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Competing With Cash Buyers in a Tight Housing Market

In areas dominated by cash buyers, homebuyers who plan to get a mortgage need to go the extra mile

As the housing recovery continues in many parts of the country and mortgage rates inch upward, homebuyers are seeing their window of opportunity narrowing if they want to snag a deal.

In competitive real estate markets such as Boston, New York City and San Francisco, homebuyers not only have to contend with high prices but also competition from all-cash buyers. In Massachusetts, for instance, 40 percent of condo sales and a quarter of single-family home sales in April were purchased without a mortgage, according to the Warren Group, which compiles data on New England's real estate market.

Some of these cash buyers are baby boomers who've managed to build up equity through previous real estate purchases. Others are investors, many of them flush with money from China and other ventures overseas. Riccardo Ravasini of Rava Realty, who handles properties in Florida and New York, says Manhattan in particular sees a lot of cash buyers, since it's a "special market that appeals to the entire world."

Some sellers like all-cash offers because they remove some of the barriers in mortgage financing, allowing the deal to close more quickly. Still, cash transactions don't always go smoothly. "Just because somebody shows me a bank statement that they have all the cash doesn't necessarily mean they're going to have all the cash when it comes time to close," says Brian Horan, broker and owner at Kilbourne Properties in Southern California, explaining that the money could be illiquid, earmarked for other things or the bank statement could be forged.

For homebuyers who can't afford to pay entirely in cash, here are some strategies for staying competitive.

1. Get preapproved. Getting prequalified is the first step in the mortgage process. However, it doesn't involve an in-depth analysis of your credit, so prequalification doesn't mean much to real estate agents or sellers. Most will want you to take that next step and actually get preapproved for a mortgage.

Bruce Ailion, an associate broker with RE/MAX Greater Atlanta, says he only works with buyers who have been preapproved by a lender he knows and trusts. "Unless you are looking at $500,000-plus homes, a buyer will be competing with all-cash buyers," he explains. "The buyer is at a definite competitive disadvantage, and when it comes to earning a fee for my work, I, too, am at a competitive disadvantage working with a buyer that cannot successfully compete and then complete a transaction."

In addition to a preapproval, supporting financial documents like a credit report can help make your case. Not all mortgage lenders are created equal, so try to find one who knows your specific market and can help you close quickly to keep the seller (and the seller's agent) happy.

2. Consider properties that might be overpriced. All-cash buyers often expect to score a deal, so they'll look for properties that are priced to move. Ravasini suggests that buyers who plan to get a mortgage look at properties that seem priced a little high. "These listings receive less attention from the market and cash buyers," he explains. Once you find a property you like, you might be able to negotiate the price. However, if the appraisal comes in too low, the deal could fall through.

3. Make a competitive bid. With tight inventory and multiple offers on properties in many parts of the country, low-ball offers might not get a second look. "With my serious buyers, I try to get them on the same page that we've got to be aggressive," Horan says. "A lot of my buyers, the ones that are actually landing the properties, are going over the asking price."

While most people make offers in increments of zero and five thousands, Horan goes one increment over by a thousand in his offers. For instance, offering $526,000 instead of $525,000. "That type of thing doesn't make much difference on the payments but can edge somebody else out," he says.

4. Send a love letter. Investors typically buy real estate to renovate and resell or rent out for income. But if the seller feels emotionally invested in the home, he or she may prefer the idea of another family making memories there. "If it's not a lender-owned property, we write a letter complimenting them and the property and I guide [buyers] through that process and the letter," Horan says. He might also enclose a cute family photo, and if possible, a photo taken in front of the property to tug at the seller's heartstrings.

5. Free up additional cash. A down payment of 20 percent or more allows buyers to avoid private mortgage insurance and qualify for a better interest rate. Freeing up even more cash could help seal the deal. Cheryl Farley, a San Jose-based financial adviser for Bank of the West, has worked with homebuyers who used an investment line of credit in lieu of a mortgage to secure a new home. "It gave them the temporary ability to use a cash bid and then turn around and put a delayed mortgage behind that," she says.

Farley points out that even buyers who can afford to pay cash may choose to get a mortgage so they qualify for the tax deduction and take advantage of low interest rates while investing their money elsewhere.




Real estate news for the month of June centered around higher interest rates after the  Federal Reserve Chairman, Ben Bernanke,  announced that the Fed would be slowing down the mortgage-and-bond buying purchases under the program known as QE3 by the end of the year. He further stated that the Fed planned to end all purchases as early as mid-2015. The reason for this announcement was because the Fed now felt that the economy was growing at a strong pace, unemployment levels have dropped and he expected them to continue to drop, so further stimulus would no longer be needed. This program helped bring rates to the lowest level seen in decades. After hitting this year’s low of 1.61% on  May 1, the 10-year note spiked soaring to a 22-month peak of 2.667% Wednesday,  its highest level since August 2011,  before settling  at 2.52% today.


