How to Compete with Cash Buyers (Part 1)
With the coming of spring, buyers are making a beeline back to the real estate market. This spring, they are shocked by two big surprises.
First, the Bay Area real estate market is now extremely competitive, with swarms of eager buyers circling a handful of inventory. It’s almost reminiscent of the heady boom years of 2005-2006, with packed open houses and lines out the door for prime properties. This is quite a reversal from the buyers’ market that had quietly ruled for four years, up until as late as February of 2012.
Then, for the buyers who brave the crowds, they’re faced with a second surprise — all cash offers. Buyers who use financing quickly learn that in multiple offer situations with all cash offers, they are at a major disadvantage. Even aggressive bids significantly above asking prices can lose out to cash offers. That can be quite discouraging, if not devastating.
But, there’s hope. There are strategies to win against cash offers. Before you toss your pre-approval letters into the ring, let’s first examine the pervasiveness of all cash deals in
the South Bay.
According to MLSListings, there were 1324 closed sales in March in Santa Clara County. Of those sales, 288 sales were purchased with all cash. That translates to 22% of sales or about 1 in 5. Very likely, there were even more cash offers that didn’t close. We can further dissect this statistic along two dimensions, one by price range and the other geography.Let’s take a look at the percentage of all cash deals along different price brackets.
As you can see, the <$300K price bracket has a much higher percentage of all cash deals than the others. This is expected as this price bracket attracts plenty of investors with lots of cash. Often, the winning investor has more cash than a homebuyer is able to borrow on the property. If you are a home buyer in this price range, brace yourself.
Location also plays a factor. The chart below shows the percentage of all cash deals by city. Quite surprisingly, Palo Alto has the highest percentage at 30%. This ratio surpasses similarly high-priced cities, such as Los Altos and Cupertino, by 9 and 19 percentage points, respectively. This appears to be a uniquely Palo Alto phenomenon.
The median price of homes in Palo Alto is about $1.5M. If we dig deeper, only 23% of sales below the median price are all cash deals, compared to a whopping 38% for those above the median price. So, if you are going to open houses in Palo Alto this weekend, it really helps to have suitcases
of cash at the ready.
What if you really like one of the price points or areas with a large number of all cash offers? What can you do? Stay tuned for Part 2, when we discuss winning strategies in the face of all cash buyers. Or, if you can’t wait, give us a ring or send us an email.
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