photo © 2011 Steven Depolo | more info (via: Wylio) A common frustration voiced on the real estate transaction front lines: We keep getting outbid by cash investors.
This is particularly common at the lower end of the price spectrum, as seasoned real estate investors are active in the market for investment real estate. They have been since the crash, and with every notch lower in the housing value indexes, more buyers step in to the market.
Any seller in this market has to be careful about qualifying any offer, given the challenges associated with borrowing mortgage money in the current climate. If financing is involved, the odds of that offer following through are lower than if there is no financing from a bank. An all cash offer conveys capability, intent, and speed – all variables that the seller will value, sometimes more so than price.
Investors use this to their advantage by offering quick closing time frames and all-cash offers, and often get the property at a discount.
Compete with price. Period.
Everything has its price, they say. If you need financing, but want to buy real estate in a market sector that is swimming with cash-laden investors, you have one real variable you can manipulate: price. You can offer more money than the cash investors – enough to compensate for the risk you bring: risk of financing following through, risk of financing taking too long, risk associated with you being a first-time buyer – a little less confident about buying in general and maybe hesitant to make it past your contingency removal dates.
You can mitigate these risks by dangling more money in front of the seller. Most sellers in this market are not selling because they think it’s a great time to do so. They’re selling because they need to. So they’re anxious. An offer to close quickly is relatively appealing. But money buys time, and offering a higher price than the all-cash investors will get the attention of that seller. You just need to find out how much it’s going to take to get that attention.
Wait just a second…
I am not suggesting recklessness in the bidding process. I am suggesting that money will compensate for the advantages the all-cash investors bring – at some point. I don’t encourage anyone to allow for budget creep – where the anxiousness about getting an offer accepted leads to overspending and operating beyond the intended price range. I just think that you can’t expect to compete with a cash offer and expect the same discount to the acquisition price.
This would be a good time to remind you that your own individual circumstances require unique planning, especially with respect to financing.
Built-in reality check
Your financing relies upon a valid appraisal. If you really shoot the moon, and pay too much for the property, the appraiser is going to have a tough time justifying the price. You’ll have a chance to think about it if you receive such an indication. The financing may still work, but would likely require you to increase your down payment dollar-for-dollar above the value indicated by the appraisal, and when making an aggressive offer, you should be prepared to encounter this.
At the end of the day, you can pay any amount you want to as long as the seller agrees. You can finance it if the lender agrees. Believe it or not, there are still some free market dimensions to this marketplace. But to continually make financed offers that are on par with all-cash offers is a process that is likely to lead to exhaustion, frustration, and disillusion. And also prolonged renting.
The other card you can use to your advantage is to appeal to the seller on a personal level. Sometimes that happens, but that’s about as common as finding a diamond in a haystack. So don’t count on it.
If you do compete with investors, and pay a higher price, you’re going to have to shake off the feeling that you overpaid for your home. Fair market value is a subjective concept, and the all-cash investor looking only for discounted acquisitions likely places a lower value on the property than a first time buyer would. If it is about buying your home, and competing with someone who wants to buy a house, fix it up, and sell it for a profit, the cost is just going to be different. Period.
Are you encountering this?
I’d love to hear about frustrations in the bidding process – have you been outbid by all-cash buyers? How many offers have you made or did you make before getting one accepted? Please share your story in the comments below!