Cash is King

We heard that last year, across the country, about a third of all sales were closed with cash, or at least did not have mortgage contingencies (that means that the buyers could have gotten a mortgage, either before or after the closing, but didn't require that they have one in order to close).  Given the low interest rates available out there now, that's particularly amazing, and says a lot about the difficulty of getting a mortgage now.  Even at the best of banks and mortgage companies, there are more regulations, requiring more paperwork, effort, and time, than ever before.  Many people who can, therefore, are choosing to opt out of the process.

When it comes to Connecticut, the results are even more surprising.  Last year, 39% of state sales were reported as cash deals.  We were about the same, or even a little higher, at Pearce.  Then we looked at this year's statistics, which were greatly affected by weather and delays, so that sales were down across the region for that period.  We were startled to discover that 56% of all our sales for the first four months were for cash, or without mortgage contingencies! And this in a period when not only are interest rates historically low, but when the stock market is performing very well, leading investors to want to keep their money in the market.  We know credit is tight, appraisals are an issue, and that exceptions are rare, but we still can't get over this fundamental change in the way business is done in our industry.  Will it continue?  Dodd-Frank would argue yes, but the number of buyers out there who can't afford to pay cash would argue no.  I guess we'll just have to wait and see.

Cash is Still King

When we first heard the national statistics, that a third of all sales currently are cash deals, we had trouble believing it.  Then, when it transpired that that figure in Connecticut was 39%, it was even harder to swallow.  However, as the year goes on, and we look at each transaction closing, it's more apparent that those cash sales really have increased a great deal.  And the difference in those deals can be huge, when the mortgage contingency is removed from the equation.  Closings are faster, deals fall through less often, sellers and buyers feel more committed; however, there is the appraisal problem.

Many buyers feel--and they are often correct--that they will get a better price from the sellers if they offer cash, for all the reasons stated above.  The mortgage process, though, does provide the security of an appraisal, ensuring that the seller is not overpaying.  In fact, these days, with the market improving, the appraisal, as I've stated before, is more often low than high.

Without the need for an appraisal, the seller may want to check the appraisal on his or her own, and sometimes does.  The fact that a deal may be called cash does not mean that the buyer won't seek a mortgage.  It simply means that the buyer intends to close, and can close, with or without a mortgage in place.  So, if they do apply for a mortgage on a cash sale, and the appraisal comes in low, they sometimes try to get out.  Without the mortgage contingency, that can get messy.  If they didn't say that a mortgage was required for them to close, or be willing to close, and they got a better price for that risk, can they now assert the same claim as a buyer who had the contingency?  We're sometimes finding that out these days.