Should you prequalify your wealthy buyers? In many of my finance classes with experienced, successful agents, invariably a nicely manicured hand is raised and the agent explains to me that in her market, agents would never think of asking their wealthy buyers about their finances. It just isn’t done.

It should be, however, and it should be done for two reasons. First, if an agent is asking some buyers whether a lender has prequalified them in the last two months and not others, the agent is violating fair housing laws by treating potential clients differently.

Second, in the event that violating the law doesn’t bother you, think about how best to earn more personal referrals from the wealthy. In class, I proceed at that point and ask the agent whether she would like to earn more personal referrals from her wealthy clients. She nods her head in agreement.

This story demonstrates how it works. An agent in my office met with one of our wealthy socialites Northwest of Philadelphia.

Rather than discriminate, as Linda worked through the questions in her Initial Interview, she came to her first finance question:

"Sir, have you been prequalified by a lender in the last two months?"

The buyer chuckled and replied that money would not be a problem. Linda continued noting that she had to ask everyone the same questions or be guilty of violating fair housing laws. He replied:

"Here’s the name and number of my accountant. Give him a call. I’m sure he can prepare a letter with whatever information you need. That’s what we did last time we bought a property."

Here is where Linda began to distinguish herself from other agents. Using her knowledge of real estate finance, she added value in a meaningful way to the relationship being created with this client:

"Sir, for some reason my wealthy clients always send me to their accountant, attorney, financial planner or stock broker. Even if I can get one of these professionals to draft the letter indicating that you are financially solvent without hinting that you are wealthy, simply including this letter with your offer sends a red flag right up the pole announcing your wealth."

How did the rich become wealthy? Could it be by negotiating smart deals? Could they be thrifty? Why would an agent not ask about the wealthy buyer’s finances and deny that potential client the ability to get a great deal?

In class, at this point in the seminar light bulbs start to pop above agents’ heads. Smiles break out as the concept sinks in.

Just as a preapproval erects a wall between the seller and the weak buyer’s financial troubles, a preapproval can be used to build that same wall between a seller and a wealthy buyer’s financial strength. In some states, agency laws and regulations even allow you to write the offer and keep the buyer’s identity anonymous. This can work if it is a common practice, but beware of falling into the same trap. To the extent only wealthy buyers submit offers anonymously, it may be raising that same flag announcing the wealth of the potential buyer.

Urge your wealthy buyer to become preapproved. In my experience working with rich buyers, they often have a friend or close acquaintance who owns their own bank and can easily have a legitimate preapproval letter prepared.

While ability to pay and willingness to pay are two different issues, few sellers will come far off their asking prices for your buyer broker clients when the sellers learn that the buyers are rich. This is not just a cash buyer, but a wealthy client.

I have two last comments to share to help you use real estate finance effectively with your rich buyers: (1) the right lender to use, (2) the difference between prequalified and preapproved.

The right lender

Almost as important as convincing the buyer to become preapproved is advising the buyer to work with the right lender ... someone who will satisfy the listing agent’s questions without revealing too much. When called by the listing agent, the lender should answer that the ratios or credit scores are acceptable and the buyer’s cash reserves are sufficient rather than revealing what the front-end and back-end ratios are, what the credit score is, or how much money the buyers have available. A preapproval with the right lender is a powerful negotiating tool.

Prequalified versus Preapproved. Know the difference between a prequalification letter and a preapproval commitment. The prequalification is only a cursory look at a borrower’s finances without a commitment from either the borrower or the lender. A preapproval, on the other hand, is worth its weight in gold. A legitimate preapproval means the lender has already given the buyer the loan. The loan is contingent only on the property appraising for the sales price. No other conditions need to be satisfied.

From a lender’s perspective a preapproval not only reduces the risk involved with financing the transaction, but is comprehensive and binding. The borrower has been given the required disclosures, returned to the lender the completed paperwork, granted the lender permission to check his or her credit scores, answered any questions raised by the loan processor or underwriter, and agreed to finance the purchase with them rather than with their competitors.

For your buyers, a preapproval means the listing agent and seller never know how strong (rich) or weak (marginal) or in trouble (a recently bankrupt or divorced buyer) your client may be. You have taken your clients’ best interests to heart, served them well, and earned the personal referrals necessary with your finance knowledge to ensure a successful career.

Congratulations.

Published: August 29, 2002

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Mike Merin, CRB, CRS, ITI is the author of ATTACK THE MARKET! Specialize in Negotiating, Finance, Pricing or Technology which details how an agent can guarantee his or her success by learning and marketing skills that consumers value today. With graduate degrees from Columbia University, Mike was a negotiator for the U.S. Government in Washington, Moscow, and the capitals of our most significant trading partners. Beginning in 1985, he purchased with partners his first of several investment properties. He left the international arena to support his wife’s career and joined Prudential Fox & Roach REALTORS® as a successful agent in the Philadelphia area. An award-winning author, you can read or purchase Mike’s publications at www.mikemerin.com.