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Cash Rules Everything

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Posted On: 06/19/2013

QUESTION:

What is the probability of having four cash offers on the same property? In a good market I would think it unlikely. I feel there’s little chance of that in today’s market.

ANSWER:

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It may well be possible to have four cash offers for a single property, all above the asking price – and more so today than during the past few years.

According to the National Association of Realtors, 30 percent of the existing home sales in March were cash purchases, or about one out of three. Alternatively, 2006 NAR figures show that 92 percent of all existing home transactions were financed, meaning that 8 percent were all-cash buyers.

A number of reports have suggested that real estate prices are rising in most markets. For instance, the Federal Housing Finance Agency says that as of February home values nationwide had risen 7.1 percent when compared with a year earlier. The S&P Case-Shiller index (now the CoreLogic Case-Schiller Index) shows that home values in 20 major metro areas as of February were 9.3 percent higher than February 2012.

Recent pricing trends surely suggest that the competition for homes in selected markets is intense, so if 30 percent of all offers are for cash, it would not be surprising to find cases where there are multiple bids for a single property from several all-cash buyers.

The recent flurry of all-cash bids is likely powered by several factors.

First, in the case of an all-cash transaction, the sale does not depend upon the approval of a lender, because financing is in hand.

Second, more buyers are willing to make all-cash bids because real estate ownership is a hedge against inflation, the rental market is strong in many areas and the alternative uses for cash are unattractive.

For instance, one-year CDs at this time return about 0.65 percent, far less than the rate of inflation.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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