Cash is King!

imagesIn the past few years I’ve done more all cash transactions than all of the time leading up to the 2007 recession. I use to get a kick about the dooms day, nay sayers stating that we were headed into the next Great Depression. That was never a risk in my opinion. You see, in a depression, people don’t have money. In this last recession, there was plenty on money, it just sat on the sidelines. It was an event in our lives that proved that money really has no benefit to an economy unless its changing hands.

There is a saying that has been around for a very long time; “Cash is King!” But is that true? I guess the answer is, it depends. As it relates to your own finances then it probably is true. I often tell clients that the decision to buy real estate shouldn’t be made because you feel you are paying too much in income tax and you need a tax deduction. That logic really doesn’t work because you are shelling cash-is-king-imgout $10 in payment to save $3 in tax. Frankly, you are better to save the $10 and pay the tax if its only tax benefit you are going after. The reason you buy property is you need a place to lay your head at night, it’s a better investment than renting and it’s part of the American Dream to own your own home.

Alas, that isn’t the topic of this post. Back to the question, is it true that Cash is King when making an offer to purchase a home? I’m sure there are many theories but what I would submit is that in many cases, it is probably not. Certainly the offer of cash makes a real estate transaction much easier than the typical financed transaction. Why is it easier? Thats an easy answer. First, there is no loan to be declined in the 11th hour of the transaction that will cause a sale fail and disappointment for the seller. Second, you don’t have the “lender required repair” event which can add a sales expense to the seller, again risking the sale fail event. Third, it can contribute to the ability to close quickly because you don’t need to wait for appraisals, underwriting, and loan doc creation which can add a month or more to the transaction timeline. Yes there are other benefits as well but these are some of the larger ones.

Is there downside to the seller accepting an all cash offer? One of the difficulties is in validating the cash itself. This is typically done with bank statements or letters from the bank stating the buyer has enough cash on hand to close the transaction. I have never seen anyone lie during this portion of the exercise but since someones finances are not being scrutinized by a third party, i.e. a Mortgage Broker, then I guess its possible to cook the books. The problem with that is they couldn’t complete the transaction and the seller would be damaged by being off the market. Again, it probably doesn’t happen often.

While it can be agreed that there are pros and cons, the real question is what is meant by “Cash is King” and what do we do with that fact if it is one? The problem I’m getting to here is that some interpret that cash gives them the power to set the market.  They are proud of the fact that they have saved this large sum of money (and so they should be) and as a result, they believe they can simply make any offer they want on a property and because its cash, the seller should accept it. There is leverage there but I’ll get to that later. The problem with this thinking, is the buyer doesn’t usually understand that the seller really doesn’t care. You see, at the closing table, the seller doesn’t care if the cashiers check comes with the buyers name on it or from a bank thru the proceeds of a loan. Either way, its all cash to the seller, and that is all they really care about. Its also all they should care about. Check my theory. Walk into a car lot and tell the Sales Manager that you are interested in that vehicle with the $32,000 MSRP price tag that has no manufacturers incentives. Now, offer him $29,000 dollars for it and see what happens. My guess is you are probably not buying that car.

So what is the real problem with the way some people think who believe they are coming to the bargaining table with leverage? The problem is as was mentioned above, that some buyers believe that cash gives them the power to set the market. Well, that simply isn’t the case in most real estate markets and in most real estate transactions. For example, in a sellers market with low inventory, if a home has an asking price of $450,000 and it’s priced competitively, then making an offer of $400,000 cash and thinking that is reasonable is simply erroneous thinking. The question to consider here is why would a logical seller accept a $50,000 discount simply because its all cash? The answer there is they won’t. So why make it? I don’t have a good answer there but please feel free to comment if you do.

So, in a tight real estate market, how can cash prove to be king? Well, its king if you use it to write a strong offer. You see, with all things being equal, if two offers come in at the same price, and one is cash and the other is financed, then yes, the all cash offer makes complete sense to accept first. Yes, it is a much stronger offer than the one that is financed and is probably the offer that the seller will accept first.

As of the timing of this blog post, homes is the Portland Oregon metropolitan areas are selling for 99% of asking price in many price points in the area. Given that fact, why would a buyer think a seller would take their offer, discounted 10% simply because its cash?

IMG_2685Portland Oregon has a population of more than 600,000 people with total households exceeding 250,000. Its a city with a homeownership rate exceeding 64% which brings us to approximately number 42 of the top 75 cities in the Untied States. And its an active real estate market also. So far in 2013, the greater Portland area has transacted more than 1830 residential homes and condominium units which is about 16% higher than we saw in 2011. Things are getting better, but that isn’t really what this blog post is about.

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Yes, Portland is a beautiful and livable city and ranks high as a sought after place to live. However we have our issues as well, just as any city does. For instance, our unemployment rate is currently running around 6.5%, about .5% below the national average. After all, the TV show Portlandia which runs on the Independent Film Channel calls Portland the city where young people come to retire. What goes hand in hand with higher unemployment levels, under employment, the high cost of food, utilities, gas, rent and other contributing factors is hunger. People on fixed incomes have to make choices and in typical situations having a roof over your head and gas in the car can many times come before putting food on the table. IMG_2691Thus the need for emergency food that the Oregon Food Bank distributes annually with over 1 million food boxes throughout Oregon and Southwest Washington. These boxes feed over 270,000 people, of which 92,000 are children. What is further staggering is that food box distribution has grown by 41% since the beginning of the great recession of 2008!

The Portland Lifestyle Team went into the Christmas season this year looking for a way to give back to our community. Realtors in Portland Oregon have largely been know for giving back. Giving back can come in many forms and while it is easy at times to simply write a check, sometimes giving back with your time can be even more valuable and rewarding. Today the whole team took their afternoon, away from what is really a pretty busy real estate market, and we refocused our time and attention to packing food boxes at the Oregon Food Bank facility in Beaverton Oregon. In the Food Banks own words, volunteers are critical to the OFB’s mission to eliminate hunger and its root causes. IMG_2703The time spent was amazing and fulfilling. The 3 hour shift went by as if it were minutes and collectively as a larger team, we packaged over 16,000 pounds of food which accounted for almost 14,000 meals for hungry families. Not a bad job for 3 hours! And, not that we need to be competitive, but these numbers were about 40% higher than the morning shift today!

So as we navigate the remainder of this holiday season, remember that while many of us are pushing our way thru the mall, looking for that perfect present that Uncle Frank really doesn’t need, that there are hungry people out there. In the words of the immortal Forrest Gump, “Thats all I have to say about that”.