So You’re an All Cash Buyer? So Friggin What!

cash buyers attack property

cash buyers attack propertyNot what you expected to read on my blog, is it?

I know that this statement may seem a little counterintuitive, but I feel as though there is a misunderstanding in the residential housing market that needs to be addressed. As buyers, we have been conditioned to believe that cash is king and by offering a seller all cash, we will secure a discount. We have also been conditioned to assume that most current sellers are distressed in some form or another and are susceptible to low offers. At least, this is what is pounded into our heads on a daily basis by our sensationalized news sources. Finally, we have been instructed to act as vultures in failing economic times, we are told to be opportunistic and to pillage at other’s peril. Their loss is your gain, etc. What we are not told is the complete truth.

Cash Buyers Can Become Court Jesters

There’s a certain warm feeling that accompanies holding a fist full of cash, I cannot image what it must feel like to wake up to a bank account balance followed by eight or nine zeros. Few of us ever will. Another interesting behavior that accompanies this warm feeling is one’s unwillingness to part with said cash. It has been compiled via excruciatingly hard work, diligent saving and through sheer, unimaginable willpower. It is understandable that one would prefer to exchange ever smaller portions of this stockpile for goods and services. I certainly would in order to ensure that I still woke up every morning with my cherished warm, fuzzy bank account balance feeling.

Unfortunately, the vast majority of residential property sellers couldn’t care less about your warm, fuzzy feelings. This is partially due to the fact that the vast majority of properties in the US housing market are financed and one virtually expects a replacement buyer to be financing their purchase as well. In other words, the system expectation is set. According to NAR, approximately 91% of all properties in the United States are financed in some way. Of course, the percentage of the asset financed varies across the board, but the percentage becomes a moot point as an appraisal is typically still required by the lending institution. Sellers are ingrained, entrenched even, by the belief and understanding that their property is still marketable and sellable despite the involvement of a third party who happens to be a lending institution that agrees to your property’s value.

Additionally, all reasonable sellers expect their property to be subjected to battery of litmus tests, including a professional appraisal and inspection prior to the completion of a sale. The expectation exists that receiving highest and best dollar still includes running this gauntlet. So, insert a cash buyer at this point. Right here at the intersection of two equal and opposite desires with sellers holding onto optimism and cash buyers embracing vulturism. Now add vocal advocates to each side. You can quickly see where the divide that can be created and where the belief that a new buyer who is utilizing financing could bridge that chasm.

The Perspective from Each Side

Cash buyers and their agents are attuned to the fact that they are in a good position. They believe that their financial prowess will lead to securing a lower price by offering a seller the assurance that they have the ability to close on the property and quickly. Cash buyers are sure of themselves and tend to make very educated and considered decisions, as it pertains to their own well being.

Sellers are striving to sell their property for as much money as possible. They typically love their property and believe it to be in better condition than it really is. Rose colored glassed are adorned and all of a sudden, their 15 year old couch has become a potential collectable and is describes as “quirky modern” or “throwback chic”. This is the same couch that they themselves have complained about for the last 5 years. Most have also given themselves adequate time to sell their property, including time to run the inspection, appraisal and paperwork gauntlet.

The Reality of Cash Buyers Versus Financing

With few exceptions, a cash buyer is no better off than a buyer who has attained a mortgage pre-approval. From a seller’s perspective, a lending institution’s money spends the same way your hard earned cash spends. In reality, this person has become a cash buyer, but with someone else’s money. The only hurdle to attain the lending institution’s money from a seller’s perspective is their property’s value must be favorably judged by a third party appraiser within a certain period of time. In my State, this time is typically not more than 30 days and if a seller has educated themselves as to the values that surround the property in question, the risk of not appraising for the contract value is very low. Remember, sellers know that lending institutions want to make loans, this is how they earn incremental income and make their living.

Current Exceptions to the Rule

If you have a very unique property that has no peer comparatives, a cash buyer may become necessary and have the upper hand since an appraisal will most likely not vet out your property’s value.

If you have a property type that is not currently financeable through conventional means. Example: owning a condo in a development that is less than 30% owned or under contract, the HOA does not have adequate reserves and no grant money is available to potential purchasers. Perhaps the development may also be in receivership or REO.

Raw land or improved lots unless the local bank is also granting you a concurrent construction loan and permanent financing.

The Real Estate Conclusion

Regardless of whether you are a cash buyer or a well qualified financed buyer, the price attained is determined by the seller’s motivation. If the seller is distressed by their circumstance, the negotiated price will be more in the buyer’s favor. This distress takes many forms: financial, time, divorce, relocation, death, bank regulators, etc. However, make no mistake, inventory levels are not themselves a distress. If a seller has no reason to sell other than to test the market and there happens to be 10 times the average inventory on the market, you will not be negotiating a price you feel is either fair or favorable 99 times out of 100.

