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Real Estate Matters: Cash offers have advantage for sellers in housing market

Sellers find certainty, timing when buyer pays cash over offers that depend on financing

As a company that is at the forefront of marketing to the Mandarin-speaking community, we love the high level of emphasis that many sellers and their real-estate agents place on "cash offers."

Because many foreign investors and recent immigrants lack the requisite credit and income history in the U.S. to qualify for many banks' mortgage programs, they often pay in cash.

Virtually all sellers see this as an advantage -- and it is -- but query, what is the appropriate premium to place on a cash offer?

In practice, many real-estate agents and their clients try to utilize rigid rules to analyze the relative value of a cash offer over an offer that needs financing. For example, one agent confidently explained that "offers that require financing should be discounted by 1% when they are compared to cash offers."

It is not this simple. Sellers should analyze the two key advantages to cash offers, certainty and timing, in light of their personal circumstances and the particular facts surrounding the transaction and the buyer.

Certainty: One of the biggest advantages to a cash offer is that it is more secure than a transaction that needs financing. There is no risk that the bank will deny the buyer's loan. There are no restrictions imposed by a lending institution or government guarantor/agency. No need for an appraisal or concern that a low appraisal will derail the transaction.

While some offers that require financing should be discarded or highly discounted due to risk, other financed offers may include very little risk at all. In fact, in today's historically low-rate environment, many buyers that could pay cash would prefer to finance a portion of the purchase to secure the low-cost funds or because they want to deduct the interest on their personal taxes.

Thus, the real question is: How much risk does the financed offer entail? The most telling answer to this question is provided by the buyers themselves. If they feel very secure about their ability to procure the requisite financing they will have, or should have, written the offer without a financing contingency. On the other hand, if they think there is material risk that they will have trouble with the financing, they will have, or should have, written the offer with a contingency that gives them the right to get their deposit back if they can't get the financing.

Beyond the inclusion of a financing contingency, sellers should consider the amount of the down payment, the size of the loan and the quality of the pre-approval letter included with the offer. Also, sellers should consider any transaction-specific factors that commonly raise problems with banks, such as long seller rent backs, pending litigation or buyers with short U.S. credit histories.

Timing: Cash buyers can close as fast as two days and they routinely close in seven to 10 days, which is often seen as a benefit to the sellers.

Buyers that require financing, on the other hand, generally need between 21 and 30 days to close. While this may make a difference to some sellers, many others would be willing to wait the extra two to three weeks if the non-cash offer were preferable for other reasons.

Generally, the additional carrying costs involved with the added three weeks are fairly de minimis given the scope of the deal, and many buyers are willing to cover these additional costs when asked.

When a home is currently occupied by the seller, there may be little if any advantage to a seven-day close in light of the seller's need to pack and move. While this is often handled by giving the seller a period of time after closing as a free rent-back, the transaction could be structured with a more traditional escrow period.

Tax consideration: In an effort to make their offer more appealing, some buyers purchase a home with cash and then borrow against the property to obtain funds at a low rate and with the hopes of deducting the interest on their personal residence. It is important to note that the IRS only permits homeowners to deduct interest on the first $1.1 million (assuming no home-equity debt) of "acquisition indebtedness," which is defined only to include loans put on the property within 90 days of the purchase.

Deal structuring: When buyers and their agents are faced with the unenviable challenge of competing against an all-cash offer, they should look for ways to assuage the sellers' concerns about security and timing. There are many deal-structuring approaches that can render a financed offer as strong as or stronger than a cash-offer. However, these techniques require the buyer to assume added risk. But then again, the buyer is in the best position to determine just how much risk their offer truly entails.

Michael Repka, managing broker and general counsel for DeLeon Realty, Palo Alto, formerly practiced real estate and tax law in Palo Alto. He serves on the board of directors of the California Association of Realtors. He can be reached at MichaelR@DeLeonRealty.com.

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Comments

1 person likes this
Posted by Mike
a resident of Oak Hill
on Apr 6, 2013 at 10:27 pm

Been a Bay Area resident for 37 years and US citizen. We are trying to buy a house in Pleasanton with 30% down, but kept getting rejected due to foreign cash coming in. Government should give their citizens priority over foreigners. Going back this weekend to look at more homes again and expected to be beat out by another cash offer. This is unbelievable as some buyers have never even looked at the house, but yet bought it.

