Across the nation, the rising number of cash offers for homes is staggering, and the San Francisco Bay Area is no exception, some estimate… over 40% are in cash. And while the almighty dollar has been a long-standing way for investors and wealthy individuals to snap up properties, recently the volume and types of people making cash offers has increased. More overseas money is pouring in, new techies have struck it big, and now add to the list, your Average Joe. Driven by the perfect storm of an ultra-competitive market, increasing multiple offers with bidding wars, and continual low inventory, typical home loan applicants have upped the ante to compete with the Big Guns.
Here’s how they are doing it:
Game Plan #1: Remove All Contingencies
If your home bid is on par with cash offers, you instantly level the playing field by removing inspection, appraisal, loan, and any other finance contingencies. This takes good planning to pull off and you could be trading up for some potential large financial risks: For instance, eliminating the inspection contingency on a 100-year-old home could mean you are on the hook for some pricey house fixes when you move in; or removing the appraisal contingency could mean that if the home value is assessed lower than the purchase price, you are responsible for making up the price difference (low appraisals are common in this hot market so know your options).
Game Plan #2: Pony Up The Cash
At one time, it may have seemed unthinkable for the average person to offer up hard cash to buy a home, but motivation can do wonders. Singles, couples, and families are pooling funds together by whatever means possible to buy their house: Buyers are tapping their relatives, using an existing home equity line, or draining retirement savings and other accounts—or all of the above. But the good news is you’ll be free of potential delays and complications caused by financing a loan. (side benefit: you could also hold a psychological advantage if the seller prefers his/her home is occupied by a “real person”, not a faceless investor that will rent their home out).
Game Plan #3: Pay Now and Finance Later
You could make a cash offer on a home and turn around and finance it with what is called a cash-out refinance. Up until mid-2012, there was a mandatory 6 month delayed financing rule, which made it more difficult for home buyers to take advantage of this type of loan, but since the change, it has become a popular option. However, just because you can refinance, doesn’t mean are guaranteed to get this type of loan. There are multiple conditions to get a cash-out refinance, so not every borrower will qualify. Another refinancing option is a home equity line of credit (HELOC) or a home equity loan. Again, these both come with restrictions, tax implications, and potential complications, so do your homework first before jumping into a sales contract and causing serious financial problems later.