But Not Everything is All-Cash.
There are a lot of crazy stories emanating from this crazy San Carlos real estate market these days, where skyrocketing prices and the huge sums of money being thrown around to win hotly contested multiple offers have seem to become the norm. One perception that I keep hearing is that all of the homes that have been selling lately have been to all-cash buyers. This is simply not true. While there certainly have been a few high-profile all-cash transactions in San Carlos this year, I can confidently tell you that these types of transactions still only make up a small minority of all of the home sales.
This doesn‘t mean, however, that there’s not a ton of cash being wielded by the buying pool in today’s market. And it’s important to know what this means to you as a buyer or seller of real estate in this market.
Strong Cash Positions.
What’s far more common to see in this market are offers that are heavily cash-laden and accompanied by a relatively small, conforming loan. These are offers where the down payment makes up 40% to 70% (or more) of the purchase price. For a $1.3M purchase, you’re talking about $520,000-$910,000 in cash. I know that the numbers have become a bit numbing lately, but that’s still a LOT of money!
There are two reasons why a strong cash position can make your offer more favorable. First, it conveys buying strength to the seller. When an offer comes in with the minimum 20% down payment, it’s easy for the seller to assume that the buyer is stretching themselves, perhaps uncomfortably, to by their house. That means that there’s a higher probability that the seller may have to pull the plug on the contract a few weeks down the road. That’s simply not the case with half a million in cash.
Second, it makes it easier for the buyers to make their offer more attractive by waiving any finance contingency. That’s definitely a much riskier proposition for the 80/20 buyer, especially considering these inflated prices.
An interesting sidelight to this whole discussion is that there are also buyers who easily have the cash to purchase a home, but they’re still opting to borrow money — why? Because interest rates are so low it’s almost like free capital, and the return that they can get investing their cash is often times far greater than what they’re paying in interest on their loan. So why not take advantage of it?
Where is it Coming From?
This question was actually posed by a blog reader a few weeks ago. Actually, it comes from a variety of sources: Equity from a previous home sale, proceeds from an IPO, rewards of a strong stock market, and even the old tried-and-true “parental assistance”. Interestingly enough, where it’s not coming from (at least not yet) is Facebook. That IPO seems to have a had a much more profound effect on the San Francisco real estate market than it has here in San Carlos. Let’s face it, if you’re young, single, and insanely rich, San Carlos isn’t where you’re going scratch that itch.
But San Carlos sits smack in the middle of one of the largest economic engines in the world. We’re literally right in between the tech and biotech industries, both of which are seeing amazing growth again. Incredible amounts of wealth are being generated every day here, and the economy isn’t even back in full swing yet. Just wait until that happens.
So where the money comes from is not as important as accepting that it’s definitely there, and that you’re going to be dealing with that fact one way or the other if you’re in the housing market in San Carlos. If you’re a buyer, the amount of cash you can bring to the table makes a huge difference on your chances of success. As a seller, the less a bank needs to be involved in the purchase of your home, the less risky the deal is for you.
The old saying “Cash is King” still rings true today.
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