I'm crossing my fingers that someone accepts our offer. We love the town and would love our kids grow up here.


1 person likes this
Posted by anony
a resident of Another Pleasanton neighborhood
on Apr 6, 2013 at 10:50 pm

As a nation, we should be more concerned about this. It is not just foreign buyers from China looking for a safe place to park their cash, but it is also deep pockets (i.e., investors) who realize that most other buyers cannot compete with their all-cash, over-the-asking-price offer.

So they will drive up the price of housing beyond what most people--except the wealthy--can afford, then proceed to sell it to another investor or desperate person who ends up paying more than they can afford for the house. Or they end up renting it out to people for more than they can afford, but who have no choice but to pay the exorbitant rent.

I am ALL FOR some government intervention in this real estate market. There should be limits to non-owner-occupant foreign buyers as well as how many properties investors can buy.

Btw, I am not a disgruntled home buyer shut out of the market (I currently own a home in Pleasanton). Just a concerned citizen who prefers to live in a stable community with fellow home owners interested in their neighbors and neighborhoods.



1 person likes this
Posted by Sam
a resident of Oak Hill
on Apr 7, 2013 at 12:04 am

As I wrote in the other thread concerning this topic, I don't think that investors are a big influence in the Pleasanton market since the price-to-rent ratio for most Pleasanton houses is not very favorable for investors. Investors in the Bay Area tend to focus on the lower range (sub-$400K), and there aren't a lot of Pleasanton houses that fall into that category.

House purchases by foreign nationals make up about 10% of the overall Bay Area housing market. Not negligible but not huge either. Also, although people seem to be fixated on the image of wealthy Chinese buyers as the foreigners buying up houses here,, more Bay Area houses are bought by Canadian and British buyers. Chinese are third, followed by French, German, Indian, Taiwanese, and Japanese buyers. (East Bay Area real estate story: Web Link )


1 person likes this
Posted by john
a resident of Another Pleasanton neighborhood
on Apr 7, 2013 at 12:05 am

This is exactly the kind of thing that feeds asset bubbles, and is exacerbated by the behavior of the derivatives speculators on Wall Street. Isn't it strange that we have government and quasi-government organizations like FHA and Fannie Mae whose mission is to make home-ownership more available, yet the government does nothing to stop foreign investors from creating housing bubbles?


2 people like this
Posted by member
a resident of Another Pleasanton neighborhood
on Apr 7, 2013 at 5:14 am

No local can find housing here, only China money, cash, speaks. Of course US citizens should have a priority, but then who wants the government to interfere for us and the realtors just keep smiling. Try to buy property in any other country! We never learn.


1 person likes this
Posted by Realtor x
a resident of another community
on Apr 8, 2013 at 8:41 am

I'm a Realtor and I believe the main reason for the recent run-up on the price is due to lack of inventory. The foreclosure market has dried up as most lenders do a lot more to help home owners stay in their house. Also, the short sale market has reduced dramatically as well. During the past few years, foreclosures and short sales made up a huge percentage of the homes sold. Now that these are reduced to minimal, but yet demand for homes is high, resulting in the run-up that you see.

Another factor is the low interest rate, but lack of inventory is the main issue.


1 person likes this
Posted by snake-oil-salespeople
a resident of Another Pleasanton neighborhood
on Apr 8, 2013 at 9:13 am

Realtors that encourage and represent all cash buyers from out of the country have no redeeming value to society [removed] along with the politicians that support or do nothing about their activities. It is obvious that despite one of the worst economic downturns in our country's history, one thing that did not change is corporate and individual greed and government complicity. We should load up these snakes in military transport planes and drop them on our enemies instead of wasting precious resources making bombs.


1 person likes this
Posted by Victim of real-estate madness
a resident of Del Prado
on Apr 8, 2013 at 2:47 pm

