Almost 27 percent of San Diego County home sales were in cash in the third quarter — its highest in seven years.
Attom Data Solutions said cash purchases, instead of loans, were up from 15.4 percent at the same time last year.
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Sellers typically prefer cash buyers because it guarantees money for the home quickly, whereas mortgages can be delayed — or fall through — for a variety of reasons.
San Diego has seen an increase in cash offers before, said Attom records going back to 2000. The real estate data provider said 36.2 percent of homes were purchased with cash in the first quarter of 2013 as the region came out of the Great Recession. At the time, many loan programs were still suspended from the housing crash and that made cash sales more of a necessity.
The difference now is potential buyers face increased competition for a limited number of homes for sale and are trying to make the best offer possible, said Raylene Brundage, a Windermere agent who sells in several North County communities.
“If it’s not contingent on a loan, there is less that can go wrong,” she said.
Brundage said sellers often go for cash sales over other loan types designed for first-time buyers and the military. Those types of loans require appraisals and inspections, making it possible a transaction could be halted. Cash sales not only mean money flows quickly into bank accounts but inspections, which are needed on loans, are often waived. A deal with a mortgage could take a month or longer to complete.
Brundage said she worked with two millennial couples this year who borrowed money from parents so they could make cash offers. Both were successful in getting homes.
The majority of cash sales are coming from typical homebuyers, not investors. Attom said 7.9 percent of sales in the third quarter came from institutional investors.
Real estate agents say buyers are feeling the pressure to come up with cash because most homes are getting multiple offers and they need to stand out. There were around 4,100 homes for sale at the end of the third quarter, said the Redfin Data Center. That was down from 5,300 in 2020, 7,900 in 2019 and 9,300 in 2018.
The median home price has continued to rise with competition. The median price hit $750,000 in November, a record high and a 15.4 percent increase in a year.
A cash sale typically entails a buyer first showing proof of funds (required in almost all types of sales) and then transferring funds from a bank account — or multiple bank accounts, especially if family is helping — to a seller. A buyer showing up with a literal briefcase filled with cash is not unheard of, but can raise concerns of money laundering with federal investigators. Likewise, a sale of a home in bitcoin, or another cryptocurrency, is considered a cash sale and will likely face increased scrutiny.
The U.S. Treasury announced in early December that it wants new regulations for all cash sales — no matter how the funds get to the seller — to cut down on laundering.
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” Himamauli Das, the acting director of the Treasury Financial Crimes Enforcement Network, said in a news release.
Cash sales can come from buyers who get loans from family, as well as institutions that have cash reserves to make a purchase easily. Without those options, first-time homebuyers, active military and veterans could be at a disadvantage.
FHA loans (for first-time buyers) require a minimum of 3.5 percent down and VA Loans, guaranteed by the U.S. Department of Veterans Affairs, typically do not require a down payment. It can be used by veterans and active service members. The VA says roughly 90 percent of its loans are made without a down payment.
With both loan types, buyers need to get an appraisal of the property from a lender. If a bank, or whoever is issuing the loan, appraises the property at a lower price, it means a deal could fall through. That isn’t happening much these days, says Brundage. However, it could still be in the mind of sellers who would want to go with a cash sale to play it safe.
Buyers using a typical, 30-year, fixed-rate mortgage who put 20 percent down have more opportunities to make their offer attractive. In addition to less strict appraisals, they can wave contingencies — whereas FHA and VA loans need termite clearance and other inspections. Still, even large loans for luxury properties, called jumbo mortgages, are often not as appealing to sellers as cash.
Another advantage of a cash sale is you don’t need a credit check, said Mark Goldman, a real estate analyst with C2 Financial Corp. It may seem like a minor factor, he said, but sellers are given access to credit reports of potential buyers and may feel less thrilled about a transaction if they have a low score.
“Cash sales just eliminate a lot of uncertainty for the seller,” he said.
It isn’t always a guarantee that sellers will take cash. Brundage said she had an active duty buyer, using a VA loan, get a single-family home in Escondido a few years ago over other offers because the seller wanted to support the military. Jan Ryan, an RE/MAX agent based in Ramona, said she recommends her sellers avoid cash offers because those buyers tend to be more demanding with repairs and are less enthusiastic about living there than a first-time buyer.
The 7.9 percent of sales in the third quarter from institutional advisors in San Diego County was lower than much of the nation.
In Atlanta and Phoenix, investors are making up 19.5 percent of sales; In Charlotte, 19.3 percent; In Jacksonville, Florida, 19.1 percent; and Tucson, 18.4 percent. Parts of the South and Midwest have some of the smallest interest from institutional investors. In Madison, Wisc., investors made up 2.3 percent of sales.
Goldman said a lot of institutional investors may be pulling away from the market because many have been overpaying for homes. Zillow’s homebuying program, Zillow Offers, was suspended in November as the company wrote down losses of more than a half-billion dollars on the value of its remaining homes, said The Wall Street Journal.
“They are getting their clocks cleaned a bit,” Goldman said. “A lot of those guys, like Zillow, were paying too much for properties.”