Is Cash Always King?
If there was ever one statement that was burned into my head and countless others during business school it was “cash is king!” If you had capital, you ran the show. It meant that if title was clean and the property wasn’t going to collapse from some physical deficiency like a shoddy foundation or rampant termite infestation, all parties involved could see the finish line within a matter of days. People start counting the money, because it’s all-cash money that is going into escrow’s account. However, with the advent of the latest recession, going all cash isn’t all that it is cracked up to be.
Many times, the seller’s aren’t in a hurry to close. I have worked with clients who were dealing with a seller that needed two to three months to close for a variety of reasons (a new home needs to be completed, the kids are finishing out the current school year, an urgent project at work has to close out within weeks, or they’re just not being ready to go yet), accordingly, “all-cash” doesn’t impress them. In many cases, both parties motivations have a need to be fully vetted out. Understandably, many buyers have oversold the “all-cash” component of a deal so much that they weren’t invited to counter and lost out to someone who was putting 20%-25% down and financed the rest. The seller was more than comfortable as the buyers had been vetted by their bankers for their ability to close.
It has been rare in our current economic cycle, but some sellers don’t want all of the cash all at once. If a seller purchased or even built a property in the 60s or 70s, they have used up all of the depreciation, are sitting on an excessive amount of appreciation, and have no need for the tax bill or the mountain of cash that the sale will generate. As such, some sellers will carry back paper, particularly if they are healthy and would prefer the timely trickle of monthly income as opposed to the jolt of a one-time lump sum. Case in point, Los Angeles real estate prices have been on a run within the last 12 months; particularly in beachside towns, markets close to employment centers and areas with great public school districts. Santa Monica is a city that has all three characteristics. I know a few individuals who had the foresight to purchase vacant lots on or near the beach, and construct multi-unit parcels at or below $100,000 back in 1965. These properties have zero debt and have values in excess of $400,000 per unit. An all cash offer isn’t particularly attractive to someone looking at a $500,000 tax bill from the sale of their fourplex.
Other times, there may be multiple all cash buyers. Some buyers are using seasoned savings account funds, some have pooled funds, many have access to funds with their lines of credit. So what makes any one cash buyer more special than the other? Not much. At that point, sellers look beyond the bank statement and focus on other knock out factors (is the buyer an owner user or investor, what are their future plans for the property, who knows them, “are they from around here?”) which may not seem fair, but if cash isn’t king, some other factor will be. Many have seen a seller who chose a buyer who reminded them of themselves when they were young, or they wanted to give the rookie a shot, or they wanted to sell to a frat brother, or maybe even to a charity that does good things in the community. So all-cash may not get it when someone else can pull at a seller’s heart strings.
I never thought that I would see a day when a $1,000,000 bank statement, a $3,000,000 bank statement, or a $10,000,000 bank statement with verifiable funds had no effect on a seller’s psyche. However, it has happened and we are beyond the day of the strength of just the almighty dollar. Cash alone wont get you there, especially if it is a commodity that everyone is using. If everyone is going all-cash, the auction becomes a fashion show that may not necessarily be won by the highest bidder (just ask the guy who lost the bid for the Revel Hotel in Atlantic City!). Cash is still King, but nowadays, sellers want a little more.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at firstname.lastname@example.org.