The Value of Cash

There must be a lot of cash sitting on the sidelines. I would venture that about half the potential buyers that have called me recently say they're looking to pay 'all cash' (meaning they won't need a mortgage.) While paying cash certainly streamlines the purchase process, most all cash buyers have the expectation that by paying cash and not requiring a mortgage will have extra appeal to sellers and therefore a sharply better deal.

In some scenarios, cash is king. But in many situations and to many sellers it doesn't have anywhere near as much value as cash-laden buyers believe. One situation where cash has great value is when the sellers want to close quickly. But "need to close quickly" situations are less common than you might think. Another is bank owned foreclosures, where either the lender's tight closing deadlines make arranging financing difficult, or the home's systems aren't operable to qualify for conventional financing. Rehab or fixer properties are another category where cash has weight. While it's certainly possible to get financing for rehab projects, the process is time consuming and cumbersome.

The vast majority of buyers don't fit into those scenarios. In other situations, including short sales, all cash is somewhat more appealing, but more in the range of a few percentage points on the price, not the 20%, 30% or 40% that all cash buyers often think it deserves. Yes, a cash sale does shorten the closing cycle by three or four weeks, and it eliminates the risk of an appraisal shortfall. But if the deal has been struck at a good supportable price, the shortfall risk should be minimal. Even in a short sale, a lender's decision on what they'll accept will be based more heavily on time on market, listing history, and the amount of the outstanding debt than on whether the buyer is paying all cash or arranging financing. Don't get me wrong — cash has some value. But it's unlikely to sway a lender in a short sale to agree to a price of $250,000 when their approval model indicates $350,000.

With regular "non distress" sellers, it's striking sometimes how little attention they, or their agents, pay attention to the financing terms. Their eyes go right to the offer number and that's what they focus on. Unless there is some other motivating factor, they just don't seem to care that much about whether a deal is cash or financing.

That's not true in all cases, and all cash buyers should certainly try to determine whether all-cash would be a significant factor in a negotiation. But don't be overly surprised when the cash element doesn't result in the seller agreeing to a much lower price than if you weren't paying all-cash.

Comments

[mofat]

David, "cash on the sidelines" has always existed.... It is NOT new.

It's a matter of smart cash vs stupid cash. But cash has always been on the sidelines. In boom times the smart cash sits idle on the sidelines while the dumb cash (loans) plays in the field. Since our debt-driven economy is in deleverage mode, the low tide exposes the sidelines while the playing field is empty. That's all.

In nowheresville of sullivan and delaware county, mortgage companies want 40-50% down. Some homes don't qualify for any loans, (ie..old farmhouses and or houses on pilings, etc..) Cash will be KING for future transactions and sellers will indeed be begging for them more and more.

[David Knudsen]

Mofat, I haven't had one client asked to put more than 20% for a mortgage here in Sullivan County on a single family home. My last 3 deals, all within the past couple of months, have been straight conventional 20% down deals. The houses have all appraised and the lenders have done the loan commitments. The situation is different with raw land, but that's always been the case. I'm seeing raw land loans with down payment requirements of 35% to 50%, but that's not up that much from the 25% to 40% from a couple of years ago.

[bluelite]

I second Dave's reply because I am buying with a 20% down traditional mortgage.

[ar]

It's been close to 4 months since you highlighted your 12 "little black dress houses" --

http://blog.catskill4sale.com/catskill4sale/2010/04/little-black-dress-houses.html

As a measure of the market, it would be interesting to know their status today. How many, if any, sold?

[David Knudsen]

Good question, ar. There were 13 houses in the group. 1 sold. 2 were withdrawn from the market. That leaves 10 of them unsold. Of those 10, only two have had price reductions in the 4 months since I posted that.