As buyers strive to land a home in the East Bay’s overheated real estate market, a surprising number are throwing all-cash offers at the limited number of homes for sale, according to newly released data.
Nearly a quarter of all the home sales in Berkeley — 23.2% — were all cash between November 2016 and April 2017, according to real-estate brokerage Redfin. Given that the median sale price for a Berkeley home is around one million dollars, that’s a lot of cash.
Moreover, 26% of all Contra Costa County sales, and 16.5% of Alameda County sales, were all cash in the first quarter of this year, according to data from property website RealtyTrac.
“We see tons of all-cash offers coming through,” said Patty Flores, a real-estate agent at Red Oak Realty.
DJ Grubb, co-owner of The Grubb Company, said 38% of his company’s sales for a million dollars and up were all cash between May 2016 and May 2017. The company focuses on Piedmont, Berkeley, Oakland and Kensington.
The phenomenon has been building over the past five years, said real-estate agent Holly Rose. Other agents pegged it at around two or three years, but all agreed it’s a factor in East Bay home sales.
“The all-cash offer is really being driven by the competition between buyers over properties because of the low inventory,” said Marion Henon, co-owner and broker at Marvin Gardens.
“Low inventory” refers to the fact that there is a dearth of homes on the market, a condition that has existed for at least four years.
Because so many buyers are competing over so few properties, bidding wars are common, and buyers are adopting all sorts of ploys to get their offers accepted. Offering all cash gives buyers an advantage because it eliminates risk and saves time for the seller.
“With an all-cash offer, it’s possible to close in a week to 10 days,” said Sam Krueger, branch manager/loan adviser at Pinnacle Capital Mortgage in Kensington.
It can even be possible to close in as little as five to 10 days instead of the customary 17-30 days, Krueger said.
“There are not as many things to deal with. You don’t have to get an appraisal,” the branch manager said.
Krueger is referring to the fact that when a bank loans a buyer money for a mortgage, the bank requires an appraisal to make sure the amount it’s loaning is equal to the home’s value.
That not only takes time, but if the appraisal is below the price the buyer is offering, the buyer could end up stuck with the difference, and might even have to call off the deal.
“When you have a loan in place it’s contingent on the appraisals, contingent on the inspection,” Flores said.
During the worst days of the foreclosure crisis, from approximately 2008 through early 2012, investors would pay cash for distressed properties and flip them or rent them out. Grubb, Flores and others said the latest all-cash phenomenon is different.
“There are very few such buyers presently,” Grubb said. “Most of our buyers are people who are in town or coming in from San Francisco. Lots of local movement, very few foreign investors.”
But if cash offers comprise 23.2% of the market, according to Redfin, that means the majority of sales do not involve such offers. Flores said, “I don’t want buyers (with mortgage loans) to be discouraged. They have plenty of opportunity.”
Agents said the majority of the all-cash buyers are concentrated at the upper end of the price scale, variously described as higher than $1.2 million or $1.5 million.
Flores said, “You’d think because they (buyers) are coming in all-cash they would be lowballing, but we’re not seeing that.”
Who are the people paying cash?
Which gives rise to the question: Who are the people who have upward of $1 million in cash to throw at a house?
“They work in the tech industry and make six figures,” Flores said. “I sold a Piedmont property and the person who bought it was under 30. He paid $1,350,000. It was part of his bonus. An annual bonus might be enough to pay off a million-dollar house in full.”
Grubb said, “From the millennial side, it comes from tech. But it’s not only the tech industry. On the baby boomer side, there is so much equity. Boomers have a tremendous amount of equity in their homes and in many cases, the’re inheriting money from their parents.”
Also, living parents or grandparents may make gifts to their children for a house purchase, Grubb said.
“There’s always the doctor father in Minnesota and the kids are having a baby and he’s got lots of wealth and he helps the kids,” Grubb said. “Talk about helicopter parenting — in this case, the helicopter is a Lear jet.”
Anita Becker, a Pacific Union real-estate agent, said she is seeing making the move from the city across the bay. “There are also folks who are cashing out their property in San Francisco and moving to the East Bay for more space or better schools. They have started their family and are getting out of their (San Francisco) condo and selling it for $1.5 million.”
In some cases, the buyer will offer cash to land the sale, then take out a loan after escrow closes.
“We just did a loan for the CEO of a tech company. He bought his house in Albany in the $1.3 million range. We did it all in cash, and we immediately put a loan on it after it closed. It’s a typical strategy,” Krueger said.
“He did not want to put all his cash in the house. He had already been pre-approved for a loan. It’s a good strategy if you have the means to do it,” Krueger said.
Rose said, “You can get a private bridge loan, which is just a privately held fund that’s managed through a local loan broker, to float you enough cash to buy the house.”
Though the interest rate is high, it enables the buyer to make an all-cash offer, then take out a conventional mortgage after the sale, she said. This is not a common strategy.
She noted, “I’ve been a Realtor now for almost 30 years and this is the third super-hot cycle I’ve been through, but this is the first time this all-cash phenomenon has happened.
“Real estate industry customs are changing all the time. In the 1980s you would just get pre-qualified for a loan, meaning that if everything you told the loan broker on the phone is true, you’ll probably get a loan. Then it evolved into being pre-approved. That means they have run all your credit reports, the loan is a slam dunk.
“Now it’s evolved into, ‘We’ll do better than being pre-approved. We’ve got the money right here.'”