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Updated about 11 years ago, 12/10/2013
Retail Cash Sales
I was reading an article and there were some hypothetical situations and one of the things ended up being a pretty clean cash offer at ~$200K for a rehabbed house.
What I could not get past is that I just can't imagine that this comes up very much. $200K is a LOT of cash to spend on anything. I kind of figure someone with that much money would fall into a couple different categories.
1) Someone that is still in the process of building wealth and would get a mortgage to take advantage of the cheap money and use that cash to get into other investments.
2) Someone that has saved and lived well within their means to accumulate a nice sum of money. They are fugal and aren't going to be allured into paying the top of the market because the kitchen has granite and cute little pendant lights over the island.
3) Someone that maybe just has a great JOB and even though they have accumulated that much cash they are not necessarily all that investment savvy and would be more likely to use that as a big downpayment on a $600-800K+ house.
4) Someone who has so much money that $200K is a drop in the bucket and will buy a much more expensive home either with financing or a lot more cash.
Part of my "bias" is that $200K is actually a lower end price point in MA. In middling communities you can get into a decent starter home. In nicer towns you are lucky to get into a 2/1 700sqft condo. So my experience at that price point are people having a hard time getting an FHA downpayment as opposed to throwing bags of money at ya.
What do other people see in their markets? Just in my mind I feel that owner occupant cash sales are going to cluster a lot on the very low end like under $50-60K since it is hard to finance them or on the very high end like getting into the million dollar and up area, since the people getting those usually are the really rich.
My Ex GF just sold one for $600k cash. Buyer was female just out of a divorce, got a lump sum settlement and wanted the security of owning her home.
Lots of houses sell for cash. I don't know the stat off hand, but somewhere between 1/3 and 1/2 of all houses in the US are paid for.
I sold two for cash this year- $53k to someone who was gonna rent it and $295k to an end user.
Can't assume everybody thinks about money the same way you do. I have zero debt other than private loans on rehabs. I'm a finance major so get the math on what you stated above, but also went broke in '07 with $6+ mil in debt on (supposedly) $10 mil in property. Kinda realized if you have a loan on something someone can take it away from you...lessons learned had are lessons learned well.
Here are some additional situations:
- Dislike having any debt
- Thinking all debt is bad debt
- Believe that a house is the best investment they can make
- Not knowing what to do with all their cash
One of my family members purchased a condo for $500k+ for cash a few years ago. He is pretty savvy with his money and felt that the condo could provide a good return since he bought at the bottom of the market. On the other hand, another one of my family members has hundreds of thousands of dollars sitting in a checking account because he's scared to invest in the stock market.
In the end, everyone is different and money isn't always the driver of one's decisions. This is very similar to a motivated seller. The money is secondary to the emotional, physical, or other driver that creates the NEED to sell.
Originally posted by Darrell Shepherd:
Lots of houses sell for cash. I don't know the stat off hand, but somewhere between 1/3 and 1/2 of all houses in the US are paid for.
I sold two for cash this year- $53k to someone who was gonna rent it and $295k to an end user.
Can't assume everybody thinks about money the same way you do. I have zero debt other than private loans on rehabs. I'm a finance major so get the math on what you stated above, but also went broke in '07 with $6+ mil in debt on (supposedly) $10 mil in property. Kinda realized if you have a loan on something someone can take it away from you...lessons learned had are lessons learned well.
That is pretty interesting that you have 3 examples that pretty much run the gambit.
The $53K cash sale to someone that will keep it as a rental is sorta my view on the quintessential cash sale. A cheap house that would be hard to finance, especially if it is an investor.
The one your Ex sold is a little less than I have in my head, but goes to that more "luxury" level of sales I think of.
The one that I would not expect was your $295K to an end buyer.
Don't get me wrong I know it happens. Do you get a lot of these? I guess frequency is what I question. The article I mentioned originally made it sound like that is a common occurrence where I think if I had someone buy one of my flips for cash I would think I hit the jackpot.