So go forth, you cherished few, and pillage at other’s peril. Only, don’t get your feelings hurt should a seller rebuff your advances. Regroup, and attack another castle!

Written by Grant Hammond, an award winning real estate broker in Nashville, TN.

Q1 2010 Nashville Condo Closings

Nashville condo closings in 2010

Below are the vast majority of the condo closings in the following areas of Nashville: 1) the downtown core, 2) the Sobro region, 3) the Gulch, 4) midtown and 5) the east bank. I have only considered condo projects that were completed after 2006 and contain more than 60 total units.

I have excluded condo projects west of the Adelicia, those excluded are: The West End, Bristol on Broadway, Bristol West End, The Enclave, and Belle Meade Court. I have also excluded condo projects north of the downtown core, those excluded are: The District Lofts, Harrison Square and Werthan Mills.

Encore Condo Developers Pay off Construction Loan

Encore condo in Nashville

Encore condo in NashvilleIn an update to my September 25th, 2009 article about the Encore Condos, I am pleased to tell you that the developers of The Encore have paid off their $63 million construction loan obligation. Led by local developer Tony Giarratana, the Encore has sold remarkably well during what many consider to be recessionary times in the national condo market.

The Encore is the first high-rise to accomplish this benchmark since Ray Hensler did it with his luxury condominium project called The Adelicia 3 years ago in Midtown. Interestingly, and perhaps admirably, Giarratana was also the first developer in Nashville to not only build a high-rise condo project in downtown, but also the first to sell a building out with his Viridian effort in 2005. The Viridian remains the tallest condo project in Nashville standing 31 stories tall and features Tennessee’s highest pool, located on the 31st floor itself.

What are the Encore Condos

Located at 301 Demonbreun Street, The Encore is a 20-story, 333-unit condo tower wrapped with 20,000 square feet of street level retail space. Only 50 developer owned condos remain unsold and incentives are being offered to new buyers. However, don’t expect to ‘steal’ a condo from the developer. Prices have remained very stable over the last 12 months and have sold steadily.

Why the Encore Sells Well

The three magic words in real estate: location, location, location. The Encore is located in the SoBro or south of Broadway area of downtown and sits directly behind the renowned Schermerhorn Symphony hall. It is within walking distance of every single major attraction in downtown including all concert venues, professional sporting events and Nashville’s riverfront. In addition, Tennessee’s largest construction project, the new Music City Convention Center, is underway just 2 blocks West, giving the Encore a bright future.

I highly recommend the Encore to condo buyers who are looking for a solid, bond-like investment who wish to enjoy all of what Nashville has to offer.

5th and Main Condos Boot Renters Out

Allium in 5th and Main condos

Allium in 5th and Main condosIn the wake of the project losing FHA certification, the lender is quietly booting ‘lease purchasers’ out of the building who have no intention of consummating a purchase. Why? It’s simple. Under HUD’s revised rules, a condo development must be at least 50% owner occupied in addition to at least 30% sold or under contract in order to attain FHA certification. A ‘lease purchase’ is not deemed to be a purchase contract, thus, they are all viewed as rental contracts until a purchase is consummated.

One must also keep in mind that these revised FHA certification rules have only been temporarily lowered until the end of 2010. Beginning in January 2011, the rules are expected to revert back to a minimum of 50% of condos under contract or closed and the maximum number of FHA backed loans capped at 30% of the total units in the development. The percentage of owner occupants is also expected to revert back to the 70% range. This could be potentially damning for a condo buying public that has become addicted to 3.5% downtown payment market rate mortgages.

Losing residents in the project is not good news for Allium or Otters Chicken, the two anchor tenants in 5th and Main who are already battling the stigma of being located in a condo project that has gone into receivership. In fact, I would imagine it would feel a little like being married to Ike Turner or substituting yourself as Mike Tyson’s speed bag in the 80’s. Both restaurants have persevered admirably, but I have to wonder when the haymaker will land.

The Future of 5th and Main Condos

As bad as it looks now, the ambient condo prices are simply declining, which is actually very good news for those buyers who have been patiently waiting for a well priced condo in a good location. Unfortunately, a few of the more eager beavers who did purchase will get burned, but the vast majority of buyers will most likely secure a very marketable price. This is not a horrible result for the macro Nashville condo market. The worse result or factor is a stagnating inventory or looming shadow inventory, both of which would be greatly diminished by an onslaught of discounted owner-occupant purchasers in the 5th and Main condo project.

