Will a Seller Accept Less than List Price to an All Cash Buyer – Irvine Real Estate – Homes for Sale in Irvine

by Robert Mack on February 22, 2013

in Latest News

CLIENT QUESTION:

Robert,

I hope all is well!!

I want to dig into your realty knowledge with today’s market.  I have a friend that is looking to buy a house, their current realtor is family but that is another story…. They are an all cash buyer, looking for a single family house in the OC area (same areas we were looking at) with a maximum budget of $450k.  What are the benefits of being an all cash buyer?  I know when we were putting in offers; some of our offers were trumped by cash offers.  Is the general trend that sellers are willing to sell at less than list price if all cash? I feel that sellers would prefer all cash due to quicker close, no appraisal issues and no loan problems. All seems like a win-win situation and with a 450k budget, it shouldn’t be hard to find a home but that is not the case for my friend.  Is the inventory really that bad?

       

Thanks,

Don 

RESPONSE:

Hi Don,

First of all, I love these types of questions, so thanks for coming to me with this!

Yes, inventory is extremely low at the moment.  It hasn’t been this low for over 12 years and with the rates still historically low, buyers are fighting over a very limited selection of properties.  What we are experiencing in our current market place is nothing like what you, Jennifer, and myself went through.  Although your situation was still tough at times, it was a piece of cake in retrospect.

With home prices currently on the rise, and interest rates predicted to go into the low 4’s by the end of 2013, it has created a huge sense of urgency amongst the current buyer community.  The low inventory is only adding fuel to this fire so in short, it has been a challenge to get offers accepted on my end as well and I have several cash buyers in the same boat as your friend.

In the past, cash would typically trump all other types of financed offers, and in many cases some sellers would accept less (within reason) to get the job done.  It is truly a case by case basis when it comes to sellers and what they will accept.  Some sellers want to sell for the most amount of money while other sellers are more concerned about how quickly the sale will go through.  Now the sellers have the best of both worlds, because even the cash buyers are offering strong offers due to the amount of competition there is out there.  For the last 6-7 years the buyer mentality has been based on logic( “I want a great deal”), and now buyers are buying emotionally (“I just want to buy a house”).

Here is the best way that I can put it.  It will always come down to risk vs. reward.  If the cash offer is close to, at, or above other offers, the seller will most likely go for a cash buyer since the process is smooth.  With that being said, if the financed offers (especially strong ones with 20+% down), offer significantly higher than a cash offer, it may be worth it to the seller to take the financed offer if the payout is much higher.

Another twist in this scenario is appraisals.  I remember that when we were looking for a home, we also were a bit concerned with the appraisal of the home, and hoping that it came it at value.  Well, it is even worse now, because homes are selling at prices that appraisers cannot justify with recent comparables due to how quickly the market is appreciating.  The new trend is that sellers are now asking buyers to remove the appraisal contingency prior to the start of the transaction, and also show that if the appraisal comes in lower, that the buyer has the cash to pay the difference or they won’t accept the buyers offer.  This is how many sellers are now able to sell their homes at above market value, and it’s actually working. 

Here is what I am telling all my clients, especially those who are paying all cash.  Right now the most flexible buyers, the ones willing to cooperate with a sellers requests and pay a price they may feel is above market value, are the buyers who are getting homes.  I know it sounds crazy, but let me explain my thought process behind this.  If a home sells in a neighborhood for a certain price, you can pretty much guarantee that a similar type home in that same neighborhood will sell for more, and the next one for more, and so on and so on, at least for now.  I’ve seen a 10% increase in values in OC in just the last 6 months.  The sooner your friend buys a home, the better for them as it is only getting tougher as time goes on.  Because cash buyers don’t have a loan or appraisal contingency, they have the flexibility to offer above market value (as long as it is in their price range), and still get away with it because it is cash.

If they see a home that is $425,000 and the recent sales are showing between $400,000 – $415,000, the natural instinct for buyers is to offer between or just above this price point, simply because this is the way it has been done for the past 7 years.  Well that has all changed, and I would recommend now offering $440,000 – $450,000 on  a home like this especially if your friend likes the home.  The reason why is that if this home sells to another buyer, even at $425,000, the next home will be listed at $440,000, and it will sell at that price or higher, and the trend will continue until you friend won’t be able to afford what he is looking for and will have to settle on something that isn’t ideal just to get a home.

Sorry for the long email, but I wanted to paint a picture for you as he is not alone. 

Warm regards,

Robert Mack

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