When Chris and Diane Finney decided to buy a bank-owned condo in St. Paul, they knew there would be competition.
Their strategy? Offer less -- but offer cash.
While others said they would pay more, they needed to finance the deal. The bank took less and took the cash.
"We were in the driver's seat," Chris Finney said.
In a normal housing market, multiple bids usually lead to higher home prices, and the highest bid wins. But when credit markets are tighter and appraisals are often lower, many sellers will take less to be sure that the deal will get done.
"If I get five offers on a property and the cash offer is darned close to being one of those top offers, I'd take the cash offer any day," said Marshall Saunders, owner/broker at Re/Max Results.
In December, 33 percent of all U.S. home sales were cash deals -- a record since the downturn started in 2006, according to Campbell Survey and Inside Mortgage Finance. As a result, home prices can't gain much traction because many sellers won't necessarily accept the highest offer.
For most home buyers, it's confounding to be rejected because they are financing the deal. For the housing market, it means more downward pressure on prices despite tight supplies and rising demand.
"It's a real sign of what's going on," said Guy Cecala, publisher of Inside Mortgage Finance. "All things being equal, cash wins."
The volume of cash deals is offsetting other positive trends in the market that should be leading to higher prices. The number of houses on the market has fallen to an eight-year low, and sales are up double digits. At the same time, home prices continue to fall.
At least a third of all homes sales last year involved an investor, Cecala said, and they often pay cash.
Throughout the metro area multiple offers are becoming increasingly common, especially among investors and first-time buyers who hope to score a good deal. Multiple offers are particularly common on foreclosures and short sales, which represented half of all home sales last year. And there's no sign that listings of financially distressed properties will abate anytime soon.
Throughout the metro area, distressed sales represented 42 percent of all active listings last month. In some areas, the percentage is much higher. In Brooklyn Center, for example, there are almost double the number of short sales and foreclosures on the market as there are traditional deals.
Those distressed sales not only put a drag on prices, they make it very difficult for appraisers to find comparable sales to support higher prices on traditional listings. When a lender can't get an appraisal that's equal to the purchase price, the buyer and seller need to make up the difference, or the deal falls apart and the property goes back on the market.
"Banks tend to be much more motivated to sell quickly because they have holding and carrying costs," Cecala said. "All that puts downward pressure on prices."
John McWhite, a sales agent with Coldwell Banker Burnet, said he recently worked with a client who made a full-price cash offer of $65,000 on a Minneapolis condo. It was one of three offers, but not the highest. But because it was cash and guaranteed to close, it was the winning bid. "That happens quite a bit," he said.
In that case, McWhite's client tried to buy the condo when it was a short sale, but the bank didn't approve the deal in time to avoid foreclosure. His client ended up getting the property for significantly less.
Still, buyers need to be remember that there's a limit to how low a seller will go, Saunders said. Not every seller is going to favor cash deals the same way.
The cash strategy doesn't work all the time. An outrageously low cash offer can easily offend a seller, especially one who has an emotional attachment to a house. And Ryan Kempenich, a sales agent for Coldwell Banker Burnet who specializes in foreclosure sales, said that Fannie Mae and Freddie Mac have rules that favor buyers who plan to occupy the properties they're trying to sell, or they want a first-time buyer, he said.
Those who can't offer cash aren't without options. Sellers always look favorably on those offers that don't have a lot of contingencies. Jennifer Olstad, a sales agent for Keller Williams who is also an experienced investor, said that non-cash buyers should make sure that they are pre-qualified for the mortgage and can offer a quick close date. "Yes, a cash offer is better," she said. "But if they're qualified and have letter of qualification and can close in 30 days, I don't see why a cash offer should always prevail."
Experts agree that at a certain point prices will fall to a level where there will be enough buyers -- and demand -- that many sellers won't have to take less than they're asking, whether it's cash or not.
For now, the proliferation of cash deals in today's market is just another sign of how desperate lenders are to unload their listings. Kempenich said that he recently worked with a client who made a $35,000 cash offer on a condo that had originally sold for $200,000.
"Being a cash buyer is powerful," he said. "Loan standards are so tight, the bank says, 'Just get rid of it.'"
Jim Buchta • 612-673-7376