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Investors Competing with Home Buyers on Foreclosures

In the last 12 months I’ve had a few situations where my client’s offer on a foreclosure was rejected in favor of a cash offer.  In my office, I know of many others that have experienced the same thing.

With the data provided by RMLS that I used yesterday to comment about FHA transactions, I am also able to dig down deeper and look at the detail at the MLS-area level.  In Minneapolis-North, median sales prices have fallen from around $150,000 in 2006 to around $50,000 today – due almost entirely to the fact that this neighborhood has been one of the hardest hit by foreclosures.

A healthy ratio of rental to owner-occupied housing has long been advocated by the City of Minneapolis and in recent years they’ve made it clear (1,2) that they intend to do what they can to protect the housing stock.  Unfortunately the foreclosure activity is far higher than can be handled by any public or private entity.

While many foreclosures are in need of serious rehabilitation, prospective home buyers can take advantage of programs offered by the city and general rehab loans like the FHA 203(k) to finance the cost of needed repairs into the mortgage.  There are also a large number of foreclosures in generally ok shape and only need a few cosmetics to make them livable again.

Prospective home buyers of these foreclosures, the vast majority being first time buyers, see both good condition and fixer-upper foreclosures as an opportunity to purchase a home at prices not seen since at least the 1990′s.  Consider this a period where the market is providing an affordable housing explosion.  Unfortunately at these prices, these properties also become excellent investment opportunities for rentals, which creates competition with the prospective owner-occupant buyer.

These investors come in with cash offers and when presented with multiple offers where most terms are equal, many banks will take the speed and surety of the cash offer versus entrusting a successful sale to a buyer that needs financing to close.  In fact, cash can often mean double-digit percentage discounts on the list price vs. a financed offer.  These cash offers have succeeded so well in Minneapolis-North recently that while cash offers were only 5% of the transactions in 2005, they made up nearly 65% of the sales in 2009.

minneapolis north types of buyer financing Investors Competing with Home Buyers on Foreclosures

While many of these cash purchases may have been for owner-occupied purposes, it is impossible to quantify what percentage are investor vs. owner-occupant.  My experience and gut tell me that most of these cash sales were to investors.

Minneapolis-North is an exaggerated version of what we’re seeing all over the Twin Cities – I have heard stories of investor competition from agents around the metro and at price points up to around $250,000.  Metrowide, cash purchases in 2007 were only 5% of sales but zoomed 240% to 17% of sales two years later in 2009.  Having this strong demand has helped us dramatically reduce the inventory of foreclosures available today and has definitely provided support for the housing market, but this investor demand has also made it hard for many prospective buyers to take advantage of what may become an historic level housing affordability.

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17 comments
rebecca
rebecca

We put an offer on a forclosed home last week. We heard nothing until a couple days ago when we found out that there had been 3 other offers submitted over the weekend. 2 are cash offers and 2 are conventional. We submitted one of the cash offers and I am wondering what are our chances of getting the house. Also wanted to mention that the other cash offer is having second thoughts and one of the conventional offers is higher than ours. Also I am not an invester. What chance to I have at getting this house we love.

Tracy Van Lone
Tracy Van Lone

Maybe it's NOT the rich getting richer. Perhaps it's the poor or young being smart. In Long Beach, CA, several people in our condominium building have purchased condos with cash in the past couple of years, and then proceeded to occupy the units. The appeal is an inexpensive condo ($150,000. . .very cheap in the Long Beach market), no mortgage payment. It's as simple as that. In these troubled economic times, people are looking for shelter with no loan to repay. I think a lot of the cash purchasers are actually owners who will occupy. There is no guarantee we will keep our jobs anymore. There is nothing more comforting than knowing we have a nice little home to live in that requires no monthly payment.

Jason
Jason

Does a home buyer really have an edge over cash investors? I'm actually a bit surprised that cash offers are quite numerous at times like these.

david
david

Finding a good foreclosure property to acquire for your-selves is a good idea in the light of making investments in property. Famous investors always viewed home and related property as a liability and not an asset as it involves taxes for the purchase and also annual taxes associated with them. But the fact is, every family needs a place to call home, their abode of happiness. Some may also acquire property for the renting business. In many places renting out properties, is a good way of income.

Brenda
Brenda

I'm considering investing in a foreclosed home... fixing it up... then selling or renting the property. Do you have some guide/reading material to suggest for me? It seems like a great time to buy now!

Mike
Mike

If you want an upper hand when buying a bank owned property as an owner occupant, you will be more sucessful contacting the listing agent to submit your offer.

