If you agree with Fed chairwoman Janet Yellen's
recent comments that wage increases are still lagging, unemployment levels are too high, and people are stuck in their jobs for too long, your overarching opinion is likely that the economy has a long way to go before it's in a state one would call stable. But despite such doom and gloom in the labor economy, it's not just tough to buy a home in some "hot again" markets -- it's impossible to do without cold, hard cash. CNN Money
recently reported that qualified buyers (at least in the sense of mortgage lending) are being completely priced out of some real estate markets due to an influx of cash buyers. Though Mortgage Bankers Association data shows that mortgage refinancing applications have dropped to lows not seen since 2009, the Wall Street Journal's Nick Timiraos says
demand remains strong because of the presence of such cash buyers.
But how in the world are so many people ready, willing, and able to buy a home in cash? More importantly, should you become one of them?
Before you panic about all cash offers standing in the way of buying your dream home, it's important to understand the realities of the broader real estate market. According to the National Association of Realtors' Profile of Home Buyers and Sellers 2013
, 88% of homebuyers financed their recent home purchase. Though some cash buyers may in fact be fueled by hefty bonuses, commissions, or the highly lucrative sale of existing property or a company, the more likely explanation is that there's more to the story behind how these cash buyers came to be -- and why. Here's an inside look at some of the factors that are creating markets driven by cash buyers and what to consider before you strive to be one of them.
Are You Willing to Buy a Less-Than-Desirable Property?
Finding that you're squeezed out of a tight real estate market, even with a hefty down payment? There may be a solution, but it will require flexibility and work on your part. Take for example J. Scott Steinhorn
, a real estate investor by occupation who managed to buy his personal residence in Ellicott City, Maryland, with cash he'd saved. Though he owns it free and clear and faced little competition among other buyers, it definitely didn't come to him move-in ready. "We wanted something that we could renovate and customize to our needs (and we ultimately decided that we're going to tear it down and rebuild). But when you purchase a distressed property, it can be very difficult (and often impossible) to get a traditional mortgage," he explains.
Do You Have a Big Appetite for Risk?
What if you'd like to take a chance on a property like the one Steinhorn bought but don't have the cash on hand? You may want to explore the world of "hard money" lenders, where private investors loan would-be home buyers cash, but only for the short term (generally, no more than two years), and at high interest rates (compared to a traditional mortgage) for the investment potential of the property. Though one of the benefits to borrowing hard money from a private lender is that they generally don't take as long to close a deal compared to a traditional mortgage and often don't require that you meet the same types of credit, income, and debt standards as traditional home loans, they're designed for a very specific type of home purchase. If you intend to purchase a home you are certain will go up in value -- either due to a "flip" or buying in a high-demand area -- a private lender will probably be interested in talking to you.
"Many cash buys are not really cash buys, but deals that involve hard money lenders funding home buying through a second escrow," explains Sasha Favelukis of Sequoian, a hard money lender and trust deed investor in California. In the case of Favelukis' company, for example, money is potentially extended to buyers who intend to borrow money for the short term (usually no more than a year) to buy and fix up a distressed property, which they'll soon sell for a profit. Though the reward potential in such agreements is the "end game" both for the homebuyer and lender, it's not for the faint of heart: Interest rates to borrow start around 9%, but can be much higher, depending on the actual property.
Are You Buying for Reasons Other Than Keeping Up With the Joneses?
Are you tempted to turn to a cash offer simply because you're frustrated by being outbid by buyers with seemingly deep (cash-laden) pockets? Remember that you're not necessarily bidding against your peers in some of today's hottest real estate markets. "A lot of buyers in places like Miami and Texas are large funds -- Blackstone
(NYSE:BX), Black Rock
(NYSE:BLK), Colony -- that are buying these properties as investments," says Favelukis. In other cases, particularly in markets with a high proportion of international buyers, deals may indeed be fueled by cold, hard cash because it's a more attractive option than the buyers' alternative. According to a National Association of Realtors' report on international buyers in the Florida market
(where a reported 84% of transactions are made in cash), 80% of realtors surveyed said their international clients (who come primarily from Canada, Venezuela, Brazil, and the United Kingdom) consider the residential housing market in the United States to be a value.
Are You Will to Pound the Pavement for Financing?
Is there any hope for the potential home buyer who wants to buy in a hot market and needs cash to compete with other offers but doesn't want to "flip" the property? Thomas Simeone
, a Washington, DC-based lawyer and cash real estate investor (with his brother) says it can be done -- if you're willing to get creative. "The trick to finding investors is to start with people who know and trust you. When you get someone to invest, you need to give them excellent service so that they want to invest more, will refer others to you, and be a good reference." For his private loans, Simeone says he immediately emails a copy of the recorded mortgage and the insurance policy on the property to his investor upon closing, makes monthly payments 10 days early (often times deposited directly into the investor's accounts for convenience). "As for terms, private investors will want a rate of return higher than what they can get at a bank or other stable investment, and will also be wary of a long term (like 30 years)," says Simeone. For example, he and his brother found success using 10-year notes at 8%, which allowed them to pay off the properties in 10 years but left little margin for profit while the mortgages were outstanding.
Are You Willing to Wait?
Of course, in the tale of cash home buying there are some who've found themselves equipped to do so by simply by saving their money the old-fashioned way. You can do the same, but it requires patience. Though author and speaker Barry Maher
says he could've bought a home earlier in life, he made the conscious decision to keep his nest egg liquid in order to have the financial security he wanted to be self-employed -- in good times and bad. Eventually, he was able to buy his home in cash with money saved over the years, but that meant waiting to be a homeowner until he was in his fifties.
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