Low interest rates and low housing prices have first-time buyers feeling optimistic about purchasing a good home. But people who have saved up enough money for a sizable down payment are finding they are still not in the most favorable position in the housing market.
Cash buyers are often beating out first-time home buyers who are taking out loans.
"They’re being beat out, but not necessarily priced out,” said Anne Oliva, president of the San Mateo County Association of Realtors. Sometimes, cash buyers get preference over buyers with home loans, even if their cash bid is lower, she said.
Traditional home buyers with a 20 percent down payment are struggling, said Oliva, who is currently working with a couple for whom she has put in nine different offers. Her clients have enough for a 20 percent down payment, but sellers are thinking it is better to go with the cash buyer for the sure deal.
The challenge may be even greater for first-time buyers of units in complexes, such as condominiums or apartments. Investors are buying up units with cash and turning them into rentals, said Oliva.
First-time buyers with a 3.5 percent down payment on a condo, for example, may get pre-approved for the loans and have their offer accepted. But they could lose final approval of the loan once the lender sees that the complex has a high number of rentals.
"Every lender looks at the renter-to-owner ratio,” said Oliva, who ran a program for first-time home buyers in San Bruno. "If the renter-to-owner ratio is high, they will not lend.”
While she understands that buying and renting condos is a good move for investors, Oliva worries about how this trend will affect the number of homeowners.
"We could have a huge problem with increasing homeownership if this keeps happening,” she said.
Abundance of cash
"There’s a lot of cash out there,” said Susan Caton, a Realtor based in Redwood City. "It’s amazing, even over $1 million there’s a lot of cash.”
Caton worked with a client who was outbid several times on homes priced at more than $900,000. "They kept getting beat out, and beat out,” she said.
One home priced at more than $1 million in San Francisco had 25 offers on it. A client offered with 60 percent to 70 percent down and had excellent credit. They were beat out by an all-cash offer that was less than asking price.
The all-cash offer closed in nine days, whereas the client’s offer which would have closed in 30 days.
"In San Mateo County, it’s the same thing,” she said. "With 40 or 50 percent down or better, you are still beat out by cash offers.”
Caton agreed that the low housing inventory is a big part of the problem, along with the conditions that come with first-time home buyers with loans.
"Fifty percent down is a darn good offer and a good loan,” she said. "But the sellers or agents are saying ‘take the cash, it’s a sure thing,’ especially with no financing or property conditions.”
Many home buyers do get discouraged.
"It’s a hard battle,” said Caton. "It takes a lot of patience, but they can’t give up.”
But she sees a silver lining in the dark cloud.
"In each instance when a buyer is beat out a number of times, when they finally get a house they are so happy they got the one they got,” she said.
There are many reasons for sellers to prefer all-cash offers from prospectors over a down payment from a home buyer with a loan. Many strings are attached to a deal with a first-time home buyer; the sale may take longer to close, an appraisal is needed and sometimes sellers are required to do repairs. And on the other hand, a cash offer may have no conditions.
"If you’re up against cash offers, it’s very difficult,” said Diane Viviani, a longtime real estate agent in San Mateo County.
The cash-buyer trend is especially apparent in the $500,000 to $700,000 range, where inventory is low, said Viviani.
Recently, a home on Oneill Drive in San Mateo had 30 offers on it, she said. The listing price was $525,000 and it sold for $675,000, after being on the market for just eight days.
"I’ll tell a buyer to make the best offer you can,” she said.
For those taking out Federal Housing Administration loans, the down payment only needs to be 3 percent, said Viviani. But with such a low down payment, the lender’s liability is higher and the buyer seems less attractive.
"It’s doable,” said Viviani of FHA loans. "But when something comes at or below market [price], they’re seeing them go [to cash buyers].”
Joe Rodden, a longtime real estate broker based in Redwood City, has seen this trend. A home on 18th Avenue was recently sold to a cash buyer, despite the offer being 5 percent less than the other offers from people taking out loans, said Rodden.
"[The seller] felt more comfortable taking cash because it was a sure thing,” he said.
When asked what happens to the houses after they are bought with cash, Rodden said this is up to the buyer. Cash buyers could potentially close a deal with cash and then take out a loan, but the contract would still say all cash.
The cash trend has become less common in the past couple of months because prices have bumped up, said Rodden.
"Now cash buyers don’t see the same bargain,” he said.