In these financially uncertain times in the housing market, all-cash sales are attractive offers to homesellers, but come with a condition–they usually must settle for less. In a typical housing market, if your home receives multiple offers (from prospective cash-carrying and/or those pre-approved for a loan), you will accept the highest bid. But in this current market, mortgages can be hard to come by, and sellers often will take less in order to have the deal go through.
The outcome: lowering prices despite fewer listings and rising demand. According to the Star Tribune’s article below, the increased amount of cash offers is offsetting other postive trends that, if there weren’t these cash offers, should lead to higher prices.
This all-cash trend is especially prevalent in distressed sales, where investors are the main buyers, and who typically deal with cash as it is. Short sales and foreclosures accounted for 42% of active listings last month, on average in metro areas. Read more about what the Star Tribune has to say on this topic in their article below:
In today’s topsy-turvy housing market, cash rules
Financing uncertainties make those cash offers alluring, but sellers often must settle for less money to guarantee a deal.
When Chris and Diane Finney decided to buy a bank-owned condo in St. Paul, they knew there would be competition.
Their strategy? Offer less — but offer cash.
While others said they would pay more, they needed to finance the deal. The bank took less and took the cash.
“We were in the driver’s seat,” Chris Finney said.
In a normal housing market, multiple bids usually lead to higher home prices, and the highest bid wins. But when credit markets are tighter and appraisals are often lower, many sellers will take less to be sure that the deal will get done.
“If I get five offers on a property and the cash offer is darned close to being one of those top offers, I’d take the cash offer any day,” said Marshall Saunders, owner/broker at Re/Max Results.
In December, 33 percent of all U.S. home sales were cash deals — a record since the downturn started in 2006, according to Campbell Survey and Inside Mortgage Finance. As a result, home prices can’t gain much traction because many sellers won’t necessarily accept the highest offer.
For most home buyers, it’s confounding to be rejected because they are financing the deal. For the housing market, it means more downward pressure on prices despite tight supplies and rising demand.
“It’s a real sign of what’s going on,” said Guy Cecala, publisher of Inside Mortgage Finance. “All things being equal, cash wins.”
The volume of cash deals is offsetting other positive trends in the market that should be leading to higher prices. The number of houses on the market has fallen to an eight-year low, and sales are up double digits. At the same time, home prices continue to fall.
At least a third of all homes sales last year involved an investor, Cecala said, and they often pay cash…
Read more of this article from the Star Tribune: “In today’s topsy-turvy housing market, cash rules.”
The following is an excerpt of recent negotiations ongoing with ING bank for a short sale transaction. Here is an example of what certain banks are still doing to literally steal money from innocent people, let alone in this case, an active duty military stationed locally and getting ready to retire, who does not have large income. The new short sale law SB 458 has a controversial statement that was covered in a prior blog post (viewable here: “Short Sale Memoirs & New Laws“) regarding a contribution by a seller towards closing costs as being allowed. This fact has been confirmed by attorneys as being interpreted as a direct violation of the law due to the fact any contribution for closing costs, taxes or otherwise is directly increasing the balance of the net sale for the lender and lowering the loss for their loan, thus breaking the law.
In addition, this lender as you can see wants to also steal money from the agents, leading me to believe that the negotiating person will get a cut of whatever he brings in. This needs to completely stop as these lenders are making it hard for most agents to earn a living themselves for their families.
While this one is not over, it shows you what is partly going on in a short sale transaction, not including negotiation with buyers and other lien holders, that make the work even more cumbersome only to have your income reduced due to the greedy tendencies of lenders that are still out there.
I anticipate a successful result as long as this lender comes to their senses.
I welcome comments…..
ING’s letter to me:
I received the 2nd lien approval, and ran the numbers. Rather than going back and forth on negotiations, here is what I need to get this deal approved:
- $3,700 cash at closing from the seller to cover the property taxes and closing costs
o Yes, we are allowed to ask for this money, as it is not going to the mortgage or missed payments
- 4.5% commissions to help with part of the 2nd lien.
o As I said before, your listing agreement is not with ING DIRECT, and our max commissions are 5%. This is only a .5% reduction to help the deal get approved.
I will pay the 5% commissions if the $1,300 is added to the purchase price. I have been doing this job for a while, and knows what my credit review committee needs to get a deal approved. This terms are it. Assuming all parties agree, I can finish the file and have a decision for you in a few business days.
And my reply:
The seller will not be bringing any contribution to the table. I have already stated that. Any difference in costs, including commission contribution that ING refuses to pay or absorb will have to be covered by the buyer and if the buyer refuses, then I will have to find another buyer to pay that or the property will go to foreclosure.