What is 5th and Main in Nashville?

townhomes in nashville 5th and mainThe 5th and Main project consists of a 6 story, 113 condo midrise coupled with 11 separate townhomes located on Main Street at the gateway to East Nashville. There is also nearly 20,000 square feet of retail space on the ground floor as well as 10,000 square feet of office space on the second floor. According to their website, “Fifth & Main offers uniquely modern homes featuring a spectacular blend of exterior resources. A vibrantly colored brick combined with Trespa paneling and expansive glass windows create an enduring streetscape with contemporary flair.”

The original developer for the project was The Home Co., a subsidiary of Affordable Housing Resources, a Nashville based organization that builds low-income housing. The project architect is EOA Architects and the contractor is Solomon Builders, both Nashville based businesses.

When 5th and Main fell into receivership in February 2009, its developers had a $36 million outstanding construction loan according to Eddie Latimer, CEO of Affordable Housing Resources. Both EOA Architects and Solomon Builders were owed fees in addition to 5 other subcontractors that have since been settled.

Nashville Condo Prices

Nashville condo prices per square foot

Most of you know that I keep a keen eye on the Nashville condo market and prices, but many of you don’t realize how much in-depth research I do. It is also interesting to learn that many buyers assume that the is the least expensive condo development in Nashville, but that is only true if you are looking at total price. A more interesting view is which condo developments offer the best price per square foot as our real estate market is heavily weighted in that direction when it comes to generating comps or ascertaining value. It’s just another way to compare condo buildings from an ‘apples to apples’ perspective.

Nashville condo prices per square foot

Nashville Condo Prices Have Shifted

It should not come as shock that one of the most expensive condo buildings to build, is one of the best priced to sell. The Terrazzo is backed by an investment fund who understands the market forces and understands how to recover their development loan. Yes, the Canyon Johnson Urban Fund is exercising their rights under a forbearance agreement, but so are Fifth Third Bank, Compass Bank, Bank of America, Pinnacle Bank and Wachovia Bank. So why is the Terrazzo priced so much better than the rest?

There are several reasons, but the more interesting question is why aren’t the other banks pricing their condos as aggressively? Do they believe that they have a better condo product or that their location is more desirable? Perhaps, they have more patience; unlikely, but it is a thought. It is also important to realize that this pricing won’t last too much longer. As the development nears 60% sold out, should be slowly raising pricing, or at least, that is what the economics of the forbearance agreement seem to suggest.

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Real Estate Tax Credit Causes Nashville Homes Sales to Soar

March 2010 closed sales

happy and ignorant about home salesMost real estate professionals would agree that the extended first-time home buyer credit has led to an increased level of purchase activity in Nashville. However, most tend to also believe that this activity has led us to a point when you can call the Nashville real estate market ‘recovered’. I can see why you may feel that way considering the combined optimism of a better than last Spring selling season and the fading memory of bank collapses and insurance company overextension. In fact, I have even seen many sellers stiffen their backs when lower than asking price offers have been presented in hopes that the 2010 market will net a higher offer a few months down the road.

Don’t be Foolish!

History is a great professor and it’s time to go back to class. Yes, March 2010 closing are 20.6% higher than those of 2009, but they are also still 16.3% lower than in 2008, a recessionary year, which did not see any government incentive induced real estate sales. Yes, it is also true that we have seen 6 straight months of year over year gains in closings, but the first-time buyer credit concludes at the end of April with little indication that the program will be extended. At one point during this run, year over of year sales were trending 59% above the previous year’s, it is no coincidence that this spike directly coincided with the end of the government’s initial first-time buyer credit program. I suspect that we’ll see this same phenomena repeated this Spring.

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March 2010 Nashville real estate closings

April 2010 Closed Homes Prediction for Nashville

I am going to go out on a limb and make a prediction that I am going to guarantee. The number of closings in April 2010 will exceed those of 2008. In March of 2010 there were 1,757 closings, April of 2008 recorded 1,994. I am predicting that the Nashville market will experience at minimum another 13.5% month over month increase in the number of closings or 237 more closings. This increase in sales is so closely tied to the first-time buyer credit that I will also make another bold prediction. Should the government not extend the credit for a third time or reestablish a mortgage backed securities buying program, by August 2010, closings will back below 10 year lows. The dotted green line represents that probability based upon an extrapolation of combined inventory predictions and fixed 30 year mortgage rates.

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2010 closed sales prediction 

Take-Away Points for Buyers and Sellers

  • If you are a seller who has received a reasonable offer for your home or condo, negotiate judiciously then take the money and run.
  • If you are a buyer who is in the market for a steal, wait. Unless your buying power is dependent upon the today’s mortgage rate, wait.
  • If you are a cash buyer for an individual home or condo, your day has not yet come. Wait until the end of Summer and you are guaranteed to rip a seller’s heart out by their wallet.
  • If you are a casual seller who is only trying to sell your property in order to be able to take advantage of a distressed seller, stock up on patience. However, the best homes do sell, so make your property the best it can be.

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