Originally posted by Justin Silverio:
- Dislike having any debt
- Thinking all debt is bad debt
- Believe that a house is the best investment they can make
- Not knowing what to do with all their cash
One of my family members purchased a condo for $500k+ for cash a few years ago. He is pretty savvy with his money and felt that the condo could provide a good return since he bought at the bottom of the market. On the other hand, another one of my family members has hundreds of thousands of dollars sitting in a checking account because he's scared to invest in the stock market.
In the end, everyone is different and money isn't always the driver of one's decisions. This is very similar to a motivated seller. The money is secondary to the emotional, physical, or other driver that creates the NEED to sell.
Yes I agree with those thoughts. The "Debt is evil" mindset I think of as more of my point 2 where if they had saved and lived well within their means for decades to actually flat out SAVE hundreds on thousands of dollars it is hard to fathom them blowing the wad on a high end of the market post rehab flip. That seems more like the retail buyers that pay a little more than we are willing to for a cosmetic level flip since they are okay with the 80s cabinets and will just strip the wall paper and paint it themselves the next 10 weekends.
Off Topic: Where did they buy this >$500K condo? Locally? I actually would say that the high end condo market in and around Boston is a better appreciation play then most other options locally.
I think your reasoning is sound for sure. When I bought the $53k one (for $14k), I made sure my ARV was going to be over $50k because of the financing, but I did get like 3 cash offers on that thing.
You get a lot of cash sales in the higher end stuff, and my buyer at $295k was pretty loaded and was gonna do some real work on the house. You still get some cash guys in the middle, though. But no, its not as common as the low stuff and the high stuff. More than you'd expect, though, especially with the lending like it is. I couldn't qualify for a mortgage right now because I dont have a job. I made $85k on my first sale this year, but by god since someone else isn't writing me a paycheck I'm a terrible credit risk. Its pretty tough to get a loan if you are self employed, especially if you are good at dodging the tax man.
I was just saying you'd be surprised who has money out there. I had an employee when I was corporate that paid cash for a townhouse and I dont think she ever made more than $26k or so a year. She saved that, too, just didnt spend much.
Originally posted by Darrell Shepherd:
You get a lot of cash sales in the higher end stuff, and my buyer at $295k was pretty loaded and was gonna do some real work on the house. You still get some cash guys in the middle, though. But no, its not as common as the low stuff and the high stuff. More than you'd expect, though, especially with the lending like it is. I couldn't qualify for a mortgage right now because I dont have a job. I made $85k on my first sale this year, but by god since someone else isn't writing me a paycheck I'm a terrible credit risk. Its pretty tough to get a loan if you are self employed, especially if you are good at dodging the tax man.
I was just saying you'd be surprised who has money out there. I had an employee when I was corporate that paid cash for a townhouse and I dont think she ever made more than $26k or so a year. She saved that, too, just didnt spend much.
Oh that is interesting that the $295K place was a "fixer". How much work was the guy going to put into it and any idea what the ARV would be after he did?
I can totally see someday "Flipping" myself my dream house since I would probably love the deal as much as the final product. :)
Oh and I hear what you are saying about the loans. Tried to do a refi on a small mortgage I have on a rental earlier this year. The underwriter said he thought I was lying on my 2012 tax return by way OVER stating my income to make it look good. Told my mortgage broker to point out to the guy the extra taxes I would have paid if that was true was more then the balance of the loan I was refinancing. Didn't matter they couldn't risk the possibility that I may not be able to make a payment about $120 less than the one I made every month for 6 years, including 3 of them being self employed.
I think your most common buyer that's going to buy a $200k home for cash would be a retired person/couple that has cash in the bank but have low monthly income coming in. They'd want the security of knowing their place is paid for and not have that monthly bill and still have the equity they could tap into if absolutely necessary.
Originally posted by Patrick L.:
I agree with that.
But again I don't see that demographic being the ones that will be inclined to make a cash offer at the top of possible market value because it was a nicely done modern flip house.
For example my parents are firmly in that demographic. They own 2 homes. They bought a nice condo in FL they are now spending most of the winter at, which they did pay cash for. My mom actually stated she likes the cabinetry that is clearly 25-30 years old (So cheap ugly 1980s stuff) more than stuff you see in the stores these days.
