This is one of the more common questions I get from new buyers. It’s been my experience that many buyers get too caught up in the “gamesmanship” of negotiating a sale. They have this very paranoid belief that the other side is always out to get them. They also tend to think that the listing agents are dishonest when it comes to viewings, offers and interest from other buyers. Obviously, for most transactions, this is not the case. Before I go off on too much of a tangent, let me cover why you should ALWAYS provide your full preapproval.
I understand where the question is coming from. If you don’t know any better, it makes sense that you shouldn’t show your $500,000 preapproval letter when negotiating a $400,000 sale. Simple logic might tell you that the seller would expect you to pay more because you can easily afford it. You might argue that this gives you less leverage when negotiating. However, if you are thinking this, you are be completely mistaken.
Here are two examples of why you should submit you’re best preapproval. If you are placing an offer of $400,000 on a house that is listed at$425,000 and submit a preapproval of only $400,000 (even though you have another one valued at $500,000) you are setting yourself up for failure and heartbreak. In this case, you have left yourself with no room to negotiate AND made yourself appear as a weak buyer in the eyes of the seller. They are likely fearful that you are a risk as you appear to be purchasing at your absolute max budget. In today’s world of financing, they may not want to risk working with you. I understand the rationale is to show them you can’t go higher and that they should take your offer. However, if they feel that their house is worth more than $400,000, they’re not going to sell it to you no matter what your preapproval says.
Here’s the professional way to do it. By the way, this is a true story and this property is under contract as we speak. My buyers were involved in a multiple offer situation on a house that was listed for $325,000. We had been looking at more expensive houses as they were preapproved for $425,000. We placed our offer of $300,000 on the property and included our full preapproval. The listing agent called me back later in the evening and said that our offer was tied for the highest and best. However, the other buyer’s preapproval was only for $300,000 and ours was for $425,000. They chose our offer because they were more confident in our ability to get the loan.
I can turn this topic into a novel, but to save you from the boredom I’ll end it here. The bottom line is that there are no negative outcomes that can stem from submitting your full preapproval, only positive ones. It is important to understand that the preapproval letter is not a negotiating tool. Its sole purpose is to show a seller your purchasing power. A seller can’t demand you to pay more if you are unwilling to do so. On the other hand, if your technique is to submit a lower preapproval to try to influence a seller to accept your offer, your offer is most likely too low. If it is a justifiable offer, the comps will support it.