Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Are All-Cash Offers Edging Out First-Time Homeowners?

Written by Paul Esajian

The prospect of an all-cash transaction is one in which homeowners welcome with open arms. It may serve as the difference between an acceptable offer and rejection. All-cash offers may even facilitate the sale of a property that was not originally on the market. For these reasons, and several more, the acquisition of hard money transcends the lengthy process that typically accompanies a traditional sale.

Investors with the capability to provide immediate capital are therefore at an advantage over the typical homebuyer. By comparison, the saturation of our market with all-cash offers has made it increasingly difficult for those without the necessary means to compete. Potential homeowners, unable to make an all-cash offer, are being squeezed out.

According to the National Association of Realtor’s (NAR’s) May 2013 Confidence Report, all-cash offers account for 33 percent of home sales. International purchases account for the greatest amount of all-cash offers in the United States. Furthermore, 87 percent of the Realtors involved in the report acknowledge that they are witnessing a continuous trend of increasing home prices. Homebuyers, particularly those in the market for the first time, are already battling low inventory and rising home prices. The added pressure of all-cash offers is therefore an unwelcome one.

According to William Delwiche, an investment strategist at Baird Research & Insights, cash transactions have been supported by investor pools acquiring real estate, not by individuals looking to live in the home. “These are investment pools paying cash for houses to hopefully get returns,” he says. “It’s not necessarily a trend among individual homeowners because most people going to buy houses don’t have that kind of cash sitting around.”

According to Patrick Newport, an economist with HIS Global Insights, sellers prefer all-cash offers to those of the traditional approach. Having the money up front removes the complications typically associated with selling a home. “If you own a home and are selling yourself, it’s probably easier if someone pays you cash — it cuts out the messiness and having the homebuyer get approved for a loan.”

Continuation of this recent trend will likely reinforce the momentum the housing sector is currently exhibiting. However, it will have a resounding impact on first-time homeowners. Karen Dynan, vice president and co-director of economic studies at the Brookings Institute, says “it just makes the housing market less affordable. It’s good for the overall economy, but not for every person in the economy.”

Concurring with Dynan, Delwiche acknowledges that all-cash offers may prevent more people from entering the market. “Home prices go up and it affects housing affordability,” Delwiche says. “You can’t have first-time homeowners who are seeds for long-term growth, because they are then crowded out of the market. So short term it’s something of a positive, but is a headwind for first-time homeowners.”

While first-time homeowners are at a significant disadvantage, it is hard to argue with the prospect of all-cash offers. Those using cash have a greater negotiating power than those requiring a loan. Sellers, recognizing the increased ease of sale, are most likely going to chose the suitor providing cash and are often willing to reduce the house’s price on their behalf.

Transactions consisting of nothing but cash carry a much lower cost. Mortgage rates alone can serve to double or triple the cost of a property. Furthermore, closing costs are significantly lowered when purchases are made with cash. Aside from saving money, all-cash offers save buyers valuable time. There is no need to locate the best lender and significantly fewer documents to sign.  So, while it may be difficult, first-time homebuyers are advised to take part in this trend.  The following tips may make the prospect of an all-cash purchase a little easier:

  • Set aside unexpected monetary gains, such as work bonuses or inheritances.
  • To help safeguard money and earn interest on it, lock it into a long-term CD at the bank.
  • Once you have the cash in-hand, look for a house you can afford without borrowing extra money.
  • Consider moving to a less populated area, further from a big city, where home prices are likely to be lower.