Is Cash King In the Billings Real Estate Market?
By Lowell Cooke, Coldwell Banker The Brokers
In a survey of closed home sales in the Billings Metro area, 502 single family homes closed from January 1 to April 30th. Of the 502 sales (including mobile, manufactured and modular homes) 72% sold for full price or greater. 72%!! Many of the homes selling for over full price sold anywhere from $500 to $30,000+ over asking price.
Cash Vs Financing
Having been on the losing end of several multiple offers, representing the buyer, and with over asking price offers, some of those loses were to cash offers. I thought I would do a little research into how many of these closings were cash sales. In this “feeding frenzy” environment, where the true laws of supply and demand are in play, where too many buyers chase too few homes for sale, multiple offers for over full price seem to be the norm. Even with an offer many thousands of dollars over full price, an offer which involves bank financing is more likely to lose to a cash offer, even if it is more than the offer which is cash. The reasons sellers like cash offers, other than the obvious, there is no appraisal or loan constraints and close sooner.
Obviously, most of us don’t have cash to buy a home. So, depending on how badly a buyer wants to buy a home, there have been some creative methods used to make offers involving financing more attractive to sellers when the buyer doesn’t have cash. One I have seen, is where an offer involves an “escalation” clause. Since only the seller and the listing agent are privy to the details of all the offers (it is unethical to disclose what the offers details are) some buyers are offering to pay over what the highest offer was, by a certain dollar amount or escalating their offer up to a maximum amount the buyer would be willing to go. This can lead to some contentious offers and counteroffers.
Appraisal and Inspection Contingencies
Another way buyers are using to make their financed offers more attractive is to forgo the appraisal and inspection contingencies. Buyers forgoing the inspection contingency will accept the property in “as is” condition and will not require the seller to make any repairs. This can be a risky situation and even if the buyer gets an inspection and finds reasons to back out, earnest money will be forfeited. Removing the appraisal contingency means if the property fails to appraise for the sales price, the buyer is willing and has the ability to pay, in cash, the difference between the appraisal price and the sales price, since the lender will only loan on the lower value. In other words, if a property sells for $300,000 and it appraises for $295,000, the buyer must have an additional $5,000 over and above the required down payment.
This is the guerilla warfare which is taking place in our current real estate environment. So, is cash king? It certainly has been a factor and one which has increased by roughly 30% since last year. Of the 502 closed sales through April 30th this year, 20% involved cash sales. Putting that into perspective, cash sales in 2019 accounted for 17% of the closed sales, 15% in 2020. While cash sales have increased, as a buyer, you still can compete against cash offers, but is not what our typical modus operandi has been forever. The buying environment right now is one of increasing prices and buyers having to give up contingencies which were a standard of practice.
Once again, if you are a buyer, be prepared for these realities and if you are a seller be prepared for multiple and more than likely, offers over asking price. One caveat, as a seller, the market still knows an overpriced property. Thinking you can set an outlandish price and get it might not happen. The typical situation now when a home comes on the market, is to allow 3-5 days of buyer showings and then having sellers evaluate all the offers and responding to them at the end of that period. As a seller, if you have many showings and no offers after the initial showing period, you have a pricing problem. The market will always find its level.