Why do sellers care if the offer has a loan or is all cash?

Image of $20 and $10 bills with the words "Why do sellers care if it's a loan or all cash?"Why are all cash offers such a big deal?

Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts or which are “all cash, no loans”.

The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a lower interest rate FHA backed loan be suitable?

All cash is better because there’s less risk

Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies.  For sellers, the fewer contingencies the better and no contingencies is ideal.  Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)

The percentage of all cash sales in Santa Clara County

The percentage of all cash sales (all cash, no loans) rose in July, but the actual number of sales, shown immediately below, shrank a little. I pulled this data from the MLS today and it’s reflective of whatever the listing agent entered into the fields for financing.

Number of Cash Sales of Single Family Homes in Santa Clara County

 

Percentage of All cash sales, month by month, in Santa Clara County (single family homes)

Next, the actual percentage of all cash sales in the county for houses and duet homes.

Percentage of All Cash Sales in Santa Clara County for Jan 2013 - July 2023

 

The average for the 11 Julys shown is 13.9%, so July 2023 with 15.7% is interesting to see. Interest rates have skyrocketed over the last 14 months, forcing home prices down in the 2nd half of 2022. It’s a little surprising that we did not see a surge of cash buyers then, but their numbers stayed in the typical range from what I’m seeing.

Now, in mid 2023, we have seen both interest rates and home prices rising – at least for the first 6 months of the year – in most of the valley.

Cash buyers are usually investors, but not always. Sometimes they are homeowners who sold their long held family home and are now downsizing and buying with the proceeds of the larger home that they just sold. We don’t get that piece of data from the MLS, but anecdotally, that’s what I’m seeing with the cash offers I’m seeing and hearing about.

 

What does it mean that cash buyers are an increasing percentage of the closed sales?

  • Rising interest rates not only don’t harm the all cash, no loans buyers, it actually helps them as it weakens their competition
  • These buyers may be feeling more confident with the softened market and easier buying conditions generally
  • My thinking when we saw interest rates rising is that it would help the mortgage free buyer more than anyone else – that seems to be the case.

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How will the rising interest rates impact housing affordability?

Interest rates and affordabilityThe rising interest rates are impacting most home buyers’ ability to afford the type of house or condo they expected to be able to purchase just a few months ago. The Fed wants to curb all spending, including home buying, and it seems to be working – rising interest rates are having a dampening effect on real estate sales.

Rising interest rates – hypothetical condo buyer

Let’s say a home buyer needs a mortgage of $800,000 to purchase the desired condominium or townhouse, and that said buyer has good credit and 20% down and is seeking a 30 year fixed rate loan.  Interest rates may vary from one lender to another, but as of right now, a 5% to about 5.5% is fairly typical, but some online lenders are advertising 4% and 6% or 6.5% rates may be just around the corner.

$800,000   for 30 year fixed rate with 20% down at 4% interest – monthly principal & interest payment is $3819.32

$800,000   for 30 year fixed rate with 20% down at 5% interest – payment is $4294.57 (12% more than at 4 %)

$800,000   for 30 year fixed rate with 20% down at 6% interest – payment is $4796.40 (26% more than the cost at 4%)

Today I created a data table showing the payments for principle & interest with ascending rates. I took it as high as 16.50%, which was under the highest average rate in 1981, when some consumers paid more than 18% interest rate on their mortgages. (I remember my mom, a Realtor – Pat Pope – talking about those 18% rates at that time. As I recall, it spurred some sellers into carrying back notes just to get their homes sold.)  When Jim and I bought our first house in 1989, our rate was 10.25% after we bought down the rate by paying 2 points. Hence my strong preference for fixed rate mortgages in recent years, when the concern was the risk of rising rates.

 

Rising interest rates - payments on 800k mortgage P and I only

 

What impact will a rising interest rate have on qualifying for the mortgage?

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Should you double app your loan?

Double App Your LoanIn this highly competitive seller’s market, some home buyers are choosing to purchase their house, condo or townhouse non-contingent, meaning with no contingencies for inspection, loan, appraisal etc. .  The “non-contingent offer” has been present in the Silicon Valley real estate scene for a few years (since 2012 or so), to the horror of those of us working in the field in 2000 and the years immediately after (it’s a very bad deja vu, given the onslaught of lawsuits that came in its wake last time).  My clients sometimes make this choice, too, explaining to me that they feel it’s the only way to get the property.

With no loan contingency to protect the buyers should the loan not come through (or fail to do so in time), some consumers are electing to “double app” the loan.  Translation: they pursue financing with two or more lenders simultaneously (fill out two loan applications, pay for two appraisals etc.).  Lenders, naturally, don’t like this because only one of them has the possibility of closing the sale or the loan, and only the one who closes the loan will get paid.   In a normal market, with normal contingencies in place, I would not recommend this approach.  But if there are no contingencies to protect the buyer, a second loan may provide a safety net as it increases the odds that a loan will be funded so that the home can close escrow. (more…)

In the luxury home market of Santa Clara County, how many properties are bought “all cash, no loans”?

