Published on June 20, 2014, in Santa Barbara News-Press House & Home.
By RENEE GRUBB
Statistics show that about 25 – 30 percent of offers are from all-cash buyers. Why this recent increase in all-cash offers?
With interest rates low, money is cheap right now, and it makes sense to get a loan and make payments rather than paying the home off all at once; however, the application process has become long and involved with lots of paperwork. We are seeing more and more people of means wanting to avoid the process. Occasionally, a buyer who has the money will offer cash then get a loan after their offer is accepted. That scenario is becoming more infrequent and more buyers are going through with their cash offers because the loan process is so complicated.
What are the benefits of offering cash rather than using traditional financing?
Both the buyers and seller can benefit from an all-cash transaction. The buyers can write a cleaner offer — all cash, no financing, a quick close date, and no appraisal. This kind of tempting offer can ensure the buyer gets the property they want, even amid multiple competing offers. For the seller, a cash offer stands out among the crowd because it allows the seller to sell quickly and, possibly, have the money they need for their next down payment. In real estate, as in life, cash is king. Sellers would rather have cash now than wait almost a month to see if a loan is finalized.
In this new world of cash offers, how can buyers with only a down payment complete?
The best thing to do is to get pre-qualified and pre-approved for a loan in the right price range before making an offer. If buyers can tell the seller they are pre-qualified and pre-approved for the loan they need, it usually increases their ability to complete against cash offers. Usually sellers are not against loan offers, they just want the money sooner rather than later. If they have to wait for loan application, processing and approval before they can sell, they may rethink accepting the offer, especially if there are other, faster options (i.e. all cash) on the table. By being proactive and having a loan as solidified as possible, buyers help the seller see them as a preferred option.
How do buyers go about getting pre-qualified and pre-approved for a loan?
Since loan applications are much more complicated now than in the past, it is important for buyers to meet with a lender — actually a couple of lenders — as they start looking for a home. Even though they are at the “just looking” phase, buyers should meet with lenders as if they had already found a house and are ready to put in an offer. The application process includes a credit check and reviewing pay stubs, tax returns other documents. It is important for buyers to check with their lenders before the meeting to make sure they bring everything they will need. This will save time. If the buyer gets approved, the lender can write a letter to accompany their offer explaining they are already approved for the loan amount.
Will this completely even out the playing field?
Not exactly. There is a catch. Any lender will want an appraisal before finally approving the loan. However, since home prices are generally higher now than they were during or before the recession, an appraiser may undervalue a home. Appraisers consider the selling prices of other similar homes in the surrounding neighborhoods. Since home sales are just now picking back up, the appraiser may be comparing the current sale to sales during or before the recession, which were probably not at the new, higher price point. To get the price they want, sellers may opt for an all-cash offer to avoid appraisers completely. For buyers with loan offers to compete, they must be willing and prepared to offer above the appraisal value.
What is your best advice to make an offer stand out?
Listen to your agent. They have experience dealing with lenders and competing against all-cash buyers. Also, as I said earlier, apply with two lenders at the same time. We call this “double app” in the business, and it can be incredibly helpful in securing the loan you want in a timely manner. Consider having at least one of your lenders be a broker. Brokers can shop the loan and look at many different options. Lenders from larger institutions only consider loans offered through their institution. Finally, consider writing a personal note to the seller and ask your realtor to write a personal letter as well. One of Village Properties’ clients wrote to a seller about how they wanted to make her house their family home for many years. The letter touched the elderly seller who had raised her kids in the house. It helped make that couple’s offer stand out.
Renee Grubb is co-founder of Village Properties, Santa Barbara County's largest independent real estate brokerage. Village Properties serves the entire coast from Ventura up through San Luis Obispo. Founded in 1996, Village Properties now has realty offices in Montecito, Santa Barbara and Santa Ynez with more than 150 agents and brokers serving Ojai, Carpinteria, Summerland, Montecito, Santa Barbara, Goleta, Solvang, Buellton, Los Olivos and Santa Ynez. For more information, call 805-969-8900 or visit www.villagesite.com.