Right now homebuyers across the country, already in frenzied bidding wars for homes, are increasingly losing out to the almighty all-cash buyer.
“I had one couple, that was very well-qualified but would require a mortgage, put offers on four properties that were all sold to somebody else who paid cash,” says Bruce Taylor, president of ERA Key Realty Services in Boston. “It’s a very tight market. Until prices escalate further, we won’t have much relief.”
Taylor’s story isn’t uncommon. Across the country, the number of homes bought with cash has rapidly increased over the past few years. More than 30 percent of homes in California are bought with cash, twice the 15 percent the state has been averaging since the early '90s, according to real estate data firm DataQuick. In Las Vegas, more than half are bought with cash, while hundreds of miles away in Minneapolis, 25 percent of homes are bought with cash.
In Boston, Taylor estimated that about one-third of the homes on the city’s eastern edge are bought by cash buyers.
These folks are mostly investors -- but not just the monolithic, institutional investment investors that have been snapping up distressed properties and foreclosures over the past few years. There are also a slew of well-heeled individuals with extra cash to invest, and they believe the real estate market is the place to put it.
“They pull the money out of portfolios or they borrow it from Mom and Dad, or I know of an instance recently where they basically liquidated everything they had, paid cash on a $700,000 home, then they will go back and take out a mortgage on it and pay themselves back,” says Atlanta Realtor Bill Golden, an independent agent with RE/MAX Metro Atlanta Cityside.
In fact, many of the buyers paying cash don’t plan to actually keep all that cash in the house.
Tanya Marchiol, CEO of TEAM Investors, works to get individual investors on their feet. She says many are pulling money out of their IRAs to purchase homes. She encourages them to do this on smart investments, with one caveat: they turn around and get a mortgage, with a historically low interest rate, right afterward.
For these investors, who wind up with a mortgage anyway, the cash is really just being used as a bargaining tool—and it may be the best one there is.
“Cash is king in terms of bidding,” Golden says. “If I have three offers on my listing and two of them are for 80 percent financing and one is cash, the cash is going to win, even if it’s slightly less than the financed offers.”
To answer why, you have to look at the appraisal process. Price appraisals are common during the home selling process. They confirm that the home’s value is not substantially below the asking price. The step is necessary for buyers who are getting a mortgage—the bank won’t lend buyers $300,000 for a home worth only $250,000.
But the market is moving so quickly that the data that appraisers use to determine value -- particularly comparable home sale prices -- are months old. Home prices have typically increased so much in that time the appraisers’ data is out of date, so the appraised value comes back lower than the agreed-on sale price, Taylor said.
That typically kills the deal, unless, of course, you have an all-cash offer. Cash buyers aren’t subject to the will of lenders, so they can sacrifice the appraisal entirely.
The average homebuyer, particularly first-time buyers, who must finance their homes with mortgages, simply can’t match that.
“The only way you can compete is with price and other terms, making the offer as acceptable to the seller as possible in all other aspects, coming in with a good price, working with the time frame sellers want--anything they can do to give them an advantage,” Golden says. “When all things are equal, cash is going to win and there’s nothing they can do about that.”
Taylor’s buyers who lost out on four homes to all-cash buyers eventually put down offers on 15 homes before finally winning the bid, and buying their home with a mortgage.