Upstate Buyer: How much cash do you need to buy a house now?
With far more buyers than sellers, compounded by historically low inventory, the bidding process is exceptionally competitive, leaving buyers with little more cash than the downpayment out in the cold. This house had over 30 showings in 5 days and 7 all cash offers.
This post has been substantially updated from its original publishing in 2019. The surge in popularity of The Catskills and Hudson Valley started long before Covid, so the observations and advice remain similar, although the numbers have become much more dramatic. And now more than ever, the importance of cash to simply be the winning bidder has never been more relevant. The only item that has been completely removed rather than edited is this: “…the market is unlikely to jump 25% or even half that, across the board, in a year.” My crystal ball didn’t really foresee 2020/1.
THE COST OF GETTING AN ACCEPTED OFFER
This post originally kicked off with a caution regarding the the number of purchase-related expenses and then the cost of homeownership at large (and we’ll run that again, separately). But if you can’t win the keys to the house when there are multiple bids, that bit is irrelevant, so here is the key reason you need more cash than you probably think, in order to buy a house in The Catskills and Hudson Valley now. It’s all about the bidding process. Economics 101: There are far more buyers than sellers, compounded by historically low inventory. The market is en fuego.
Properties in the low to mid price range (up to around $600k) that do not require a massive reno and that tick a lot of the boxes the Metro NY buyer is looking for (privacy, good light/generous windows, pleasing layout, proximity to a decent town) and do not have significant flaws will be in huge demand. More often than not, buyers are willing to pay over the value that a bank will appraise it for, meaning that the buyer needs to have more cash to make up the difference. Said another way, if the bank’s appraised value is less than the sale price, they’ll still give the buyer a mortgage but only for the 80% (or 90%) of THEIR value, not of the sale price.
What happens then? In a seller’s market, the seller will want the buyer to cover the appraisal shortfall in cash, and to see that willingness in their offer. Making the seller confident that the buyer has the wherewithal to pick up the shortfall in cash if necessary is key to winning in a multiple bid situation. Otherwise, these most desirable properties are selling to all-cash buyers a significant percentage of the time. Functionally, the appraisal shortfall coverage makes an offer ALMOST comparable to an all-cash offer.
Have a look at Ferrymaster’s House, listed at $415,000. I launched this listing on a Wednesday night and had 33 showings by the end of that Sunday, with eight offers in by the Monday deadline. (There were 23 additional showings that cancelled, largely due to a snow storm.) Seven of the eight were all cash (an unusually high percentage). And the house sold over 35% over the asking price. Not all listings will be so extreme, but this illustrates what is happening right now in our market.
What Our Agents Are Seeing
I conducted a very informal poll of my team this week as follows: How often have you been successful representing buyers who put 20% (or less) down with no appraisal shortfall coverage? For every 10 buyers, approx. how many walk away with the keys with a standard 20% downpayment? Here are their answers:
• I’ve had success with traditional 20% financing when a property has been on the market for a bit. I’ve probably moved 4 of these in the last year. That said, I’ve had 0% success when it was a bidding war (which is unsurprising).
• 2/10, but in both instances, the house was either a. in need of serious cosmetic work or b. on a very loud road. Different from what our average client typically goes for.
• Without shortfall coverage? 0 of 10.
• Only one of my 2021-22 buyers was all-cash. The others financed 80-90%. A couple agreed to make up a shortfall in appraisal but didn't need to since properties appraised at or above deal price.
• I would say 4 to 5 out of 10 buyers who put just 20% down get accepted offers. It's a lower ratio however for the really competitive listings.
• At the higher end those buyers know that if they want to be successful they MUST offer additional (or all) cash to be competitive. 1-2/10 gets the keys without offering extra cash down but never when there are multiple bids.
• I'm at about 20% (7 out of my last 32 sales).
Not all buyers need to actually pony up that added cash, by the way, because the appraisals sometimes do hit the sale price. But it’s necessary for it to be part of the offer in order to remove the risk so the seller is comfortable in accepting it. And to be clear, as illustrated in the responses above, this advice is not relevant for every listing. It’s for the in-demand properties which attract so much interest that prices are driven up and there are multiple buyers vying for the sale.
In fact, the other takeaway from this is to give the properties that don’t jump out at your a longer look. Are you put off by something that’s actually not that challenging to change? There are strategies to separate from the pack to be a successful buyer, and to avoid such a competitive environment. (See more in our post 7 Tips for Buying in a Seller’s Market.) But if, for example, you have your heart set on a modern farmhouse on five acres within ten minutes of a top town, you’ll need to raid the piggy bank because you’re in great company and there are not nearly enough of those to go around.