We heard recently from Peter and Susan, a couple of house-flippers who accompanied their agent to see a townhouse foreclosure, in a good area at an attractive price. When they approached the front door, they realized they would have some leverage in their negotiation with the bank. The front door had been broken in and was secured by a padlock.
“No way that’s passing an FHA inspection,” their agent said.
Since most home purchases are financed, the property must be in good condition for a lender to accept it as collateral. It can’t have any broken windows or other defects that a bank simply refuses to repair. Therefore, the only potential buyers are people like Peter and Susan, who have the cash to purchase the property.
Cash cuts through competition
Because only cash buyers could make an offer on this particular property, they had less competition. They ended up buying the property well below the asking price, which had already been discounted.
That’s one way in which paying cash for real estate will get you a better deal, but it isn’t the only way. RealtyTrac has released data showing that all-cash buyers of single family homes and condos paid on average 23% less per square foot than the median homebuyer.
The average buyer paid $118 per square foot, but all-cash buyers paid only $91.
“While large institutional investors and other cash buyers continue to shrink as a share of U.S. home sales, these buyers still typically beat out traditional buyers using financing — in some cases even when they submit a lower offer for a home,” said Daren Blomquist, senior vice president at RealtyTrac.
Blomquist notes that part of the discount is because the property needs some work. The other part is because cash takes almost all the uncertainty out of the sale. In today’s super-tough underwriting environment, someone who is dependent on qualifying for a mortgage is not a sure thing.
Oddly, paying with cash doesn’t always get you a discount. RealtyTrac has identified nine housing markets where cash buyers actually pay a premium per square foot. It turns out these are the nation’s hottest housing markets, with cash buyers actually driving prices higher.
“In most markets, cash buyers act as an anchor for home values, but in these exceptions to the rule, cash buyers are acting as an oversized sail, catching more wind and pushing home price appreciation to a potentially precarious pace,” Blomquist said.