How much is my Cash Offer worth in Southwest MI? Pt 2

How much is my Cash Offer worth in Southwest MI? Pt 2
December 16, 2014

Jeffrey Bucholtz

We all know the saying, “money talks” but what does it say? With interest rates on mortgages so low, is it a good idea to pay cash for a home? With the criteria for credit worthiness getting stricter by the day, are cash offers more likely to be accepted? And can a buyer with a cash offer expect to get a discount or other considerations thrown in? I decided to explore the popular notion is that cash buyers can expect a discount, and sellers can expect a hassle free quick transaction.

To test this notion I looked at the total residential sales of single family homes in the 49120 zip code; in Niles and Brandywine schools priced between $100,000 and $200,000 (slightly above and below average. I chose this market because I felt it gave a large enough sample size, while excluding properties sold at a deep discount, market areas with stagnation, rural or declining areas, in short one of the most stable markets in our territory, with a large enough sample size to analyze.

All the data is courtesy of the South West Michigan Regional Information Center, trendvision and Freedom Realty. In the past year there were 73 total properties sold in the $100,000-$200,000 price range in Niles MI, including only the Niles and Brandywine school district.

Of those 73 sales, 11 sold for cash, 31 sold with FHA, VA, RD and 26 sold with Conventional financing. FHA/ VA/ RD together make up the majority of the financing type with conventional close behind.

Sellers who's buyers secured a mortgage to purchase the home got 93.86% of their asking price, while sellers who sold their homes for cash money got 92.46% of their asking price, for a discount of 1.5% for a cash transaction, and average of $2200 for our data set. A significant discount for buyers who use cash, the sellers do not have to deal with the hassle of the buyers securing a mortgage. Also the seller typically does not pay concessions on a cash sale. While if the buyer is obtaining FHA, RD, MSHDA or other insured mortgage sellers paid an average of $3150 in buyers closing costs. For conventional financing sellers paid an average of $1271 in buyers closing costs. Each transaction is different, and everything is negotiable, but these numbers are the average.

So if this is the case, why are buyers feeling like hot shots, when they present cash offers? and why are sellers so excited to receive them? The average discount sellers are giving for cash offer is so close to the average sellers pay in concessions on deals involving mortgages, there must be something else happening here. It could be just that cash offers are simpler, they offer less hassle and a quicker closing time.

The average time on the market for cash transactions is 85, while the average time on market is 114 ( and that number includes the cash sales). Transactions that closed in Niles-Brandywine area between $100K-$200K in the last month reduced their original list price only 7 out of 31 times, or 22% of the time, and when they did reduce they reduced their original list price by only 5.02%, for a total reduction of 1.14% pretty good for the first 90 days.

Now after 85 days there is a different story; 27 of 39 sellers reduced their price, that comes out to 69.2%, they reduced on average by $13,689 or 12% of their asking price. Sellers who’s house is on the market for longer than 85 days also get less than the average percentage of asking price and are likely to net less and pay more sellers concessions.

Of the 39 properties in our study that were on the market for over 85 days, 5 were financed with cash, one was a short sale (that accounts for a long time on the market) and only one other was eligible for any other type of financing, another was on the market for only 100 days.

So how much of discount for a cash transaction can a buyer expect in Niles-Brandywine school district? Depends how long the house has been on the market. Keep in mind that most lenders require 45 days to close a transaction, some longer, some shorter, that leaves just 40 days for your agent to market, promote, produce an offer, negotiate terms and file all the necessary paperwork before the sellers fall off the abyss of the 85 limit. Consider that most cash transactions can close in less than two weeks and you see the real value of cash in today's real estate market for sellers. And while it is true that many transactions go smoothly, and we do our very best to make every transaction a success, these days it's simply more difficult for buyers to secure mortgages, due to higher credit expectations, changing regulations in the mortgage industry, declining employment opportunities, dynamic home prices affected by distressed sales and competing houses on the market.

So the numbers add up to $13,689 is the value of a true cash offer in the Niles-Brandywine $100,000-$200,000 price range, assuming the home has been on the market for longer than 40 days, and the only hope of not going into price-reduction land is a cash offer that can perform quickly. This seams insane, and real life does not always reflect macro statistical trends, the sample size is just over the threshold of a viable data set, and every home is unique. We measure what we can, the best we can. Data can provide validation for our instincts regarding the trends of the market, uncover unexpected trends and give us a better idea of how to meet our real estate goals.

So with interest rates at record lows, is it a good idea for buyers to pay cash in this market for a home? It's tough to say, the data would lead me to say that the party in this market who benefits the most from a cash transaction is the seller, but again every transaction is different and everything is negotiable. As of this writing the 30 T-note is at 3.06% and 30 year mortgages are at 3.57%, 15 year at 2.71%, so there is some hardcore math at work here, it maybe the best time to borrow money, maybe one of the best times to invest in stocks. I'm tempted to say that for buyers in this market with cash, because of the insanely low interest rates, maybe better served getting a mortgage and investing there cash elsewhere, other than a primary residence in this particular market,; ie Niles 100K-200K, principle residence. I would recommend looking for a highend foreclosure or a large parcel of land or a multifamily investment. Everybody's cash position is different, goals are different, and there is many ways to make money in real estate.

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