Mortgage interest rates were up sharply both for the week and month. A 30-year-fixed conforming mortgage is now at 4.38% up from 4.24% last week and climbing steadily from 3.75% a month ago. The rate was 3.57% on May 1, so rates are up almost a full percent in 60 days.  A 15-year-fixed mortgage rate is now up to 3.46% up from 3.31% last week and up over half a point from 2.90% last month. Rates on high balance conforming $417,000 - $625,500 ( LA and Orange county and $598,000 for Ventura county) are about 1/8% higher than conforming and jumbo loans are about ½% higher. This week Federal Reserve officials continued efforts to curb a rise in long-term interest rates, hoping to calm fears raised by comments made by Chairman Ben Bernanke that triggered turmoil in global financial markets. Officials say an increase in the Fed’s benchmark interest rate is still a way off and bond purchases could also be prolonged if the economic performance doesn’t measure up to forecasts.


Reports on home prices continue to beat expectations. The California Association of Realtors reported that the median housing price in California increased 31.9% in May, the largest year-over-year increase in 33 years. Inventory levels remain low while the number of sales in May continue to rise. In May, there was a 2.6 month supply listings at the current sales rate, down from 3.6 % a year ago. A six-to-seven-month inventory represents a balanced market.  DataQuick reported that an estimated 42,293 new and resale houses and condos sold statewide last month. That was up 8.3 % from 39,051 in April, and up 1.2 %  from 41,790 sales in May 2012. The sales count was the second highest May ever reported behind only May 2006, where 54,099 homes were sold. We are seeing the strong market continue to get stronger and it seems rising interest rates are making a red hot market even hotter as buyers rush to make deals before interest rates get too high. 


2013 March Economic Update

The big news this week was that no deal was reached to avert the sequester spending cuts. Despite warnings of "doom and gloom" the stock market closed up for the week! Obviously, investors don't see these cuts as any real risk to the economy. Even health care was up and defense did not see any real drops in their stock prices. These cuts are such a small percentage of the budget that they probably won't have any real impact. In most cases,spending in these areas cut are pretty much rolled back a year ago levels. The argument was that targeted cuts would have been better than across the board cuts. Unfortunately, there was no agreement on targeted cuts or limiting deductions to avoid cuts. The good news is that between these cuts, the end of year tax increase deal, the 2011 cuts, and winding down the wars the U. S. is expected to save over 4 trillion dollars over the next 10 years. The growing economy should make tax revenues higher as well.  We should expect to see an upgrade in the United States credit rating soon. Bond yields dropped this week as well, easing interest rates! So for us, it's more of the same. Low rates, rising prices, multiple offers and low inventory. We are beginning to see more homes priced too high and not selling. That is a sign that we might see the market normalize within a year.
The 30-year mortgage rate slightly fell this week to 3.51 % from 3.56% last week, dropping near the record 3.31% low reached in November. Last year this time, the 30-year FRM averaged 3.95%. The 15-year rate slipped to 2.76% from 2.77% last week. The record low is 2.63%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.61 percent this week with an average 0.6 point, down from last week when it averaged 2.64 percent. A year ago, the 5-year ARM averaged 2.83 percent. 1-year Treasury-indexed ARM averaged 2.64 percent this week with an average 0.4 point, down from last week when it averaged 2.65 percent. At this time last year, the 1-year ARM averaged 2.72 percent. These low rates are continuing to help the drive housing market up, while mortgage delinquencies are decreasing and home prices are steadily rising as demand surges. 



Make sense of this!

  • December’s prices were up 27 percent from a revised $288,950 recorded in December 2011, marking the tenth consecutive month of annual price increases and the sixth consecutive month of double-digit annual gains.
  • The substantial increase in price was due in large part to a significant increase of higher-priced properties, while inventory constraints continued to constrict sales of lower-priced homes.  Price increases are not expected to continue at a high pace into 2013.
  • California’s housing inventory was further constrained in December, with the Unsold Inventory Index for existing, single-family detached homes dropping to 2.6 months (Sherman Oaks is 1.5 months), down from 3.1 months in November and a revised 4.3 months in December 2011.  The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate.  A six- to seven-month supply is considered normal.
  • The median number of days it took to sell a single-family home edged up to 38.1 days in December 2012 from 37.5 days in November but was down from 58.7 days for the same period a year ago. 

Inventory shortage drives down California pending home sales in December

Seasonal factors, combined with low housing inventory, particularly a lack of real estate-owned homes (REOs), drove California pending home sales lower in December, C.A.R. recently reported.  However, the share of distressed properties increased in December, as lenders pushed to close short sales and move them off their balance sheets. 

C.A.R.’s Pending Home Sales Index (PHSI) fell 20.5 percent from a revised 103.5 in November to 82.3 in December, based on signed contracts.  Pending sales were down 6.5 percent from the 88.1 index recorded in December 2011.  Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.
The share of equity sales – or non-distressed property sales – compared with total sales decreased for the first time in 11 months.  The share of equity sales in December decreased to 63.6 percent, down from 64.9 percent in November.  Equity sales were still higher than December 2011’s share of 48.4 percent.
After falling steadily for the past several months, the combined share of all distressed property sales rose to 36.4 percent in December, up from 35.1 percent in November but down from 51.6 percent in December 2011.