHA down payment), or even 10% down are often getting passed over when making offers when there are competing offers, especially on newer homes.

While everyone supports the idea of making home ownership accessible to first time buyers and buyers who need low down payment financing, the reality is that they are getting out gunned during multiple offer presentations… sometimes badly. Often, they feel like they are bringing a squirt gun to a knife fight.

For sellers, the dynamics are different. In most cases, they want certainty. Sellers usually are looking for the best price with the least amount of hassle. The general consensus (fair or not) is that buyers with higher down payments, or all cash buyers in the extreme, are a much surer bet in terms of certainty.

For a real life example, take a look at this recent offer presentation scenario on a newer home in Pleasanton. The asking price was $649,000. It was a 24 year old home (which can often be considered “newer” in Pleasanton, which does not have the abundance of new construction that the surrounding cities have), and was upgraded and showed extremely well. This is the type of home that is receiving extreme interest right now from buyers.

The seller received 9 offers on the home. 5 of the 9 offers were under the asking price. 4 of the offers were above the asking price. All of the offers had at least 25% down, except for one FHA buyer. All but two offers had a 30 day close. The accepted offer was not the highest, however. The seller countered the offer at $660,000, and came to agreement at $663,300. Why? That offer did not have an appraisal contingency. All other offers did. In essence, the buyer was saying “I will pay you $663,300 for this house, even if the appraisal comes in below the agreed upon price”. This is the trump card for certainty, and it worked in this situation. The FHA buyer was never really in the game, and likely would not have gotten the house, even if their offering price was the highest. In this situation, any buyer putting less than 25% down would have had an uphill fight. And if there was an all cash buyer in the mix, the seller would have done everything possible to craft a deal with that buyer.