Investors Beating Out Homebuyers With Cash

By Alex Veiga, AP Real Estate Writer

LOS ANGELES (AP) β€” Melissa Hughett and her husband set out to buy their first home in the best buyer's market in years, confident they would land a deal within a few months.

The couple put offers on several homes, but lost them all to rivals who weren't offering more money β€” just a lot more cash.

"Each time somebody came in and put $100,000 down in cash and scooped up the property or they had enough money to pay for the whole property in cash," said Hughett, 30. "It's agonizing."

Would-be homebuyers, armed only with financing, are competing with real estate investors with the means to pay for a home in cash. Often, the all-cash buyers are edging out everyone else, leaving many frustrated at a time when lower prices and tax incentives favor buyers.

The market scuffle is happening primarily over heavily discounted foreclosed homes and other properties typically less than $300,000, or even well below $100,000 in some markets. These homes are attractive to investors seeking a good return and first-time buyers looking for an affordable home.

The trend is most pronounced in areas of California, Florida, Arizona, Nevada and elsewhere where home prices have dropped sharply and foreclosures make up a large slice of homes for sale in many metro areas. In Las Vegas and Phoenix, for example, foreclosures accounted for more than half of all home resales in December, according to MDA DataQuick.

Although getting financing for heavily damaged foreclosures can be difficult, there's still a healthy competition. Ultimately, cash is king.

"Even though a first-time buyer may be offering the same price as an investor, or a higher price, the investor has the edge," said Jed Smith, a researcher for the National Association of Realtors. "The investor may actually pay less, but it's cash, right now."

Across the country, some 22% of all previously owned homes sold in December were purchased entirely with cash, up from 16% a year earlier. That's the highest level since March and April, when all-cash purchases made up 30% of sales, according to a survey by the trade association.

That rate jumps even higher in metro areas where foreclosures have driven home prices down sharply.

In Las Vegas, all-cash transactions accounted for nearly 46% of all sales in December, up from 33% a year earlier, according to MDA DataQuick. In Miami, they were 54% of sales, an 8% increase. While in Southern California, they accounted for a quarter of sales, an increase of 2%.

"I've never seen so many cash transactions in my career as I have in this market," said Stephanie Vitacco, a Coldwell Banker agent in Woodland Hills, Calif., with 20 years in the business.

Making matters worse, the inventory of homes for sale is down in many markets. That's due in part to banks delaying the foreclosure process as troubled homeowners are evaluated for loan modification assistance. It has all made the competition for the most affordable properties even fiercer.

Many of the cash buyers are groups of people who have pooled their money to buy foreclosures and flip them or turn them into rentals.

Another large segment consists of homeowners looking for a vacation property. It's possible that some cash buyers will turn around and take out a mortgage later.

Sellers favor all-cash or cash-heavy deals because it speeds up the closing process and makes it more likely the transaction won't fall through. One common concern when a loan is necessary is that the property appraisal could come in too low for the bank to approve the deal. It's a pitfall that's become more common as home values have fallen.

"Even if the offers are comparable, a seller will go with all cash all of the time," said James Joseph, who owns Century 21 and Coldwell Banker real estate offices in Southern California. "They don't have to worry about an appraisal."

Hoping to circumvent competition from investors, Hughett approached family friends about buying their three-bedroom, two-bath house for $340,000. The owners had yet to put the home for sale.

"That's the only way we can get in," said Hughett. This way she and her husband are sure there won't be another buyer "coming in and dropping a large amount of cash."

Homebuyers who can't afford to pay cash are at a disadvantage. But experts say there are some steps homebuyers can take to boost the chances:

  • Get a financing prequalification letter from a lender for an amount that's 20% higher than the price they're offering the seller.
  • Come up with a large down payment in the 20% range.
  • Look for HUD properties. Only noninvestors are allowed to make offers on HUD properties during the first five days that they hit the market. That gives buyers a head start over investors or those looking for second homes.
  • Ask a real estate agent to get a list of recently repossessed properties being prepared for sale. It can take several weeks before these homes hit the market. That's because the bank's agent can't officially advertise the home until it's ready to be sold. But agents can ask for details on these foreclosures and get their clients ready to pounce.
  • Write a letter to the seller or bank handling a foreclosure sale and make a case for why they should sell you the property β€” anything to make you stand out as a potential buyer.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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