Cash Buyers’ Role in the Real Estate Market
The percentage of cash purchases each year can vary widely depending on a variety of factors. This includes the appeal of other asset classes, domestic and international economic strength and fear, availability of financing, trust in real estate lenders and banks, interest rates, property prices, and real estate market trends.
During the days of subprime lending there may have been very few active cash buyers. As long as you had a pulse you could borrow 100% of the price of a property, sometimes even more. Sometimes you didn’t even need a pulse to qualify. The opposite became true in 2008. Not much was happening unless cash buyers were involved. Even in 2015 the majority of transactions in some markets like Detroit and Miami may have been cash deals.
Some types of transactions can appear almost limited to cash buyers. Some sellers and agents will only contract with and sell to cash buyers. Some co-ops and associations only allow cash buyers. Auctions require cash. Many properties do not qualify for traditional mortgage and bank financing. Some have structural repair needs, others are uninsurable, or have title defects. Some only make financial sense for cash buyers. When lenders tighten up or redline neighborhoods transactions may only be possible by cash buyers.
Cash buyers provide great liquidity, and strengthen real estate markets by keeping equity in properties, and providing a cushion to retain flexibility.
The Benefits of Cash Buyers
There are many benefits of cash buyers for real estate investors. This is true for builders who need capital to begin construction. It’s true for wholesalers and rehabbers, as well as asset managers and funds selling distressed property.
Cash purchases offer a substantial speed advantage when it comes to closing real estate deals. A cash buyer can go from start to finish in hours or just a few days, compared with weeks or months for buyers relying on financing. This is particularly vital for builder, rehabbers, and wholesalers who can be a tight timeline.
Avoiding the Guessing Game
The truth is that no matter how qualified a buyer appears to be – there are no guarantees of getting a mortgage loan. They can have great credit scores, a seven figure annual income, and money in the bank, and still get turned down to quirks in the funding and underwriting process. Contracting with a buyer relying on a loan essentially means signing a contract and hoping they can close. You are tied up for weeks or months fingers crossed that no insurmountable obstacles pop up. That makes it really difficult to plan ahead, and to maximize cash flow and returns. If the deal falls through then sellers have to begin the process all over again; marketing for a new buyer, and there is no telling what may change in the market during that time you are bleeding holding costs every day.
Some properties are just tough to finance with institutional lenders. There may be a lack of real estate comps, it could be in a buffer zone between residential and commercial properties, and there may be clouds on title, liens, or structural repairs. These can still be great deals, they may just need some attention before a buyer can get a loan on them. Then there are co-ops, condo-hotels, unfinished rehabs, and homes or condos with little square footage that no one wants to lend on. Buyers may also have trouble getting loans on lower end properties on which banks don’t make enough money to bother to lend on, or in certain neighborhoods that lenders have blacklisted.
Preserving the Deal
A buyer needing a loan will often require more inspections and visits to the property in advance. They will often want to view it upfront, have home inspections performed, be required to get appraisers and surveyors out, and then may do another walkthrough on the day of closing. If you are an investor flipping a contract or house you haven’t yet closed on you know that brings increased problems with the seller and their tenants, raising the chances the deal will fall apart. These factors are much less intense with a fast acting cash buyer.
Who are Cash Buyers?
Before you can effectively and profitably market to them, you have to know who the cash buyers are.
Who are they? They represent a wide cross section of demographics. Funds, trusts, and corporations can be, and have acted as cash buyers. But for the most part investors will find they are looking for individuals. Very few individuals save or earn their way to becoming cash buyers. Some may be heirs of estates who have come into some money. Lottery winners and beneficiaries of various types of settlements can have a windfall of cash to invest in real estate. Retirees and seniors who are downsizing may have built up enough equity or retirement account balances to pay cash for a new property.
In many cases cash buyers will be other investors. They will be house flippers and buy and hold landlords. Depending on your market a significant percentage of these buyers may be foreign investors. For much of the world U.S. real estate is far safer and cheaper than what is available to them locally.
Finding Cash Buyers
There are a number of ways to find cash buyers for your real estate deals. You can simply run ads promoting your inventory. That included yard signs, newspaper ads, Craigslist, Zillow, listing with a Realtor, and on your own website. Of course these tactics all won’t work for every investor, all the time. You may be wholesaling and unable to list the property, you may not have any inventory, signs may be banned in your neighborhood, and so on. You will also have to filter out all the calls and inquiries from non-cash buyers. Although these can all be valuable leads too. Other methods of marketing directly to cash buyers include emails, social media, PPC advertising, and direct mail. Cash buyers can often be identified and sourced by acquiring lead lists. This provides the ability to directly market to cash buyers in volume, consistently.
Effective List Building Tips
Whether contacts are amassed by buying lists, in-person networking, or inbound marketing they need to be organized for cost effective and efficient ongoing marketing and sales. These lists should be segmented based upon what buyers are interested in and able to buy, and identified by how you connected with them. Create multiple backups of these lists in the cloud, on your devices, and physically. Lists are money. Don’t risk losing them once you found them. Then determine the best ways to contact your list members when you need them. This may be email, direct mail, phone calls, or social media. Remember to continually build out the contact details for each person. Always make sure adding more names to your list is a top and scheduled priority.
Nurturing Your Cash Buyer Relationships
While real estate may be business, and very transactional in nature, it is those investors who invest in nurturing relationships with their cash buyers who will realize the best results over the long term. The hard numbers may sway a sale, but customers invariably trend toward doing business with those they like and trust. So keep showing up, do what you say, strengthen the connection, build the relationship. This might include more follow ups with blog posts, sharing market insights, introducing members to others who can help them, and even organizing in person meetups. Keep showing up. Don’t be a stranger. Be in their voicemail, email inbox, and mailbox every month just like a family member.
Other Uses for Cash Buyers
There are others ways to leverage cash buyers in addition to just selling them your property inventory as well. They can be used as private lenders with capital for funding your deals, while simply providing them a return. They can be used to partner up on deals, or combined together to take down even larger deals. In some cases your cash buyers will have a significant existing portfolio of investment properties. They may not be able to get loans to access that pent up equity for more investments or expenses. So they may also become sellers and a source of deals to serve to other members of your lists.
Start building your cash buyers list today and grow your real estate investment business….