Cash is king … in deflation.


As this San Francisco Chronicle article aptly demonstrates any one with cash on hand has an upper hand when buying assets in this deflationary economic environment. Banks accept lower bids from cash buyers/investors on the repossessed properties that they are trying to liquidate and forego higher bids from buyers that need to get a mortgage approval before a real estate transaction can close. It is quite clear that banks are trying to dump the rapidly depreciating real estate assets as quickly as they can while fueling deflationary spiral in the process. Appraisers too don’t give out general estimates anymore and soberly undervalue properties. Banks and appraisers know that house prices are on an unstoppable slide downhill and are hedging their bets by correclty discounting present house values to their future prices. Deflation is here no matter what privately owned U.S. Federal Reserve and U.S. Government want us to believe.

San Francisco Chronicle. August 23, 2009.

‘Cash is king’ in market for foreclosed homes.

As an aspiring first-time home buyer, Jay Nielsen hoped to find a cheap, bank-held foreclosure in Vallejo that he could finance with a Federal Housing Administration mortgage. What he didn’t expect was having to compete with buyers willing to pay in all cash.

“Since January, I’ve put in 10 bids (on foreclosed homes); some were up to $80,000 over asking price and were still turned down,” said Nielsen, 41, a medical assistant. Each time, the banks selected offers from investors with all-cash offers – even when those offers were lower than his, Nielsen said.

“Cash is king right now,” said Glen Bell of Keller Williams Realty in Berkeley. For foreclosed homes, “a cash offer that hits the target price will many times trump a higher-priced offer with a loan. The ability to close has become just as important to banks as price. The prospect of a property being tied up longer, still on their books and then falling out is costly.”

Cash offers close escrow quickly and easily, while offers with a mortgage now often take 45 days or longer to close and can fall through if the financing hits any snags.

The result is that average consumers say they are being shut out because they can’t compete against deep-pocketed investors snapping up homes to rent out or flip. The situation could have long-term repercussions as neighborhoods shift toward more heavily rental, and it has frustrated many who hoped that low interest rates and increased affordability would let them gain a toehold in the market.

‘Gold Rush mentality’

All-cash sales are most common where prices are low and bank-owned properties account for the lion’s share of listings. In foreclosure-ridden Pittsburg, for instance, 42.7 percent of home sales in the first three weeks of July had no record of a purchase loan, according to county data analyzed by MDA DataQuick. The median price for those transactions was $105,000.

For the same period in San Pablo, 45.1 percent of sales appeared to be cash transactions; their median price was $110,000. In the Bay Area overall, 22.2 percent of sales in the July period looked like cash transactions; their median was $200,000, DataQuick said.

“Houses are less expensive than they’ve been in over a decade, and there is a Gold Rush mentality out there,” said Andrew LePage, an analyst with San Diego’s DataQuick. “If you want to be the one who gets the house, in some cases you just have to have cash.”

“As properties hit below 100 bucks a square foot and the cash-flow ratios are there, investors are out buying 10 properties at a time in some of the same areas where first-time home buyers are looking,” said Kevin Kieffer, an agent with Keller Williams Realty in Danville. “If you buy a $150,000 home in Pittsburg, you can rent it out for $1,500 a month. But if you get a $500,000 home in Walnut Creek, renting it out for $5,000 is not going to happen.”

Tim Garton of Coldwell Banker in Vallejo acts as a listing agent for many foreclosures. Another dynamic at work, he said: “Asset-management companies that handle sales for the banks are graded on how fast they can get properties off their books so they can get more properties.”

But Gary Kishner, a spokesman for JPMorganChase, said that banking giant accepts the highest offer on foreclosed homes, regardless of how offers are financed. The only time an all-cash offer might trounce a higher one with a mortgage, he said, would be if the financed offer were contingent on selling another house, or on rehabbing the foreclosed home to meet Federal Housing Administration requirements.

Cindy Kraeber of Hayward, who is relying on traditional financing, has bid unsuccessfully on nearly 30 homes from Fremont to Brentwood in the past four months.

Bidding quickly

“People are jumping on homes so fast it is like combat house-hunting,” said Kraeber, 49, an executive assistant. “You can’t go see a house in person (before making an offer); once you see it online, you have to put in a bid as quickly as you can. If you wait, there are already six bids.”

She visits homes after making an offer to decide if she wants to proceed.

Of her 30 offers, Kraeber had just one accepted. But the deal for a house in Brentwood fell through when an appraiser said the house was worth $21,000 less than her $175,000 offer. Banks will not write mortgages for properties assessed below the sales price because there is not enough collateral.

“If you come in with cash, the appraisal is not even an issue; most cash buyers don’t ask for one,” Kieffer said.

Kieffer offers tactics to help regular buyers compete. “If my client likes a property, I have them bring an inspector the day we look at it and get the inspection report that night, before we write an offer,” he said. “Then we know what we’re looking at and we can write an offer with no inspection contingency.”

Cutting contingencies

The fewer contingencies, the better chance that a deal will go through.

LePage, the DataQuick analyst, said some owner-occupant buyers may be strategizing to put together cash offers. “My hunch is, in many cases there are loans involved from family, friends, private individuals,” he said.

Nielsen, who was looking for a property under $185,000, devised his own creative approach. He decided to sidestep foreclosures and went door to door in neighborhoods he likes, leaving notes explaining what he wanted to buy.

His ingenuity paid off. A man called, saying his family wanted to sell their longtime home. They agreed on a price based on comparable local sales and are in escrow.

“It was next door to one of my best friends, on a street I really like,” Nielsen said. “It’s a small house, but something I will be able to manage.”

Where the cash sales are

All-cash sales are most common in areas where prices have plummeted. These figures are for sales that closed escrow in the first three weeks of July.

City Sales with no purchase loan recorded Median price for transactions with no loan
Antioch 34.6% $152,250
Brentwood 33.9 339,000
Concord 36.2 148,000
Oakland 40.5 105,000
Pittsburg 42.7 105,000
Richmond 41.2 72,500
San Pablo 45.1 110,000
Vallejo 43.4 82,500
Bay Area 22.2 $200,000

Source: MDA DataQuick

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2 Comments

  1. Posted July 27, 2010 at 1:56 am | Permalink

    Cash will be king someday soon. I am a real estate agent and prices in my Bay Area town are down 50%. Remarkably, a lot of the foreclosures (REO- or real estate owned by the bank) are bought for all cash – no loan. Looks like gold is heading down.

  2. Posted July 31, 2010 at 9:20 pm | Permalink

    I am a real estate agent in Livermore California in the San Francisco Bay Area. Yes! Cash is King. Many
    REO (Real Estate Owned) sales are all cash and no contingencies.


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