In hot housing markets, cash can help you get what you want. Use this strategy to make an all-cash offer without selling investments.
Because of strong demand and tight supply, buyers across the country are seeing intense competition for homes.1 If you—or your children—are home shopping in a market this tight, how can you stand out in a sea of buyers?
Becoming a cash buyer may save you the heartache of being outbid for properties.
In many cases, all-cash offers can beat mortgage-backed offers, even if the mortgage offer is higher. Why? Real estate agents report2 that sellers favor cash offers because the lack of a financing contingency usually means a quick, smooth close. In fact, according to the research firm CoreLogic, in January 2017 cash transactions represented 36.5% of all home sales nationwide.3 And in a review of the past two years of home sales, Redfin reports that all-cash improves a competitive offer’s chance of success by a whopping 97%4
In some markets, investors from outside the United States are contributing to this trend; in Florida, for example, 72 percent of foreign buyers paid all cash in 2017, according to the National Association of Realtors.5
But how to raise the funds for a cash offer?
- If you have a large amount of equity in your current home, you can sell before making an offer on a new home
- Borrow from family
- Secure a bridge loan
- Liquidate investments
Another option that buyers—or parents who want to help their children—may turn to is a securities based loan (SBL). If qualified for an SBL, buyers have the ability to make an all-cash offer potentially without needing to sell investments.
Qualified borrowers can apply for an SBL, a loan which is secured by some of the eligible assets in their stock portfolio. If the loan is granted, the borrower could then pay for the home in cash, allowing them to meet quick closing deadlines and potentially negotiate better sales terms. The borrower can then separately apply for a residential mortgage loan later, if desired, and if they are approved for the residential mortgage loan, may be able to use those loan proceeds to pay off or refinance the SBL.
SBL funds can also be used for renovations or home furnishings. In a buyer's market, you might have been able to demand that sellers perform all needed renovations before closing, but agents advise against requesting repairs in a bidding war.6
Note that borrowing against securities may not be appropriate for everyone. As with other loan types, there are risks. A sharp drop in equity prices could trigger a maintenance call, which means that the borrower would need to provide more capital immediately or sell the investments securing the loan, and the lender may sell securities in its own discretion.
There are many home financing options when purchasing a home property. Morgan Stanley clients should talk with their Financial Advisor today to determine which strategy may be right for them.
Borrowing against securities may not be appropriate for everyone. You should be aware that there are risks associated with a securities based loan, including possible maintenance calls on short notice, and that market conditions can magnify any potential for loss.