Any contribution by the seller can be interpreted as a contribution to the loan and this has been confirmed by numerous attorneys. You are directly taking advantage of military personnel that has sacrificed his life for 20 years for our country, besides if the property goes to foreclosure, there is no recourse on this loan by ING, only more losses. No other lien holder in a short sale has ever done this to a United States military personnel borrower. You and ING are now crossing the forbidden line of respect for our military. I hope you cause ING to reverse their stance in this case. You have a borrower trying to do a good thing by selling the property early to avoid further losses to the bank only to get penalized for it.
If you’re shopping for a home with a bargain-basement price, a short sale could be the answer.
This is where a lender allows borrowers who can’t keep up with the mortgage payments to sell their home
for less than they owe on the property. The bank or mortgage company takes whatever you pay to purchase
the home and forgives the remaining debt.
How low can you go and still expect a lender to approve the deal?
Lenders usually will accept offers that net at least 82% (after expenses) of the home’s current fair market value, regardless of what the borrower owes, says Tim Harris, co-founder of Harris Real Estate University in Las Vegas.
Why would a lender do that?
Because it will lose less by allowing a short sale than by going through a foreclosure.
Taking advantage of a short sale is less risky than buying a foreclosure, because so many repossessed homes need tens of thousands of dollars’ worth of repairs. The worst of the bunch have been deliberately vandalized by angry owners just before they were evicted.
Here are 4 smart moves for buying a short sale property:
Smart move 1. Make sure you’re a good candidate for a short sale.
Short sales are all about presenting the lender with a deal it can’t refuse. Banks and mortgage servicing
companies are most likely to approve buyers that:
• Have a substantial down payment.
• Have been preapproved for a mortgage.
• Place no contingencies on their contract, such as having to sell their current home before
proceeding with the purchase.
Smart move 2. Hire a real estate agent who’s experienced in short sales.
You need someone who can steer you away from short sales that aren’t likely to succeed.
Vincent Bindi, a real estate broker for ShortSalesASAP in Orange County, Calif., says your real estate agent should interview the listing agent to determine whether the seller has done everything that’s needed to win lender approval.
You need to know whether the home has been aggressively marketed — the bank won’t like it if the seller hasn’t made a good-faith effort to get a reasonable bid — and whether the bank has received a broker’s price opinion, which it will use to determine the home’s market value.
Smart move 3. Offer the right price.
Short sales aren’t the time or place to do a lot of dickering.
Lenders don’t have the time or staff to evaluate an endless bunch of bids, each a little higher than the last. If you deliberately lowball a bank or mortgage company, it will just write you off as a waste of time.
You need to come up with a cheap but reasonable offer, which the bank or mortgage company will accept, in one try.
Start by estimating the fair market value of the home for yourself, using comps (values of comparable properties that have sold near the home in the past few months).
Take the condition of the home into account and reduce your estimate if the home needs repairs. It’s a buyer’s market, and you don’t have to treat a fixer-upper like it’s in pristine condition.
Calculate 82% of the home’s value, throw in a few thousand dollars to cover the lender’s cost of doing a short sale (ask your agent what that typically is for your area), and you have a good starting point.
Now look at the quality of your comps.
If they’re straightforward deals, and the homes spent at least three or four months on the market, then you’re good to go.
But if all of the comps are foreclosures that sold within a few weeks of hitting the market, you’ve got to assume those were damaged homes being dumped at fire sale prices.
You’ll have to adjust your offer upward, perhaps all the way to the full fair market value calculated with those comps.
Check how close your offer is to the asking price on the home. Remember, the sellers won’t get any of the money, so they have no incentive to demand an unreasonable price.
They’re just trying to find a price you’ll pay, and the bank will accept, to relieve them of their debt.
If you’re close, then you’ve probably come to the same conclusions as the sellers and their real estate
If not, then your agent needs to have another talk with their agent to find out why.
Smart move 4. Be patient.
It almost always takes longer to close a short sale, because it takes so long for lenders to review and accept
We’ve heard of deals closing in as little as five weeks when the lender has preapproved the short sale and asking price and you agree to meet that price.
But that rarely happens.
Most sellers don’t seek the lender’s approval for a short sale until they have a signed purchase contract in hand. (Here’s a step-by-step look at what sellers must do to complete a short sale.)
More often than not, it takes two to four months to get a “yes” or “no” from the bank or mortgage servicing company.
Although lenders say they’re trying to process these requests more quickly, there still aren’t enough loss mitigation specialists to deal with the rising demand for short sales, and we’re not seeing a big improvement.
By Bonnie Biafore | Interest.com Contributing Editor