It is sickening that the real estate market is being distorted like this, in the wake of the damage mortgage fraud has so recently caused. This is NOT just driven by foreign nationals trying to buy a home for themselves or their families. This is real estate played like a stock market.
From the Contra Costa Times: "In February, 1,044 houses and condos -- 28 percent of the sales -- in the counties of Santa Clara, San Mateo, Alameda and Contra Costa were bought by absentee buyers. That is the highest percentage since DataQuick began tracking them in 2000. In Contra Costa County, absentee buyers were 35 percent of the sales."
This is EXACTLY what drove the lending fraud that was exposed in 2008 - investors desperate for better returns on their "investments", and mortgage lenders eager to make money on the deal.
Real estate agent Melissa Haugh in the same article discussing a fixer-upper in San Jose: "We ended with 69 offers, all but five for cash," she said. "It's mostly foreign investors. I've never seen this much cash, ever." 69 out of 74 offers for cash. Try competing with that.
I'm sure there are buyers from other countries trying to move here and buy a home without ever living or working here. These buyers are not the majority of those cash offers. Investors both in the US and from all over the world are willing to put up cash to be the middlemen in the invest-in-real-estate world. The are driving homeownership out of the hands of people who DO live and work here. It's profit-chasing by exploiting the only investment most of us will ever be able to make. Holding the bar higher on what people NEED: a place to live, so that they can take a slice out of the middle of that purchase. Real Estate has become a diseased market, played by people gambling away America's financial stability.


2 people like this
Posted by Mortgage person
a resident of Another Pleasanton neighborhood
on Apr 8, 2013 at 6:59 pm

As a loan officer it's simply frustrating to see how hedgefunds and foreign monies have purchased up not only the this area but areas out past Lodi and then turned around and sold for 50K above what they purchased it for just 60 days prior with out as much as a paint improvement. Sure Banks have guides to protect Buyers as well their investment, but the "cash" investors have found loop holes. It leaves FTHB out in the cold or commuting 2 hours to work. I don't understand how we allow foreign funds to purchase us out of our own neighborhoods...Then again Hedgefunds are getting into the rental business and adding to problem. GREED at it's best.


1 person likes this
Posted by anony
a resident of Another Pleasanton neighborhood
on Apr 8, 2013 at 7:10 pm

The last commenter was spot on. Just google "hedge funds buy up houses" and be prepared to be angered--and disgusted.


1 person likes this
Posted by Positive Story
a resident of Another Pleasanton neighborhood
on Apr 9, 2013 at 8:15 am

I recently got back in the real estate market after being divorced for a while and saving up for the down payment. I really wanted to live in Pleasanton due to the school district. It was very frustrating as I lost out on about 4 properties. But finally my 5th offer stuck. Now we live in a nice townhome in Pleasanton. Oh, I am born and raised here in the US. Keep up the faith for those of you still trying to buy in Ptown!


1 person likes this
Posted by Realtor
a resident of Downtown
on Apr 9, 2013 at 9:14 am

In response to the comments above- Realtors are very frustrated with this market as well. Most who work full time are writing offer after offer for our clients. We all wish for a more even market.
I tell my sellers when reviewing offers:
1. Look for strong financing- pre-approved and proof of funds- many lenders will approve a buyer up to the loan being underwritten so these buyers can compete with the cash buyers.
2. Contingencies- keep them at a minimum.
3. The desire to close escrow- how much does this buyer want the home?
If you are looking for a home, don't give up and it is important to stay positive!!


1 person likes this
Posted by Incredulous
a resident of Walnut Grove Elementary School
on Apr 10, 2013 at 11:12 am

To me, the response posted by "Realtor" is a non-response. Just put up more money, give more to sellers on the deal and don't think about how you are the loser here. Just eat it and smile!
What better advice from the person making money on the transaction. Not an informed word about the issue being discussed here: why there are so many cashs offers, absentee buyers, and lack of concern about another real estate fiasco.


1 person likes this
Posted by Recent Buyer
a resident of Pleasanton Meadows
on Jul 4, 2013 at 4:39 am

We just bought a house in Pleasanton with the first offer we made after a brief search, not all-cash, although the downpayment was significant. It's not impossible.

Although we ended up competing against many bids for our house, our impression from actively watching the housing market here was that quite a few houses did not have more than one offer. These tended to be homes that were overpriced at listing, or where a nearby, slightly nicer home was also on the market.

Just offer below asking on the overpriced homes. (Of course, not all sellers are reasonable enough to lower their expectations ...) And, when there is a better home a block away, see it for what it is: just an accident of timing that shouldn't make you like the house less.

Good luck to everyone out there looking!


Posted by Name hidden
a resident of Ridgeview Commons

on Jun 3, 2017 at 6:15 pm

Due to repeated violations of our Terms of Use, comments from this poster are automatically removed. Why?


Sorry, but further commenting on this topic has been closed.

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