Orchard and Hills in Saratoga, California

Orchard and Hills in Saratoga, California

The amount of all cash offers in Santa Clara County has been very high for the last couple of years, and I’ve written about it here.  But what of the luxury market?  At one point, I read that nationwide, 50% of all homes sold at over a million dollars were bought all cash, no loans.  So I thought it might be similar here.

Just now I logged onto MLSListings.com to run the numbers for the last 90 days in Santa Clara County.  I ran the numbers with the following criteria:

  • houses, duet homes, townhouses and condos
  • sold within the last 90 days (closed escrow)
  • within Santa Clara County
  • sale price at or over $2,000,000

The number of properties matching this list over the last 90 days was 351 (it was 306 on 5/24/14).

The number of properties matching this list which were identified as having all cash, no loans financing = 108 (it was 111 on 5/24/14)

The percentage of all cash sales identified as such on the MLS for this period is 30.77% (back on 5/24/14, it was 36%).  (For all prices right now, it appears that the average is 16.86% or so. – it was 18% on 5/24/14.)

Disclaimer: for this to be accurate, it requires the listing agent or office admin who closes out the sale on the MLS to accurately represent the financing used.  It is possible that this is off, and the more accurate data could be from the county records themselves. If I can obtain that data, I’ll update this article then.

Back to the ratio of cash sales in the luxury market: why does it matter?  More than anything, it matters because interest rates are rising and this impacts the buyers’ ability to purchase property.  In real estate generally, if interest rates rise, home values are negatively impacted.  We’ll want to see what impact the more expensive loan products have on high end or estate housing, not just here in Silicon Valley, but across the country.

See homes currently for sale in Santa Clara County in the map below:

 

 

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(all data current as of 6/22/2024)

Listing information deemed reliable but not guaranteed. Read full disclaimer.

 
 

 

 

 

You say you are an “all cash home buyer”? Be prepared to perform like one!

In our overheated Silicon Valley real estate market with so many multiple offers, a lot of properties are selling to “all cash buyers”*.  Some of the contracts are written as all cash when in fact the buyers are actually trying to get a loan (for all kinds of reasons, perhaps including tax reasons). Listing agents and home sellers are wary of the promise of an all cash offer when the close of escrow is long.  Really buying all cash?  You can close in a few days, not a few weeks, if that’s the case.

Home buying all cash but not really

What’s the problem with getting a loan, anyhow?

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Low down payment, conforming loans are back

Low down payment conforming loan is backFirst time home buyers, you have cause to be grateful as low down payment, conforming loans are back.  This means that if you have less than 20% saved toward your down payment, you aren’t stuck needing to utilize FHA backed financing.  FHA insured mortgages can be a wonderful thing for home buyers in particular situations (such as not having enough of a credit history), but they are costly – especially now, with the requirement that the mortgage insurance stay for the life of the loan.  Buyers with FHA financing also are less desirable to sellers and listing agents as FHA has stricter requirements than conventional lenders.

Being able to purchase a condo or house with 5% (or possibly less) using conforming loans will open a lot of doors – at least in theory.  In our crazed Silicon Valley sellers’ market, though, where multiple offer situations are the norm, having a high loan to value ratio may get you on the list of bidders to be eliminated.  San Jose area sellers want large downs, or better, all cash buyers.  It’s hard to compete with that!

The smaller your down payment, the more important it is to either avoid multiple offer bidding situations altogether or to aim at properties with lower numbers of offers.  What may help you most is targeting condos, townhomes or houses which have been on the market a month or more, as these seldom will have more than one contract presented at a time unless there’s a price reduction.  You and your real estate agent may also target the homes which are not offered via the multiple listing service (yes, they are harder to find), whether represented by another Realtor or licensee or sold without professional representation (aka, a FSBO).

Related reading:
First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

Santa Clara County’s “Jumbo Conforming” Rate Soon To Be Lowered

News flash – in case you didn’t know, the current “jumbo conforming” loan rate in Santa Clara County of $729,750 is about to be repositioned (to speak euphemistically) to $625,500. This is all over October 1st, but many banks will stop lending at these rates long before that, perhaps prior to September 1st.

What does that mean to YOU, a San Jose or Silicon Valley home buyer, seller, investor or owner?

For many properties, there will be no change.  But if your property’s value is such that a 20% down purchase (a normal situation) has the loan between $625,500 and $729,750,there’s about to be a painful change.  How painful? About one half of one percent.

Right now a $700,000 loan is a jumbo conforming (good rate: 4.5%).  Under the new limits, it’s a jumbo (good rate: 5%).  The hike means, concretely, $210 per month for that $700,000 loan amount, or about $75,000 over the life of the loan.  That’s some serious dough.

This change probably WON’T impact homes priced lower than $625,000 or greater than $912,187.  But we may be seeing some pressure and price compression in the zone between.  It’s also likely that there will be some pressure to sell but also to buy before this change happens.

When money becomes more expensive, prices usually fall.  But this is an odd situation since not all price points are impacted.  For buyers with large down payments or who purchase their house “all cash”, it’s no difference to them – but it might be a huge difference to sellers.

My best guess: investors will make good use of this opportunity at a vulnerable point in the market.