Know Thy Enemy

Understanding the Role of Cash and Investors in the Competition for Home Buying

by Karina Gafford
 
With an average age of servicemembers, both officer and enlisted, in their late 20s, and the average price of a single-family home in the US at a little over $200,000, the prospective of military families purchasing a property for cash seems slim. Then again, if your family is stationed in one of the areas hard hit by the foreclosure crisis, such as MacDill AFB, where you can find a trendy, comfortable condominium for well below $100,000, then you may just find yourself in the same buying market as that of 33-percent of the country last year, the cash buying market. 
 
According to the Realtors Confidence Index report, a full 33-percent of all residential sales last year were cash sales. This data aligns with recent information also released from the National Foreclosure Report shows that approximately one-third of all homes in the US are owned outright without a mortgage, meaning that the homes were either bought for cash or the mortgage has since been paid off on the property. To have a better idea of the cash homebuyers in the US, here is how some of that 33-percent broke down in January 2014:
 
  • 13-percent of first time homebuyers paid cash last year.
  • 48-percent of second time homebuyers paid cash.
  • 22-percent of families relocating from one area to another (hello, military families!) paid cash.
 
Not all of these cash purchases are by families, though. The vast majority of investors, for example, operated on a cash basis in sales, securing 69-percent of the homes this group purchased for cash. Another less obvious group is the international sales market. Certain sectors of America appeal to international buyers for vacation homes, such as Florida and California. These buyers primarily came from Canada, China, Mexico, India, and the United Kingdom. International buyers similarly present tough competition as 57-percent of them purchase in cash. Their cash purchases are often a necessity, though, as it can be tough for internationals to secure mortgages in the US.  
 
These numbers present tough competition for prospective military family homebuyers. Military families are already contending with relocation, unfamiliarity with the local area, and in many cases, a VA loan process that generally takes longer than a conventional loan to close. To see this from the perspective of a home seller, when given the option of selling to a family who must wait on loan contingencies or a buyer with cash in hand, the cash talks. 
 
Cash buyers offer home sellers a quick sale as they don’t require mortgages contingencies such as appraisals, but that’s not the only challenge facing military families in this market.  A recent report shows that 90-percent of Realtors also report that they noticed home prices rising over the past 12 months, and they anticipate that the home prices will continue to increase over the subsequent 12 month period, too. It seems possible that increased numbers of cash buyers in the market are driving up prices by competing against each other in sales. Given such tough cash competition and rising home prices, what is a military family to do to help secure a good home at their next duty station?
 
How to Compete in a Soaring Cash Investor Market
A series of articles floating around the internet over the past few years have suggested that the best way to compete with a cash investor is by appealing to the emotional side of the seller. Humans are emotional creatures, so why not try to exploit emotion to override the logical sense of the seller who wants a quick, easy sale? These articles suggested composing a letter of how much your family loves the quaint built-ins, how you will carefully tend the clearly beloved garden in the backyard, and how you can envision growing old in the home and whiling away hours peacefully rocking back-and-forth on the front porch watching your grandchildren play in the front yard. For most military families, this is nonsense. You know it, and the sellers will know it; military families simply can’t stick around. You’re buying the home to live in for the duration of the duty station, and then you’ll either sell it or rent it, leaving the tending of the family’s garden to the mercy of the next buyer. Given these circumstances, if you truly want to present a competitive offer, then it’s time to get serious.     
 
  1. Offer more money!
The first way that a buyer can offer more money is by simply increasing the price above that of the asking price. In some markets, home sellers can easily achieve multiple offers that cause the sale price to rise above the asking price, but this only represents about 6-percent of the current home sale market. Meanwhile, 57-percent of all home sales fall in the 90 to 99-percent range of the original asking price, which suggests that leeway does exist in most cases for offering a higher price. The second way that a buyer can offer more money is in the form of a higher down payment. By putting down more than 20-percent, homebuyers can waive various contingencies, such as an appraisal that would typically be required by a lender in a conventional sale. Less contingencies make for a quicker, more secure sale from the perspective of the home seller. The third way that prospective buyers can offer more money in the form of a higher escrow deposit, and thus conveying to the seller the seriousness of the offer; when you put more money down, you obviously stand to lose more money if you eventually back out of the sale. From the seller’s perspective, though, if you forfeit the money, they get to keep it; it’s a win-win situation, as you thereby earn a greater chance at earning the position of homebuyer. This latter option is really the best option for military families who hope to use their VA loan, as the VA will not permit loans that far exceed the value of a house or that waive their legally required contingencies.
 
  1. Don’t request seller concessions
Asking for typical seller concessions such as a carpet allowance, an appliance allowance, a home warranty, or assistance with closing costs will not help matters at all when competing with a bevy of cash-rich investors. Instead, you would have a far greater chance at presenting a competitive offer by including a concession to the seller, such as an offer to pay for his broker’s fees.
 
  1. Provide financial information to sellers
In addition to a loan pre-approval letter, consider also including the financial information that will substantiate your pre-approval, thereby making the loan process simply look like a formality. If you have savings in the bank, retirement savings, or additional equity, include proof for your seller. Pre-approvals without evidence simply represent a letter from a lender based on unverified information; give the seller the comfort level they need to accept your offer by providing more financial information.
 
If you are planning to buy in a competitive market, make sure to interview multiple real estate agents and ask for referrals to ensure that you are working with someone who is both responsive and experienced in competing on behalf of military families against cash investors.