CommentaryMortgagesReal Estate Tips January 24, 2024

The Pre Approval Shell Game

Years ago, I was the listing agent on a property where an offer came in significantly below asking price. The pre approval accompanying the offer was for the exact amount offered, tens of thousands of dollars below asking. My client asked why, if they were only approved for $450,000, that they’d even look at a home listed for $500,000.

So I asked the buyer agent. He proudly told me that their loan officer advised them to not disclose what they actually could afford to dissuade the seller from asking for more. So my client asked me to tell them that they would like to counter their offer, but they didn’t appear to afford anything more, so good luck. This is not what the buyer agent expected. But that’s what happens when you play games with a process that’s not meant for gamesmanship.

The purpose of the pre approval is to give the seller confidence that the buy can afford the house. If that buyer actually qualified for a $600,000 home, the seller wouldn’t counter them at $600,000. But they would feet comfortable working with a byer that was so  well qualified. But that lesson seems lost on some, as I have seen offers and counter offers with 2 or 3 updated pre approval letters as if proving that the buyer is well qualified is some sort of bad thing. Sellers don’t go for it- if the buyer is qualified for only the amount they are offering, the message being sent is that a small rate hike or tac increase might take them out of the running.

It is the most un-strategic strategy I have ever seen, and I excel in appreciating a good tactic when I see it.

The chief proponents of the practice are loan officers. But negotiation advice isn’t their job; it’s the broker’s job.

The same goes for proof of funds in a cash transaction. I have seen sellers with a $300,000 listing given $310,000 in assets from a buyer and heard them say that this buy is one bad day on the stock market away from no longer affording the listing. When the agent says they have other assets, we have to smile. Assurances aren’t assets. I’m not suggesting that a person worth $10 million share their entire portfolio with us on a $100,000 deal. But I am saying that if you qualify for more than asking price, you should not hide it. Anything that reassures sellers to be confident in your ability to close is good advocacy.

The fear that a seller will counter for more money with a well-heeled buyer is fallacious, as market conditions are so overheated that virtually all buyers are in a multi-offer competition.

There are times to be stingy with disclosure. Giving a seller confidence that you are the best buyer whose offer they should choose is not one of them.