They also are looking to downsize the big house in MA for a condo here to get away from maintenance issues. The woman was ready to slash my throat when I made a few simple suggestions on things they could do to modernize it a little since the target market to buy the house is a family that is my age +/- like 5 years.
So again maybe my personal bias but I can't see many of those folks paying the premium for the trendy modern rehabbed house. :)
@Shaun Reilly I think with someone that's older isn't going to want a fixer upper with a list of projects to do. If they like dated finishes that's one thing but I don't think the majority of retirees are going to seek out 1980's finishes.
My personal background is the opposite of yours though. When my dad was getting ready to retire he bought a condo in FL with all 1970's finishes and had me treat it like one of my flips. I went in there with my crew and we redid both bathrooms, completely gutted the kitchen and did new cabinets/granite/stainless appliances, new flooring throughout, popcorn removed and all walls and ceilings retextured and painted, new ceiling fans and light fixtures, new closet systems, new interior doors, new tankless water heater, new HVAC etc. There wasn't anything that we left and he was thrilled to have an essentially brand new place with nothing old to worry about. He can just relax and enjoy the view.
I can't speak for others, but I just bought my personal residence for $225K cash...here are my reasons:
- The sellers gave us a great deal and wanted to close quickly...if we would have asked for 4-6 weeks to get a mortgage, the sellers may have decided to list the property (and would have gotten more);
- The property wouldn't qualify for financing as-is. It required some basic maintenance to be move-in-ready;
- We are planning to tear it down and rebuild and would rather hold off and get a mortgage when the house is built, so we can pull out more than if we had gotten a mortgage on just the purchase.
Again, that's just one example of why someone might choose to pay cash, but it certainly made sense to us for this deal...
Originally posted by J Scott:
- The sellers gave us a great deal and wanted to close quickly...if we would have asked for 4-6 weeks to get a mortgage, the sellers may have decided to list the property (and would have gotten more);
- The property wouldn't qualify for financing as-is. It required some basic maintenance to be move-in-ready;
- We are planning to tear it down and rebuild and would rather hold off and get a mortgage when the house is built, so we can pull out more than if we had gotten a mortgage on just the purchase.
Again, that's just one example of why someone might choose to pay cash, but it certainly made sense to us for this deal...
That is pretty cool.
But in this case you bought at a discount, on a place that wasn't easy to finance and have a big value add play on it.
I was asking about retail sales.
Like how many of your rehabs do you get clean $225K cash offers on that you had listed at $209K with the highest sold comp (Which was not quite as nice as your house) being $220K?
That is more the situation that the author of the article I'm talking about seemed to indicate isn't uncommon.
Originally posted by Shaun Reilly:
I was asking about retail sales.
Like how many of your rehabs do you get clean $225K cash offers on that you had listed at $209K with the highest sold comp (Which was not quite as nice as your house) being $220K?
That is more the situation that the author of the article I'm talking about seemed to indicate isn't uncommon.
There are a few things at play here:
1. The cash offer
2. The offer above list price
3. The offer above market value
#1 is fairly common in my experience. In some cases, people have equity from previous house sales (downgrading houses), in some cases they came into an inheritance or lawsuit settlement, in some cases they've saved for a long time, and then some people just have a lot of disposable income.
#2 is less common, but in markets like we have today in many parts of the country, there is a lot of competition for good houses, and many people realize that making offers at list price or below means a bidding war that they may or may not win -- so they offer over list price to separate themselves from the competition. So, seeing this doesn't really surprise me very much.
#3 is the part that's not very common in my experience. Cash buyers generally have a reasonable indication of market value, and while they may pay over list price, there aren't too many buyers who are happy to pay more than a house is worth. I haven't read the article yet, but if the author is saying that this is a common experience, either his experience is a lot different than mine (which, of course, is quite possible -- I've only worked in a few lower-end markets) or he's just using hyperbole to create a good story/article.
Just my experience...
Originally posted by J Scott:
Originally posted by Shaun Reilly:
Like how many of your rehabs do you get clean $225K cash offers on that you had listed at $209K with the highest sold comp (Which was not quite as nice as your house) being $220K?
