Mortgages face tough competition from home buyers paying cash

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Plummeting home values are attracting cash buyers who outcompete mortgages with lower offers. Image: Flickr/Show Appeal Realty CC-BY-SA

The depressed housing market is attracting more people who buy homes with cash. In turn, home buyers who need a mortgage are finding it tough to compete with cash buyers. Yet mortgage buyers can match up better against cash by being better prepared when they make an offer.

Cold, hard cash is king

Deals made for cash comprised more than a third of home sales in February, an all-time high according to the National Association of Realtors. Cash buyers have become formidable opponents for many home buyers financing their deal with a mortgage loan. More home buyers are paying with cash because plummeting home values have made real estate a more attractive investment than the volatile stock market. People are also pulling their money out of the market and investing in rentals that net a greater long-term return than stocks.

In 2010, 59 percent of home buyers purchasing as an investment paid cash. Cash has an advantage over a mortgage because the seller knows a closing is unlikely to be derailed by contingencies. That convenience is often enough for the seller to accept a lower offer than one a financing buyer would make. Cash usually wins when the bank is the seller. Eager to get foreclosures off the books, banks will go with the safest option.

How to compete with cash

Foreclosures accounted for 25 percent of all home sales in 2010. Fannie Mae saw a 128 percent increase in short sales last year as well. But financing buyers have a more even chance over cash with sellers who have equity. Equity holders aren’t under pressure to take whatever they can get and will wait for the best offer. Financing buyers can also compete with cash by getting pre-approved for a mortgage. Being prepared with a high down payment also evens the odds. Listen to what the seller wants and be willing to do whatever it takes. Treat them with respect and have a detailed contract ready that makes the deal clear. When the time comes, act quickly. If none of these strategies work, financing buyers need not give up hope. Sometimes cash deals fall apart, too.

Cash deals versus mortgage financing

In addition to getting a better deal, paying cash to buy a home has several advantages. When mortgage rates are higher than available returns on other investments, the money saved on interest puts a buyer ahead of the game. Plus, with no leverage, if the value of the house falls, the buyer only loses what they put in. For a mortgage with 20 percent down, if the value goes down 10 percent, the home buyer loses 50 percent of the down payment.

But mortgages also have advantages over cash. Buying a home with cash leaves less liquidity for other investments. And leverage works both ways. If the value of the home goes up, the mortgage holder gains a higher percentage than the cash buyer. Plus, mortgage interest is tax deductible, which lowers the cost of the loan.




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