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Why Are Cash Real Estate Deals on the Rise?

Why Are Cash Real Estate Deals on the Rise?

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By Elaine VonCannon, ABR, SRES, Associate Broker, Notary, Team Leader, Property Manager, Award Winning Agent

This is an ideal real estate market for cash buyers and according to CNN Money, cash sales accounted for 43% of the national real estate market in 2014.  This is nearly half of all transactions. What has caused an increase in paying for a property in cash?  Several factors contribute, including a tough mortgage lending market.  There are only a limited number of qualified buyers who have not suffered a dent in their credit, a foreclosure or short sale of property in the last five years.  Banks and mortgage brokers are still quite strict with lending requirements.   With Baby Boomers’ retirement looming or imminent, many have the means - and find it easier to pay with cash, rather than relying upon a mortgage lender. 

In some markets, there are inventory shortages, and cash buyers want to go to the head of the line. Often they do – because the real estate purchase is simplified and the closing time may be shortened if the buyer is able to pay in cash.  

Who is the Cash Real Estate Buyer?

There are many different personas capable of paying cash for a home purchase, and there are foreign buyers influencing cash purchase figures.  The reality is that cash buying is on the advance in many states, including Virginia, where the brokerage I represent, Coldwell Banker Traditions says that cash buyers account for 33% of all sales in 2014 as of May 2014. 

Retirees Pay Cash for Homes

The retired sector of the economy now has decades of equity in homes and they are once again on the move. As the real estate market perks up in various U.S. markets, retirees are considering moving out of state to lower expenses and downsizing or embracing retirement community living lifestyles.  Living in the Williamsburg, Virginia real estate market has always been popular with retirees, especially those who love golf, history and plenty of outdoor activities.  

Cash Buyers Looking for Deals

John Starke is a Registered Principal at Financial West Group, based in West Lake Village, California. He said, “I purchased a foreclosure in Virginia that was in excellent condition, so I picked it up.  I saved at least 35% by paying cash for the home in the fall of 2013. The property is in Mechanicsville, Virginia. It’s just 10 miles from Richmond and sits on a half acre.  It’s a 3 bedroom 2 bathroom with an enclosed backyard, to keep my dogs happy,” added Starke. 

Jeff Hurd, Loan Originator at Fidelity Bank Mortgage in Newport News says, “As a lender, I don’t see the cash buy of owner occupied homes. I think the number of people has increased, simply because a lot of people are meeting more resistance to getting a mortgage in the first place.  It’s more of a ‘perceived’ hassle to finance a house.” 

Clearly the trend to pay in cash has benefits for the home buyer.  There are lots of reasons why home buyers prefer this to traditional financing. The most popular cash buyers in today’s market are the second home purchaser, the owner occupied home purchaser and foreigners purchasing real estate in the United States. 

Second Home Purchases Often Paid for With Cash

The second home purchase is becoming increasingly popular for cash buyers in Florida.  In fact, in the Cape Coral area of Florida, cash buys account for 74% of all purchases in 2014.  This is a significant portion of the market, accounting for three out of four real estate transactions.  In the Williamsburg, Virginia market, Coldwell Banker Traditions has measured their cash buys at 33% in 2014 – accounting for one in every three home purchases being paid for in cash. 

Owner Occupied Buyers Pay Cash

The National Association of Realtors (NAR) reports that less real estate investor cash buys are occurring, while property buyers looking for a primary residence who are willing to pay in cash are on the rise. This includes retired couples and individuals who sell their homes and purchase a new one with the equity gained over the past several decades.  It’s also reported that 50% of millennial children will ask their parents to help buy them a home.  Speculatively - many millennial children may be paying cash for homes. For all age groups, nothing compares to the security of home ownership. 

Hurd says that many people are searching for 100% mortgage financing. “It is not available to all home buyers,” Hurd cautions.   To qualify, home buyers must be Veterans, first time homebuyers or homebuyers in rural areas.

Down payments commonly range from 5-50% of home value. “I do have buyers put a big chunk of cash down,” observed Hurd. “It varies. I would say that more than 50% of the people I work with put 5% or less down. Many are Veterans who do not need a down payment or they are in transition and do not have cash at the ready,” commented Hurd. 

Heftier down payments are common, too.  Hurd says, “Occasionally I have a client that puts down 20% or 30% or even 50% on a home purchase. Many people I work with could have bought a house with cash only, but because interest rates hover above 4% it is still enticing to have a mortgage and receive a federal tax break each year.”   

Foreign Buyers Invest Cash in Real Estate

The NAR also reports foreign purchases of U.S. real estate often occur in cash. For example, in Miami, Florida, Latino families and individuals are likely to purchase homes for cash.  In California those of Asian ancestry often pay in cash, too.  Each ethnic group wants their stake in the American dream - and they want it without a mortgage. 

In brisk real estate markets where inventories are low - such as urban areas like San Francisco, Boston and Washington D.C. - some buyers believe if they pay in cash, they will go in front of financed buyers. “From my perspective, a cash buyer may be chosen for the contract in front of a financed buy,” says Hurd. “ It is a generally accepted perception that the home purchase will close much faster if it is not reliant upon financing,” says Hurd. Cash buyers are not receiving the deep discounts (such as the example provided by Starke) in real estate as they did in years past.  Still, in some markets where inventories are low, cash deals may be rather enticing to sellers to speed up the sale.    

Cash home purchases are certainly an optimum way to buy if the resources are available.  Many finance experts usually recommend using only a portion of savings to purchase a home. So, in some cases, a 30-50% down payment may suffice, especially with today’s mortgage rates still low enough to be enticing. 

Learn more about homes for sale in Williamsburg, Virginia. Visit http://www.voncannonrealestate.com.