Risk management is a term we most likely hear in the world of investing. However, it’s a term that you should hear when selling your home. When you decide to sell your home, there is a tremendous amount of risk that you are trying to manage. How so?
Let’s start with the single most important factor, you and your family’s future. When you choose to hire a Real Estate agent to sell your home, you are looking for representation, plain and simple. This agent must have your best interest in mind at every critical step along the way. Every decision that is made is an endeavor to minimize your risk.
What is at risk? Most importantly, your family’s security as it relates to your real estate. There is nothing more important than the happiness and security of your family. Whether you are a family of ten or a family of one, your financial future, and large portion of what determines the level of stress in your life at this time may very well hinge on selling your home.
If you could remove every risk of the sale, then you would be “living in a perfect world”, which you don’t (if you do just skip this article now). However, if you can remove most of the risk, this would put you at ease and in control.
Control What You Can When Selling Your Home
The appearance of your home, the sales price you choose, your choice of representation, and most importantly the buyer are all items that you can control when selling your home. Things you cannot control are the weather, interest rates, and lenders guidelines. A storm can occur and damage your home, interest rates can rise and have a prohibitive effect on buyers, and banks can change their lending guidelines in an instant of time.
So let’s focus on what you can control. Today let’s just consider the potential buyer. Every time a buyer is considered, your Real Estate agent will ask for two items, the Buyer’s Financial Information (BFI) and the lender’s Pre-Approval letter. Are these sturdy documents? Again, “living in a perfect world” where everyone knows and tells the truth, you could have a measure of trust in these documents.
The BFI is not backed up with hard data, it’s the buyer’s (the folks who want to buy your home) word that they are financially strong. Fortunately this is backed by their signature. The Pre-Approval is a document that has been put together by a Loan Officer which is not signed by the prospective buyer. He or she has reviewed the income (pay-stubs/tax returns/W-2s), the buyer’s credit report, and their asset statements. Do not be comforted with the assurance “if they misrepresent, they could lose the deposit they put down.” You could be losing valuable time and market position. The domino effect could be devastating!
The problem here is that both the buyer and the Loan Officer are not the last word in qualifying a borrower, an underwriter is. But here you are putting your ultimate faith in these 2 well meaning, but biased people. The loan officer wants the deal, and the buyer wants your home. So, how do you remove this risk? As I said, the buyer is one aspect you CAN control. How so?
Many lenders offer the most important key to the success of the sale of your home, a Commitment Letter (subject to appraisal). The provision of a Commitment Letter will make the sale of your home just about trouble free. A buyer can be completely approved by the lender before an offer is ever made. Imagine that your Real Estate agent says to you, “I have a buyer that is completely approved. The only item that needs to be satisfied is the appraisal of your home.” Will you accept this buyer? I would venture to say yes!
By accepting this buyer, you are removing or mitigating the largest portion of risk in this transaction. Every time I have provided a Pre-Approval, I get a call from the listing agent asking if this Pre-Approval they are looking at is any good. Here’s the reason, new and more stringent lending laws are in place, and generally this makes the Pre-Approval not worth the paper it is written on.
However, in the scenario where the buyer is completely approved by an underwriter, your Real Estate agent will be confident in the offer being made, your buyer is 100% ready, and your family is in a more secure position. Now you can now move forward with a greater degree of confidence!
You can request that only offers that include a Commitment Letter will be considered. Now taking your home off the market after an offer has been accepted is far less risky. Now, only the appraisal remains to be done.
It’s true you cannot remove every single conceivable risk. However, you can manage the riskiest part, the buyer. Doing so will bring tremendous benefit to every person in the transaction.
If you are a home buyer in Berks County, PA or the surrounding area, contact me and I can help with getting you pre-approved. If you are a home seller, rely on your real estate professional to guide you through the process as it relates to buyers who desire your home.