Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
When an all-cash offer is not the best option.
The record-breaking Powerball this week had lots of people discussing what they would do with the potential winnings. Of course, “charity” was first and foremost, but in addition, most fantasies focused on buying or building a dream house with all that cash. Interestingly, all-cash offers were on the rise, and is something that has been on the mind of many active participants in the real estate marketplace of late.
Is the Trend Back?
The last few months of 2015 saw an increase once again in the ‘all-cash’ offers – a phenomenon that many thought was slowly tapering-off back to normal since the housing recovery. Interestingly, this time around, more of these buyers are individuals, and not the institutional investors who rushed into the housing market when it collapsed, trying to take advantage of the opportunities for a cheap rental or quick fix-and-flip investment.
A diverse group of affluent individuals, foreigners and retirees are boosting markets across the United States with these all-cash deals. These purchasers are helping make up for an alarming shortage of first-time buyers who are struggling to save for a down payment or qualify for a loan. “It’s the investor and the wealthy individual who’s keeping the housing market alive,” said Mark Zandi, chief economist at Moody’s Analytics. “The wealthy buyers in particular are fully engaged now. The stock market was up and times are good for them.”
For sellers and buyers alike, there are many obvious advantages to pursuing an all-cash purchase:
· Sellers will favor buyers who can pay all cash rather than the potential of dealing with a novice buyer just starting out.
· All-cash buyers might benefit from a reduced price due to speed and a streamlined process with no paperwork.
· Full ‘equity’ in the home means you can sell at any price level and not be concerned that you won’t walk away with proceeds.
· There is always the opportunity to refinance once the property is owned free and clear, although a competent mortgage adviser should be consulted before you close on the purchase transaction
How to Compete (Tips for Non-Powerball Winners Only)
For the independent average home buyer, an all-cash offer can take away good options for someone trying to get into a first home, or move-up buyers looking to purchase with traditional methods and financing. That said, there are opportunities for even the most novice home buyer to compete with an all cash offer if managed properly.
Go Beyond a Traditional “Pre-Approval”
Gives the seller confidence your financing will come through by working with a lender who is able to give you a firm mortgage commitment/approval subject to only the property appraisal. A competent lender can fully approved a buyer for max financing, leaving no question as to the prospect of getting a mortgage in an orderly and timely manner. Get all your personal paperwork and qualification out of the way and give the seller the confirmation they need to know it’s a non-issue.
With a standard purchase, there are many contingencies that a normal buyer would move forward with a home purchase. With the guidance of a competent and knowledgeable attorney, lender, or real estate professional, a home buyer can consider moving forward, removing some of the standard contingencies in a contract which would usually pique the interest of a seller.
A Title Contingency is one when a seller is responsible to provide a clear title with no outstanding liens or clouds (issues) against the property. If the seller has some skeletons in their closet with some old liens, judgements or violations that they aren’t in a position to resolve – a potential home buyer can utilize these insecurities (if fully understood) to gain the favor of the sellers who might not be able to resolve these issues in a timely manner. Again, a competent professional should be utilized to consider an option like this.
Increase the Downpayment
For the risk-averse buyers who aren’t looking to be overly aggressive with any type of creative offer, they can maintain their financing contingencies but put down a considerably larger downpayment. For a seller, or their attorney, seeing a 30 or 40 or 50 downpayment is just the assurance they need to know they are dealing with a competent and qualified buyer. And guess what, just because you say you are putting down 50% doesn’t mean that you actually have to. Contact me directly for details on that.
Best Offer Upfront
Typically, an all-cash buyer is motivated by a quick deal with a discounted price as a result of their “amazing” offer. Sometimes, much more important and appealing to a seller is “the bottom line” dollar in their pocket, as compared to the bottom fishing vultures offer. More often than not, depending on the circumstances of a seller, a solid offer with more money netted to the seller could prevail over a cheaper cash offer. Occasionally, an aggressive offer with a firm deadline for acceptance is appropriate in certain circumstances, putting the pressure on the seller to act quickly on the presented offer.
Accommodate the Seller
Know thy sellers! Find out what’s motivating the seller. Are they in a hurry to move? Are they interested in a long-term contract and late closing? Are they flexible with closing conditions? Do they have a place to go? Do they need a lease-back option? More often than not, a buyer using an all-cash offer is looking to move quickly and time is of the essence to get to the closing table so they can move or start demolition. Along those lines, perhaps the seller is very emotionally attached to their home, and knowing that a buyer with a small family will be moving in and maintaining or preserving the home as they had it might be more appealing to them than dealing with a disconnected fix-and-flip buyer.
Long-term cash buyers can be a sign of concern for the housing market, and something everyone should pay close attention to as a buyer or seller. With the stock market in the US and abroad having a terrible bout thus far in 2016, some analysts are starting to strongly predict a market sell-off and the competition from all-cash buyers might start dwindling. Until that time, however, all-cash buyers are a source of serious competition to a traditional buyer and knowing how to compete against those offers are critical.
I can’t tell you home many times I have had a client who was up against an all-cash offer, and with the proper guidance from myself and other competent real estate professionals, their offer was accepted in lieu of the all-cash offer. The options are numerous and with an experienced real estate and financing professional your interest can be preserved and your offer can be heard.
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