Down Payment

17 Replies

This might be a dumb question - but here goes: In my search for my first investment property, every realtor I speak to has the same question - how much am I going to put down? My question is this - assuming you close escrow timely, what is the big deal about the down payment? If the seller is going to get 100% of the money in a couple weeks after I tender my downpayment anyway, what is the effect of a bigger or smaller downpayment?
Thanks for any thoughts!

yameen, I think you're confusing "earnest money" and "down payment". Earnest money is the check you submite with you "offer", usually $500-$1000. Down payment is the amount (percentage) of the total price that comes out of YOUR funds, not borrowed money.

BTW, most deals don't close "in a couple of weeks" after your offer is accepted.

all cash

To add a little more info, there are several considerations when weighing a contract from a potential buyer, one of which is net proceeds and another is likelhood to close the deal. Here are two very simplified example contracts:

Contract A:
Sales price = $100,000
Buyer finances $100,000
Net to seller = $100,000

Contract B:
Sales price = $100,000
Buyer finances $10,000 and pays $90,000 cash
Net to seller = $100,000

You are right in that both "net" the seller the same amount of money. However, I KNOW that the person on Contract B with 90k in cash can make the closing date (they're much less dependent on a lender and the property will ABSOLUTELY appraise for at least the 10k being financed)--and I know that they are VERY unlikely to wiggle out of a contract because they "couldn't get financing." However, the person with Contract A may have bad credit and got a pre-qualification letter from a lender who hasn't really done much due diligence on them yet (nobody needs to when they kick out those useless letters) and when it goes to underwriting, the bank may say no deal. Buyer may have lied to them about employment status or income, or debt, or assets, etc. That means the deal can fall through, closing dates slip, and headaches dealing with contracts.

Rest assured, your Realtor gets NO BENEFIT from you putting more money down other than some assurance that you in fact can afford the place you're trying to buy. Far from trying to screw you, they are trying to help you make reasonable offers and not waste your, or their, time. In fact, some would argue to use a strategy for putting the maximum amount you can down on a purchase agreement; then worst case (assuming you have a financing clause in the sales contract), once you secure a ratified contract, you can change your financing terms as long as it doesn't negatively impact the seller. Your Realtor should be your teammate in getting the home you want; if you don't trust their advice, don't use them. If you're not going to listen to their advice; don't use them. Good ones can save you a LOT of effort, stress, and money.

-Takleberry

I understand that the seller can have more confidence that the deal will close with someone who puts lots of cash down, but can't those issues be alleviated with an approval letter from the bank (as opposed to just a pre-qualification letter).

My issue is this - I have plenty of monthly income to get loans to make purchases, but I don't have stockpiles saved (yet!), to put a significant down payment down on a property. How bad of a position is this to be in?

Isn't it generally true that the less I have to put in the deal out of my own pocket, the better my returns will be? I know that is simplistic, but it doesn't seem impossible, as long as I/my bank can assure the seller that the deal will close.

thanks for the info!

IMHO letters from banks are utterly worthless. They would only mean something if you've already been approved for a specific loan, for a specific amount, for the specific property in question. Underwriters (as far as I know) won't do a full work up if you don't have a specific property since it costs them money to do so.

Whether you put no cash down, or go "all cash" depends on what you're trying to get out of the deal and what you're going to do with the property. And, how long you want to keep it. And how many properties you want to have altogether.

-tb

Your not always required to use a down payment. Although if this is your first property and you don't have extremely strong credit you may be required to have a down payment.

I'm fairly new to investing, and am looking to purchase a third property. I was going to partner with another invester on a duplex, and we found creative financing that would finance 100%. The deal fell through though, because another buyer stepped in and offered $15,000 more before everything was settled.

In any case, usually with good credit you can obtain 100% financing.

Many sellers don't understand that no matter what you put down, they will recieve the full payment provided your loan is approved and the deal closes.

Yameen,

To address another one of your questions: yes, you may lose the deal if you have 100% financing to someone paying more cash down. That's a risk. But, if you have no cash to put down, it really isn't an issue--you don't have options. Things you can do to help your negotiating position:

-Learn something about the seller and write a cover letter to your offer that somehow connects with them. "Having recently divorced, I am rebuilding..." or "When I was in the Marines (like you), ...". Sometimes that makes a personal connection that's emotional, which always trumps rational.

-Get your lender to write the pre-qual letter and title it a "Fully Approved for Financing" letter. The guts of the letter are the same, basically you are fully approved as long as everything you told them checks out. It's completely non-binding to the lender but the seller may see two offers, one "pre-qualified" and one "Already fully approved for the loan" pending verification. The second offer looks stronger.

-Find out something about the seller and structure your offer to meet their needs. I.e. if they want to sell now but stay in the house for another 3 months, include a blank post-occupancy settlement agreement in your offer and let them know you're open to that idea.

-Consider striking some clauses in the agreement. I hate suggesting this because it greatly increases your risks, but you could forego a home inspection or--much better--do a home inspection "For Informational Purposes Only" which means that you won't nickel and dime them for every bent pipe or dirty outlet. Nothing really prevents you from going back and asking for minor repairs after the home inspection FIPO, but it makes the seller feel like you won't and you still get a professional to tell you if there are any major issues with the house. The seller is still obligated to disclose or disclaim any safety or major structural problems, both of which may be found during the inspection.

-Offer to pay for a professional moving company for the seller. Everyone hates moving. Make it easy by shelling out $2,000-$3,000 for a mover. Make sure you're not moving a 6 bedroom, 4 floor house before you suggest this, though!!!

Somewhat related to this discussion, I have heard instances of investors including a "discount" in their offer/purchase price if they purchase properties with 100% cash.

If this is common practice, what kind of discount are we talking? A percentage? Or a flat 20-30k (just to throw out numbers)?

Any thoughts?

Originally posted by Ken Yearwood:
Somewhat related to this discussion, I have heard instances of investors including a "discount" in their offer/purchase price if they purchase properties with 100% cash.

If this is common practice, what kind of discount are we talking? A percentage? Or a flat 20-30k (just to throw out numbers)?

Any thoughts?

Hey Ken -

For reference, this discussion is 5 years old, so don't be too surprised if you don't get much response (though feel free to start a new thread with your question if you'd like to get more input)...

Here's my answer...

It's really going to depend on who the seller is and what their situation is. For example, if the house is a foreclosure and the seller is a bank, a cash offer may get you up to a 5-10% discount, in my experience.

If the seller is a private seller, it's really going to depend on how desperate the seller is to get rid of the property and how much money he "needs" to make on the deal.

For example, when I'm selling my properties, I like to get cash offers because it means less risk that the transaction won't close and it generally means a faster close, both of which are important enough to me that I'm willing to give a discount of up to 10% (depending on my profit margin for that particular property).

Now, that said, some sellers are trying to get every penny out of their property, and the benefits of a cash deal (less risk, faster close) isn't worth trading any profit. So, those types of sellers are unlikely to give an preferential treatment to a cash buyer.

In short, it's really going to depend on the seller and their situation, but in general, up to 5-10% discount is about right in my experience...

Deal with sellers directly and avoid the earnest money issue. Realtors on both end want to see some skin in the game, thus earnest money deposit. When buying directly from sellers, your earnest money can be as low as $20.

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