That is more the situation that the author of the article I'm talking about seemed to indicate isn't uncommon.
There are a few things at play here:
1. The cash offer
2. The offer above list price
3. The offer above market value
#1 is fairly common in my experience. In some cases, people have equity from previous house sales (downgrading houses), in some cases they came into an inheritance or lawsuit settlement, in some cases they've saved for a long time, and then some people just have a lot of disposable income.
#2 is less common, but in markets like we have today in many parts of the country, there is a lot of competition for good houses, and many people realize that making offers at list price or below means a bidding war that they may or may not win -- so they offer over list price to separate themselves from the competition. So, seeing this doesn't really surprise me very much.
#3 is the part that's not very common in my experience. Cash buyers generally have a reasonable indication of market value, and while they may pay over list price, there aren't too many buyers who are happy to pay more than a house is worth. I haven't read the article yet, but if the author is saying that this is a common experience, either his experience is a lot different than mine (which, of course, is quite possible -- I've only worked in a few lower-end markets) or he's just using hyperbole to create a good story/article.
Just my experience...
Yeah so I know that #1 happens, and will happen at any price point. I still believe it will be more common at the low points and the much higher ones, but still will happen at all of them.
I can also believe an above asking price one in the right situation. In the one I had (and the ones that the article I mention had) the list was below a not as nice market comp, so there was still value there.
So it is definitely point #3 where I think the hypothetical situation breaks down. I do think that even retail buyers often realize there is value in a cash offer and don't overpay because of that. In the article the price differences were actually bigger than what I laid out there. The offer was a full 10% over list and 3.3% above that highest sold comp.
BTW don't know if the guy works in other markets too, but he definitely works in the Atlanta area so your comments leads me to believe that point was thrown into the story overly sensationalized things to make his point.
Originally posted by Shaun Reilly:
BTW don't know if the guy works in other markets too, but he definitely works in the Atlanta area so your comments leads me to believe that point was thrown into the story overly sensationalized things to make his point.
I've seen some unsavvy investors who will pay over market value for distressed properties (and even non-distressed properties), but I can only think of one situation in the past 6 years where I've seen a retail buyer pay well over market value.
That situation was a bit unique in that the house was out of place for the neighborhood (much nicer) and even though the appraisal probably would have come in 10-15% below what the buyer paid, I still think it was a reasonable price given how much nicer the house was than the comps that would have been used. So, it's really not that crazy in that situation.
There is no accounting for what people will do with money, especially when they are uneducated on the subject.
A good friend of mine sold his mother's 3b/2b house 22 years ago for $27k and left the money sitting in the bank because his brother, a Realtor, advised him to do so. A similar house in the area , post crash, can't be bought for less than $250k these days. This guy is very savvy about everything else and as hard nosed as they come!
In the end, it's not so much about having money, it's about understanding it's highest and best use!
Originally posted by J Scott:
Originally posted by Shaun Reilly:
BTW don't know if the guy works in other markets too, but he definitely works in the Atlanta area so your comments leads me to believe that point was thrown into the story overly sensationalized things to make his point.
I've seen some unsavvy investors who will pay over market value for distressed properties (and even non-distressed properties), but I can only think of one situation in the past 6 years where I've seen a retail buyer pay well over market value.
That situation was a bit unique in that the house was out of place for the neighborhood (much nicer) and even though the appraisal probably would have come in 10-15% below what the buyer paid, I still think it was a reasonable price given how much nicer the house was than the comps that would have been used. So, it's really not that crazy in that situation.
Thanks for the story. That is much more like I expected.
The point about the appraisal was another reason I was guessing he used that example since along with the allure of a cash offer closing faster and easier, he avoided anyone asking "What if it doesn't appraise?" when the offer is several grand higher than the highest comp.
Honestly I had never really heard of CASH buys until we got to California. This summer when we were buying our primary house, there were a tons of cash buyers. Some were investors, some were flippers, others were farmers using the cash to buy a house. Honestly CASH buyers out here were paying ABOVE list price.
"My Ex GF just sold one for $600k cash."
You couldn't patch things up? Or was she just the RE Broker?