All cash offers are destroying the real estate market

461-2nd-St-01-682x1024We roared out the real estate slump in a matter of a few months at the beginning of 2012 and it has been an up trajectory ever since. We went from properties taking longer to sell, to a flood of buyers and not enough properties in a very short time frame. Since that time, the lack of available homes to buy has maintained a situation of multiple bids and over asking offers. We have seen this in the Bay Area before, but not nearly so aggressive and without any sense of the ultimate value of a home.

In an effort to do their best at winning, buyers have showed up with trunks full of money; hence the all cash offer. No loan, no appraisal, no problem. All cash offers are sexy and everyone loves it when they can say that a buyer wanted their home so much, ‘they paid all cash!’ This is happening at all price levels; even those homes over $1 million.

So now the logical question you ask, is ‘why is that a problem?’ A buyer with cash legitimately wanted my house. I didn’t want to worry about an appraisal or financing contingency.

My experience has been that there is usually one cash offer in a sea of offers on a property; everyone else needing financing. To give an example, a house is on the market and receives four offers; one all cash, the other three need financing. The lack of inventory and the fact that several of those offers have probably lost in competition before, prices continue to go up in each successive offer in an effort to be more competitive. The all cash offer swoops in, may get a bit of a break in price and gets the home. You can see how a buyer would get tired of losing out, bidding higher and higher every time they find a home that they like well enough to live in and never be successful.

The choice for these three unsuccessful buyers is to; 1) leave the marketplace; 2) lower their price range and expectations (and push buyers out of that lower price range); or 3) leave the area, going into another more forgiving market. The long term affect will be fewer bidders (we are already seeing this happening, as well as offer dates coming and going with no offers), prices will adjust downward and then, I think, the all cash buyers will get something else, lower prices. The competition has been reduced, so prices have to come down.

All this being said, there are legitimate reasons to accept an all cash offer. If they were the highest, or if the condition of the property warrants all cash, then by all means, go for it.

In the spirit of full disclosure, I have counselled sellers to take the all-cash offer when it was a little under the highest offer with financing. We all want the deals to go through with fewer problems, but it is time to challenge that thinking.

It is time for sellers and agents alike to throw a buyer a bone. If they have a strong offer, give them a chance to buy your home with financing and put the all cash buyer in a back up position. The winning buyer will be so thrilled at the chance to get out of the grind, they will likely jump through whatever hoops they have to.

The long term effect will be maintaining a healthy, strong market place in which everyone can participate. By taking this approach, I anticipate that we will maintain the seller’s market for a lot longer and you will still get top dollar for your home.