I'm confused about how pre-approval letters affect negotiations. Let's say I'm pre-approved for a $400k loan and have $100k for a down payment. I find a property listed at $500k but I want to offer $450k and negotiate from there. If I submit my offer showing I'm good for $500k, won't the seller hold out for the asking price or make a counter-offer with very little price reduction? If I get another pre-approval for a $350k loan, the seller may think I'm maxed out at $450k and reject the offer rather than making any counter-offer. What is the best pre-approval amount to submit in an offer assuming that I am looking for a 5% to 10% reduction from the asking price?

The advice I got from the lenders I worked with and my realtor were to always submit with a preapproval letter corresponding to the exact size loan for the offer you're presenting.

OTOH, your existing lender should be able to give you a new copy of the letter with the lower amount: there's no need to get a new approval.

Even if they don't counter, you can always resubmit your offer and bid up.

I've had different advice on this. Most people say to submit a pre-approval letter with the offer amount written in, and lenders will happily provide a letter for anything up to the amount you're approved for. But one realtor made the opposing point that the fact you're pre-approved for more makes it more likely, in the current market, that the final approval will actually happen. Many lenders and brokers will, as I'm sure you know, issue pre-approvals with very lttle due diligence and sellers know this, so its a fair point.

Really, this comes back to a point I've made before - you need to know what you think the house is worth, and not let the seller dictate terms, or just try to get the biggest discount you can over list (10% below list is still way too much to pay for some listings I've seen!). Offer that, or a bit less, and know your limits. If you do that, the seller you tries to push you higher just because you're preapproved for more is going to lose out.  

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Gina wrote:

I always advise my clients to have their pre approval letter match the corresponding terms made in the purchase contract. This makes for a clean offer where there is no confusion about where you stand financially and what you are willing to pay for the property. If you are actually qualified to borrow more and you show that, a seller will wonder why you are not offering more, they will counter you to that amount, and you will lose negotiating power. It is your agents job to negotiate the terms to make sure you are getting the best deal. Especially if you are trying to negotiate the price down, it is best to match everything up (pre approval and loan amount on the contract), make a clean offer, stand your ground, and allow your agent to negotiate for you. If you are open to a counter at that point, your agent will do their best to get you one.

 

Lastly, make sure you have a lender who is accessible, thorough, and truly invested in you as their client/borrower. They will play a key role in the offer and escrow process and it is important that they have a good relationship with you and your agent.

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I got the same advice from my real estate agent - however the argument doesn't make much sense to me. Why would anyone assume I am willing to offer more than I am offering just because I have a paper saying I can afford it? Do you normally pay $100K for a car because you can afford it or you can get a loan for that much?

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Sunny-sun wrote:
So, may I ask if it's a common practice from a buyer's agent to refuse to send a counter offer to the seller's agent because he/she felt that the amount offered was too little?  My main concerns with offering more to buy this property was because it needed quite a lot of fixing up, therefore, the costs of fixings will come later on to cause extra financial burden on me.  Any advices would truly be appreciated. 

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NEVER let an agent dictate the price you are offering. You offer what you are willing and comfortable to offer - anything more is in direct conflict with your interest (and coincidentally, well in his/her interest). If the agent doesn't like it, there are many more agents who would be happy to take his/her place. 

There is no reason not to have the pre-approval equate to your offer.

Whether or not you are willing to pay more is irrelavent.  It's knowing that you can pay more.  The seller can try to wring out as much money as possible see how much you really want the house.

You are between a rock and a hard place.  From a broker's perspective, if I am representing a seller, I pay attention to the preapproval letter.  If we are receiving a $450k offer with a $500k preapproval letter I advise my sellers that the buyer is able to purchase more and therefore we can offer a counteroffer at a higher price, assuming the offer is under list price and the property is worth more than the buyer's offer. 

On the other side of the fence, I advise my buyers to present a preapproval offer at whatever they have chosen for the offering price because the listing agent may be thinking what I think when I am the listing agent.  Generally when you receive a counteroffer, the listing agent will ask if you client has the ability to entertain the counteroffer (a veiled way of asking "can your buyer afford more").  It is the negotiating dance.  When you represent the seller your goal is to do your best for them and when you are representing the buyer your goal is to protect and do the best for your buyer.  I have never had a buyer lose a property because we had a preapproval letter at our asking price.  I have had buyers lose a property because the offering price was too low, but not because of the preapproval letter.

Sharyn

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Prost wrote: 

NEVER let an agent dictate the price you are offering. You offer what you are willing and comfortable to offer - anything more is in direct conflict with your interest (and coincidentally, well in his/her interest). If the agent doesn't like it, there are many more agents who would be happy to take his/her place. 

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Thank you very much, Prost, for your prompt and insightful response.  So, if we've already told by the agent to sign a consession letter to get out of the deal, and the property is still available now.  And the price is lowered by the seller because of the pre-forclosure due time, it would not be kind to the old agent and hire a new agent to send in the offer, isn't it?  However, it's quite impossible to continue to work with the old agent who had already refused to send our counter offer to the seller.  Anyone has any advices how we should proceed with it considering the situation would truly be appreciated.