Jonah Waalen- The Waalen Team of Edina Realty
Jonah Waalen- The Waalen Team of Edina Realty

I do like the 10-15 day rule for investor offers....that helps. Investor (cash) offers are part of the game and there is really no way around them. It is just another aspect of real estate that is "real", and we have to deal with it.

Joe Rigney
Joe Rigney

Aaron, Thanks for the info. Another question about the phenomenon you describe: Are most of these investors looking to rehab and re-sell, or rehab and rent? And if it's the former, what type of price difference are we generally looking at? The home we lost was 4Bed/2Bath in need of a new chimney, kitchen, appliances, and paint. It listed for around $125K. Normal homes in the area are listing for around $170K-230K. We really liked the house, and might be interested in waiting to see what it looks like on the other end. Thanks

Joe Rigney
Joe Rigney

Aaron, I can verify what you're saying here. My wife and I found a home that we absolutely loved. Saw it the day after it was listed, made the offer over the weekend, did everything you put in your comment (conventional, 20% down, double earnest money, 30 day close, $7K more than ask price). The bank took a lower cash offer (I'm assuming an investor) b/c it wasn't subject to appraisal. It certainly makes it hard for folks like us to get into a home when all the good deals get snatched by investors with cash-on-hand. One question: is it possible to get a lender to commit the cash up-front, provided the buyer pay for an appraisal pre-offer, in order to fight fire with fire (i.e. I can offer cash to the bank in order to get the home, and finance with the lender)? Have you heard of people doing this?

Heather Humphries
Heather Humphries

So what advice would you give to a first-time home buyer who may be competing with cash offers on a foreclosure? What can we do to make our offers look the most appealing?

Jonah Waalen- The Waalen Team of Edina Realty
Jonah Waalen- The Waalen Team of Edina Realty

It's just another case of the rich getting richer. I do know a number of people with cash buying these homes (most not with my assistance). Unfortunately, I do have quite a few first time home buyers who are forced to compete with cash offers as well, and let me tell you, it is quite a battle! Eventually they do get one though, wish there was a better situation, but it is what it is I guess. I will just keep doing my best for these first timers!

Aaron Dickinson - Edina Realty
Aaron Dickinson - Edina Realty

When it comes to Minneapolis-North, the median sales price in December was only $50,000 and my guess is that most of the cash sales were below the average. I haven't done any research into who is buying what or how many so I can't tell you if this is spread amongst a few or many. I know there are quite a few people out there that have had cash sitting on the sidelines for some time, waiting for an opportunity like this.

Brent
Brent

Thanks for the follow-up on the cash-only transactions. I wonder where their cash is coming from. Investment clubs? Venture capital? Rockefeller-esque slum lords ala the 1930s? It's hard to believe that somebody would have that much cash lying around without some sort of lending backing it.

Aaron Dickinson
Aaron Dickinson

The biggest rule is that banks do stupid things sometimes. Typically a bank likes a cash offer with fewer contingencies over a financed offer enough that they will take a little less on the house to get it but sometimes the highest price is the one that wins. Sometimes they will go back to all the parties and ask for a "highest and best" offer. I tell all my clients to not try and over-think it - banks do many stupid things and as such you can't use too much reason when you work with them. Make sure you and your agent put together the best offer you were comfortable making and cross your fingers!

MikeLord
MikeLord

@Mike IF YOU DONT WANT PROPER REPRESENTATION YOU WOULD CONTACT THE LISTING AGENT... THE LISTING AGENT WORKS FOR THE BANK NOT FOR THE BUYER... GOOD LUCK WITH THAT!! FIND YOUR OWN REALTOR AND BE REPRESENTED FULLY.


Aaron Dickinson - Edina Realty
Aaron Dickinson - Edina Realty

Joe, I haven't heard anything like you suggest. If you're not paying cash at closing you are not doing a cash transaction. An appraisal can take a week to complete - house might not be around that long. If you submit the cash offer to the seller (bank) you will be requested to provide proof of funds.

Aaron Dickinson - Edina Realty
Aaron Dickinson - Edina Realty

It's hard to compete with cash investors. Some banks will only consider owner-occupant for the first 10-15 days on the market. Many banks don't give any preferential treatment. The best thing you can do is put in the strongest offer you can as quickly as you can. This means looking at houses as soon as they are listed and submitting offers same-day, writing good sized earnest money checks, doing 20% down conventional if you can, 30-40 day closings, all paperwork filled in correctly and completely. In many cases these days, foreclosures have one or more offers above asking price. There's not a lot more you can do - I tried to purchase an REO house for myself almost two years ago and offered 5% down payment with closing in 40 days. The seller instead took an offer that was 15% lower than mine but closed in 3 weeks and was cash.

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This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.