Taking a cash offer is a sexy option but no guarantee to get past the home inspection. The best buyers work with the best agents, and another variable worth considering when selecting the winner.
Almost 27 percent of San Diego County home sales were in cash in the third quarter — the highest in seven years. Attom Data Solutions said cash purchases, instead of loans, were up from 15.4 percent at the same time last year.
Sellers typically prefer cash buyers because it guarantees money for the home quickly, whereas mortgages can be delayed — or fall through — for a variety of reasons. San Diego has seen an increase in cash offers before, said Attom records going back to 2000. The real estate data provider said 36.2 percent of homes were purchased with cash in the first quarter of 2013 as the region came out of the Great Recession. At the time, many loan programs were still suspended from the housing crash and that made cash sales more of a necessity. The last highest level for cash sales was in the third quarter of 2014, with 27.2 percent.
The difference now is potential buyers face increased competition for a limited number of homes for sale and are trying to make the best offer possible, said Raylene Brundage, a Windermere agent who sells in several North County communities. “If it’s not contingent on a loan, there is less that can go wrong,” she said.
Brundage said sellers often go for cash sales over other loan types designed for first-time buyers and the military. Those types of loans require appraisals and inspections, making it possible a transaction could be halted. Cash sales not only mean money flows quickly into bank accounts but inspections, which are needed on loans, are often waived. A deal with a mortgage could take a month or longer to complete.
Brundage said she worked with two millennial couples this year who borrowed money from parents so they could make cash offers. Both were successful in getting homes. The majority of cash sales are coming from typical homebuyers, not investors.
Attom said 7.9 percent of the San Diego County sales in the third quarter came from institutional investors, which was lower than much of the nation.
In Atlanta and Phoenix, investors are making up 19.5 percent of sales; in Charlotte, 19.3 percent; in Jacksonville, Fla., 19.1 percent; and Tucson, Ariz., 18.4 percent. Parts of the South and Midwest have some of the smallest interest from institutional investors. In Madison, Wis., investors made up 2.3 percent of sales.
Cash sales can come from buyers who get loans from family, as well as institutions that have cash reserves to make a purchase easily. Without those options, first-time homebuyers, active military and veterans could be at a disadvantage.
FHA loans (for first-time buyers) require a minimum of 3.5 percent down and VA Loans, guaranteed by the U.S. Department of Veterans Affairs, typically do not require a down payment. It can be used by veterans and active service members. The VA says roughly 90 percent of its loans are made without a down payment.
With both loan types, buyers need to get an appraisal of the property from a lender. If a bank, or whoever is issuing the loan, appraises the property at a lower price, it means a deal could fall through. That isn’t happening much these days, says Brundage. However, it could still be in the mind of sellers who would want to go with a cash sale to play it safe.
Buyers using a typical, 30-year, fixed-rate mortgage who put 20 percent down have more opportunities to make their offer attractive. In addition to less strict appraisals, they can wave contingencies — whereas FHA and VA loans need termite clearance and other inspections. Still, even large loans for luxury properties, called jumbo mortgages, are often not as appealing to sellers as cash.
Another advantage of a cash sale is you don’t need a credit check, said Mark Goldman, a real estate analyst with C2 Financial Corp. It may seem like a minor factor, he said, but sellers are given access to credit reports of potential buyers and may feel less thrilled about a transaction if they have a low score.
“Cash sales just eliminate a lot of uncertainty for the seller,” he said.
It isn’t always a guarantee that sellers will take cash. Brundage said she had an active-duty buyer, using a VA loan, get a single-family home in Escondido a few years ago over other offers because the seller wanted to support the military. Jan Ryan, a RE/MAX agent based in Ramona, said she recommends her sellers avoid cash offers because those buyers tend to be more demanding with repairs and are less enthusiastic about living there than a first-time buyer.
Goldman said a lot of institutional investors may be pulling away from the market because many have been overpaying for homes. Zillow’s homebuying program, Zillow Offers, was suspended in November as the company wrote down losses of more than a half-billion dollars on the value of its remaining homes, said The Wall Street Journal .
“They are getting their clocks cleaned a bit,” Goldman said. “A lot of those guys, like Zillow, were paying too much for properties.”Link to UT article