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Cash is King: First-Timers Give Way to Bidders Coming Out of Foreclosure

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By Andrew King

cash_in_caseThe all-cash buying real estate trend has not let up at all in early 2014. In fact, most states have seen an increase in cash purchases—a stunning trend when you consider how popular cash buyers were last year and the fact that many institutional buyers are starting to drop out.

Part of the reason why the momentum has been sustained and even strengthened in some regions is because new types of all-cash buyers are emerging and brokers are embracing it. In some instances, brokers are being proactive and pursuing this type of purchase through aggressive marketing and strategic partnerships.

Joseph Rand, managing partner and general counsel of Better Homes and Gardens Rand Realty, oversees a large real estate firm in the New York City suburbs. With about $1.5 billion in annual sales, the company has an alliance with OwnAmerica, a North Carolina-based organization run by his brother Greg, which represents hedge funds and investor syndicates that look for buying opportunities that are turned into profitable rental properties.

According to Rand, the institutional investors came into the areas that were hardest hit by the housing market crash. “They’re investing in the South and Southwest, where you have home prices well below where they were at the height of the market,” he explains.

The Northeast, however, has had fewer professional investors because of the region’s pro-tenant policies and the fact that prices never came down that much to begin with, says Rand, adding that an average single-family home costs $800,000 in Westchester County, N.Y., and $400,000 in Rockland County, N.Y.

As the institutional investors start to subside, Rand has noted a surge in several types of so-called “regular investment buyers”—all of whom tend to pay in cash:

  • People of means who are buying without selling. “They don’t need the money out of their home to buy their next home,” explains Rand. “For them, it’s a buying opportunity and not a selling opportunity.”
  • People of reasonable means who have done well in the stock market (In May, the five-year bull market on Wall Street has set several new all-time highs). “They have millions of dollars to play with on the street,” says Rand. “That’s taking up a much larger part of the trend.”
  • People who were foreclosed on during the height of the crisis who stopped paying their mortgage and used the past half-decade to save money for an all-cash purchase today. “We have created hundreds of thousands of people who can’t get a loan (because of a foreclosure),” says Rand. “They cannot get a mortgage but they can buy all-cash.”

In New York, there has been a huge spike in all-cash deals. In the first quarter of 2014, 58.9 percent of all home purchases in the state were done without a mortgage, according to RealtyTrac. In the first quarter of 2013, only 27.2 percent of the purchases in New York were made that way.

Nationwide, RealtyTrac reported that 42.7 percent of the deals in the first quarter of 2014 were all cash; 37.8 percent of the deals in the fourth quarter of 2013 were all cash; and 19.1 percent of the deals in the first quarter of 2013 were all cash.

A shrinking portion of that is coming from institutions. According to RealtyTrac, institutional investors—entities that have purchased at least 10 properties in a calendar year—accounted for 5.6 percent of all U.S. residential sales in the first quarter, down from 6.8 percent in the fourth quarter of 2013 and down from 7.0 percent in the first quarter of 2013 to the lowest level since the first quarter of 2012.

Among metropolitan statistical areas with a population of at least 500,000, those with the top five highest percentages of cash sales were all in Florida: Cape Coral-Fort Myers, (73.6 percent), Miami (67.1 percent), Sarasota, (65.1 percent), Palm Bay, (64.1 percent), and Lakeland, (61.8 percent). Other major metro areas with more than 50 percent all-cash sales included New York (57.0 percent), Columbia, S.C., (56.1 percent), Memphis (54.9 percent), Detroit (53.5 percent), Atlanta (53.2 percent) and Las Vegas (52.2 percent).

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