I know that this statement may seem a little counterintuitive, but I feel as though there is a misunderstanding in the residential housing market that needs to be addressed. As buyers, we have been conditioned to believe that cash is king and by offering a seller all cash, we will secure a discount. We have also been conditioned to assume that most current sellers are distressed in some form or another and are susceptible to low offers. At least, this is what is pounded into our heads on a daily basis by our sensationalized news sources. Finally, we have been instructed to act as vultures in failing economic times, we are told to be opportunistic and to pillage at other’s peril. Their loss is your gain, etc. What we are not told is the complete truth.
Cash Buyers Can Become Court Jesters
There’s a certain warm feeling that accompanies holding a fist full of cash, I cannot image what it must feel like to wake up to a bank account balance followed by eight or nine zeros. Few of us ever will. Another interesting behavior that accompanies this warm feeling is one’s unwillingness to part with said cash. It has been compiled via excruciatingly hard work, diligent saving and through sheer, unimaginable willpower. It is understandable that one would prefer to exchange ever smaller portions of this stockpile for goods and services. I certainly would in order to ensure that I still woke up every morning with my cherished warm, fuzzy bank account balance feeling.
Unfortunately, the vast majority of residential property sellers couldn’t care less about your warm, fuzzy feelings. This is partially due to the fact that the vast majority of properties in the US housing market are financed and one virtually expects a replacement buyer to be financing their purchase as well. In other words, the system expectation is set. According to NAR, approximately 91% of all properties in the United States are financed in some way. Of course, the percentage of the asset financed varies across the board, but the percentage becomes a moot point as an appraisal is typically still required by the lending institution. Sellers are ingrained, entrenched even, by the belief and understanding that their property is still marketable and sellable despite the involvement of a third party who happens to be a lending institution that agrees to your property’s value.
Additionally, all reasonable sellers expect their property to be subjected to battery of litmus tests, including a professional appraisal and inspection prior to the completion of a sale. The expectation exists that receiving highest and best dollar still includes running this gauntlet. So, insert a cash buyer at this point. Right here at the intersection of two equal and opposite desires with sellers holding onto optimism and cash buyers embracing vulturism. Now add vocal advocates to each side. You can quickly see where the divide that can be created and where the belief that a new buyer who is utilizing financing could bridge that chasm.
The Perspective from Each Side
Cash buyers and their agents are attuned to the fact that they are in a good position. They believe that their financial prowess will lead to securing a lower price by offering a seller the assurance that they have the ability to close on the property and quickly. Cash buyers are sure of themselves and tend to make very educated and considered decisions, as it pertains to their own well being.
Sellers are striving to sell their property for as much money as possible. They typically love their property and believe it to be in better condition than it really is. Rose colored glassed are adorned and all of a sudden, their 15 year old couch has become a potential collectable and is describes as “quirky modern” or “throwback chic”. This is the same couch that they themselves have complained about for the last 5 years. Most have also given themselves adequate time to sell their property, including time to run the inspection, appraisal and paperwork gauntlet.
The Reality of Cash Buyers Versus Financing
With few exceptions, a cash buyer is no better off than a buyer who has attained a mortgage pre-approval. From a seller’s perspective, a lending institution’s money spends the same way your hard earned cash spends. In reality, this person has become a cash buyer, but with someone else’s money. The only hurdle to attain the lending institution’s money from a seller’s perspective is their property’s value must be favorably judged by a third party appraiser within a certain period of time. In my State, this time is typically not more than 30 days and if a seller has educated themselves as to the values that surround the property in question, the risk of not appraising for the contract value is very low. Remember, sellers know that lending institutions want to make loans, this is how they earn incremental income and make their living.
Current Exceptions to the Rule
If you have a very unique property that has no peer comparatives, a cash buyer may become necessary and have the upper hand since an appraisal will most likely not vet out your property’s value.
If you have a property type that is not currently financeable through conventional means. Example: owning a condo in a development that is less than 30% owned or under contract, the HOA does not have adequate reserves and no grant money is available to potential purchasers. Perhaps the development may also be in receivership or REO.
Raw land or improved lots unless the local bank is also granting you a concurrent construction loan and permanent financing.
The Real Estate Conclusion
Regardless of whether you are a cash buyer or a well qualified financed buyer, the price attained is determined by the seller’s motivation. If the seller is distressed by their circumstance, the negotiated price will be more in the buyer’s favor. This distress takes many forms: financial, time, divorce, relocation, death, bank regulators, etc. However, make no mistake, inventory levels are not themselves a distress. If a seller has no reason to sell other than to test the market and there happens to be 10 times the average inventory on the market, you will not be negotiating a price you feel is either fair or favorable 99 times out of 100.
So go forth, you cherished few, and pillage at other’s peril. Only, don’t get your feelings hurt should a seller rebuff your advances. Regroup, and attack another castle!
Written by Grant Hammond, an award winning real estate broker in Nashville, TN.