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A Different Strategy for Home Buyers

dublin mortgageThere is a distressing reality for many home buyers today: not only is there a shortage of inventory, but “normal” buyers are finding that they often must compete with buyers offering all cash and a quick close of escrow.

Yes, there are many buyers who are flush with cash today. Sellers often have the luxury of choosing from multiple offers. When one of those offers stipulates closing in a week and—more important—has no loan contingency, they often jump at these proposals, even through an all-cash offer may be lower than others.

There is a common narrative—a false one, to be sure—that “It’s so hard to get a mortgage today that almost nobody can qualify.” Sellers who are genuinely motivated like the certainty of a deal where the buyer is not at the mercy of some faceless lender.

Buyers who are walking around with a lot of cash know they are in the catbird seat, so they often ask for severe price concessions. “Yes, Mr. Seller, I know my offer is $20,000 lower than my competition,” they say, “but if you take my deal, you will know it will close. Here’s my $5,000 deposit to show I am serious.”

The seller is now able to decide whether the certainty of that all-cash, contingency-free offer is worth giving up something; $20,000 in this example.

For many sellers, that certainty is worth taking a lower price. With that in mind, many buyers today are choosing to buy for cash, sometimes without even negotiating price concessions.

However, with the attractive mortgage rates today (still hovering around 4% for 30 year fixed rate loans), it does not make financial sense to have so much cash tied up in a home. The ability to deduct mortgage interest on a homeowner’s tax return reduces the effective cost of a mortgage to below 3%. That is very cheap money. Some buyers have opted for alternative strategies in their quest for home ownership. I have already discussed the growing trend toward offers without a loan contingency. Those buyers who have access to cash are using another approach: delayed financing.

This means that the buyer acquires the property for cash first, then refinances it immediately so as to avoid having so much cash tied up in the home. In the past, lenders would not allow a “cash-out” refinance earlier than six months from closing—and if you buy a home for cash, then take some of that cash out with a refinance, this would technically be a cash-out refinance. Now, with delayed financing, the lender no longer considers this a cash-out refinance; it is treated the same as any “rate-and-term” loan.

Many investors today have found opportunity on the courthouse steps, buying foreclosure properties at Trustee’s Sale. There are bargains in these sales, but they are always for cash. Now, investors can avoid having a great deal of cash tied up for a long time in these new acquisitions. Using delayed financing, they can extract their valuable cash quickly.

This technique is not limited to investors. More and more, buyers in search of a new personal residence are finding sources of cash to make these powerful all-cash offers, then extracting their capital shortly afterwards. Sometimes they are able to find this money from supportive relatives, sometimes from tapping retirement funds. In today’s highly competitive home market, it is good to be aware of every possible strategy available to prevail in the all-too-common bidding war.

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