Cash Is King
You’ve heard it a thousand times- “cash is king!” It’s thought that a former CEO of Volvo first used the expression while describing companies during the stock market crash of 1987. Companies with plenty of cash reserves could handle the changing market better than those that had poor cash management.
In today’s world, I interpret it to mean cash will get you a little bit more than paying with an alternative source of payment. At a convenience store, you may not have to pay the 50 cent credit card transaction fee. When buying a car with cash, you won’t pay extra for interest occurred during the life of a loan. When it comes to real estate, a cash buyer is what most sellers dream of. In an all-cash transaction, many financing hurdles are non-existent. If all offers are close to each other, a seller may choose a cash offer just for the simplicity of the transaction. In some cases, a seller may be willing to take less for an all-cash offer. An appraisal isn’t required in cash transactions, as there is no lender requiring one to determine the worth of the asset. However, I can’t stress enough the importance of the buyer obtaining an appraisal even in cash transactions (feel free to call me 530-632-3428). Many times, cash buyers are from out of the area and are flush with cash from their sale of a 1-bedroom condo in San Jose for $2.2 million, for example. These out-of-the-area buyers with cash should still know the market value of the asset they are buying. Furthermore, all real estate agents are typically held legally responsible for their fiduciary duties to act in the best interest of their client.
There are many financing options when purchasing a home. In 2019, 58% of homes were purchased with conventional financing. Typically, a conventional loan is a type of mortgage that is not insured or guaranteed by a government agency such as FHA or VA. FHA and VA loans accounted for 13% of loans in Nevada County in 2019.
There were 359 all-cash residential sales in 2019 in Nevada County accounting for 23% of sales volume. Cash transactions totaled over $177 million for residential real estate in 2019.
Compared to the Sacramento Region, Nevada County had a significantly higher amount of cash transactions. This may be due to a variety of reasons including slightly lower overall prices or future retirees relocating to get the highest bang for their buck. There was also a much higher amount of FHA transactions in the Sacramento Region.
Cash transactions have really grown over the past 19 years in Nevada County. Between 2001-2007, cash represented less than 20% of all transactions and conventional financing was at its height over 69%. Lending was much different back then and a conventional loan was basically given to anyone with a heartbeat.
Things were much different from 2010 - 2014. Probably due to low values, cash transactions made up over 30% of the market. Today things are right in the middle. Between 2015-2018, cash represented 26-28% and last year, cash transactions fell to 23%.
As the median home prices rise and fall, so does the percentage of conventional financing. Cash transactions peaked about the same time prices hit rock bottom. As prices have recovered, cash transactions have slowly started to decline.
Lots and Land
Undeveloped land sales are a little different. From 2001 - 2008, it was fairly easy to get a loan from a bank on undeveloped land. Cash was still the major player representing 38-60% of sales during those peak years. In 2005-2006, more undeveloped land sales had bank financing than were cash sales. ‘Other’ financing can be a variety of different sources such as a friend or relative. In 2004-2007 there were many hard money lenders that had a large impact on the undeveloped land market.
In 2007, the median price of undeveloped land started to plummet and so did lenders willingness to lend money to buy it. Many land loans were the first to be foreclosed upon and lenders quickly realized loans on undeveloped land were a very risky investment. Between 2010-2018, loans on land represented 2-6% of all transactions. Cash has been king in the land transaction representing 55-69% of transactions since 2012.
Conclusions
It’s always best to be informed about what’s happening in the market. That’s one of the major reasons I write these articles. If you or your client are going to ask for owner financing on a property, know that those types of transactions only represented 2% of all sales in Nevada County in 2019. Don’t even think about it in the Sacramento region. Are you or your buyers looking for land? Maybe owner financing is available, as 18% of the sales in Nevada County did some sort of owner financing in 2019. Cash always represents a big chunk of the market for both residential and undeveloped land in Nevada County. It will never fully go away, but when lenders are willing to lend their money, the real estate market is ready with their hands out. If you or your clients know you are competing with an all-cash offer, know that’s probably going to carry some weight with the seller.
DISCLAIMER: All information presented in the Nevada County Appraisal Blog is meant for educational purposes only and is NOT intended for any other use. This information is not considered an appraisal and does not support any specific value opinion or eliminate the need for an appraisal for a specific property. Please give us a call at 530-632-3428 to order an appraisal for an accurate opinion of value for a specific property.
