Why Do All-Cash Sales Equal Big Discounts?

Cash is king in real estate. If you don't believe it just look at the latest discount numbers from RealtyTrac.

For the 1st quarter, RealtyTrac found that the typical cash buyer paid $207,668 for property with a fair-market value of $237,900. That's a 13 percent discount.

In cash terms, the measure everyone understands, that's a better than $30,000 per unit.

Why is cash worth such a massive write-down?

Part of the answer is that cash buyers are especially busy -- but only in selected areas.

"Among metropolitan statistical areas with a population of at least 500,000," says RealtyTrac, "those with the top five highest percentages of cash sales were all in Florida: Cape Coral-Fort Myers, (73.6 percent), Miami (67.1 percent), Sarasota, (65.1 percent), Palm Bay, (64.1 percent), and Lakeland, (61.8 percent).

"Other major metro areas with more than 50 percent all-cash sales included New York (57.0 percent), Columbia, S.C., (56.1 percent), Memphis (54.9 percent), Detroit (53.5 percent), Atlanta (53.2 percent) and Las Vegas (52.2 percent)."

Cash is generally moving toward areas where buyers are relatively scarce and where purchasers have leverage because many homes have been foreclosed. The bet is that these markets will one day return and when they do cash buyers will either sell to get back their capital or rent to produce cash flow.

The exception is New York. New York attracts cash buyers because overseas purchasers are flocking to the city, a location which is far-safer than many politically-unstable and financially-uneasy places around the world. Big real estate purchases for cash in New York are really a form of banking for many overseas buyers, a way to keep dollars in the US with the purchase of a large-scale asset.

Where Are the Lenders?

The RealtyTrac report shows that 42.7 percent of all U.S. residential property sales in the first quarter were all-cash purchases, up from 19.1 percent in the first quarter of 2013.

“Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,” said Daren Blomquist, vice president at RealtyTrac. “The good news is that as institutional investors pull back their purchasing in many markets across the country, there is still strong demand from other cash buyers -- including individual investors, second-home buyers and even owner-occupant buyers -- to fill the vacuum of demand left by institutional investors."

I'm not sure strict lending standards are really the answer. For instance, are lending standards today any tougher than in the 1990's? Mortgage rates are certainly lower today than back then but in the years before the foreclosure meltdown -- just like today -- you needed real money at closing for a down payment, no-doc loan applications were rare and lenders carefully reviewed loan files before originating a mortgage. That's pretty much the way things are now.

A more likely reason for fewer purchase-money originations is simply that people have less money and therefore do not qualify so readily for mortgages. The Census Bureau says household incomes have declined 9 percent since 1999.

Why Discounts?

The idea that cash buyers should pay less is curious. At closing a home seller gets a check for the net amount due after mortgages, closing costs and settlement expenses have been paid off. Whether the buyer pays cash or finances with a mortgage the check to the seller is the same, unless the owner has agreed to pay some of the buyer's lending costs.

Where cash buyers have an advantage is that they can make an offer which is not contingent on lender approval. With cash a seller gets a done deal, there are no worries about underwriters or fluctuating mortgage rates. For many sellers that's attractive, especially if they have had an offer fail because of financing.

Looking at the numbers, the real reason for all-cash discounts boils down to the idea that cash purchasers are buying a lot of discounted property and the real estate market remains fragile. These are the advantages that cash buyers are using to score big discounts.

Get Home Mortgage Loan offers customized for you today.