Are you one of the Millennials—of which there are 80 million in US—saddled with student loans, car payments, and a paltry disposable income? If so, you probably aren’t alone, but your probably also not one of the many hipsters I regularly encountered in Williamsberg in the early 2000s. So if you happen to be in the former (and even the latter) category, this article in the Atlantic (goo.gl/eU1HDL) might be of interest to you. The article really resonated with me, as I’ve represented a number of first-time homebuyers and experienced a very similar sequence of events. One of the trends I’ve noticed—this is anecdotal, but the article speaks to my suspicions—is that Millennials (people currently in their 20s and 30s) are disproportionately interested in “hip” urban markets, e.g., Boston, Brooklyn, Cambridge. I know, it’s actually pretty obvious. Millennials are the generation that for better or worse reversed the “white flight” phenomenon of the mid-20th century.
The term “Millennial” was coined by authors William Strauss and Neil Howe in 1987 as “1982-born children”, that is, those destined to graduate in the year 2000, up until those born in 2004. I was born in 1982, so I am an archetypal Millennial.
I distinctly remember the dejected expression on the face of a client seeking condo ownership in the South End when I informed he and his wife that their bid on a condo (the bid being over asking price) was shot down. When they asked why this had happened, I had three words in mind, although I obviously put it with more tact than this. CASH is king. They had put down 20%, which would have been more than reasonable under different circumstances, but the fact of the matter is, if a buyer has cash on hand, all things being equal, he or she is much more likely of winning a bidding war. As this article explains, this is an increasingly frequent scenario, especially in “hip” urban markets, where you have a confluence of foreign home buyers and well-to-do Millennials. I’ve admittedly had clients become so frustrated with this phenomenon that they decided to take time off of the home search in favor of renting.
According the National Association of Realtors (NAR), homeownership among the 35 and under crowd is down to 36%, from a high of 43% in 2005. That being said, there are a number of steps that first-time homebuyers can take to increase their chances of submitting that winning bid. One of things that I encourage all first-time homebuyers to do is to obtain a pre-approval letter from a financial institution indicating approval for a loan up to a specific dollar amount. This is significantly different than, though often confused with, a pre-qualification, which is essentially just a cursory review of your financial history that does not ensure a loan will be granted. This is a very important distinction and one that is often lost on the uninitiated.
So if you have a pre-appoval from a financial institution, what’s the incentive for a seller to go with cash? This is an interesting question, and one that normally only comes up in instances where properties have been bid up. When you obtain a loan from a bank, the bank will inevitably send out an appraiser to determine the market value of the property in question. You might reasonably assume that the price you pay for the property is fair market value, since it represents what the market will bear, but it is not. The bank conducts appraisals, in part, so they can protect themselves in the event of a foreclosure, and also to form risk tolerances for various loan packages. Prior to the 2008 financial crisis, many of the appraisals that were done were not done with the level of scrutiny that you see today. The wild west of home appraising that preceded 2008 did contribute to the housing bubble and bust that followed a very exuberant housing market. The current climate is reactionary in a way. Appraisers have grown weary of housing prices and are more likely to undervalue a given property than the other way around.
Let’s say, for arguments sake, you win a bid on a Back Bay condo for $1.5 million. In this particular scenario, let’s say you put 20% down; however, the bank determines that the market value of the property based on their analysis is $1.4 million, resulting in a $100,000 shortfall. Under these circumstances, the bank will not approve the loan. Now let’s say that you bid $1.5 million (with the 20% down) and your competitor makes a bid of $1.475 million in cash. The cash deal is not subject to the property appraising at or above “market value”, so a savvy seller (or one with a knowledgable listing agent) may elect to take the cash, knowing that there is a distinct chance that the property may not appraise at the $1.5 million bid.
I have encountered this twice on the very high end, where buyers were more able and likely to pay cash. In both instances, I recommended that my clients insert a provision (since they both paid cash) stating that the purchase and sales is contingent on the property appraising “at or above market value”. In both instances (both were above $2.9 million) the provision allowed them to have a stronger position vis-a-vis the sellers, and resulted in happier buyers in the end.
The lesson: get a pre-approval letter if you really are a serious homebuyer. And if you can pay cash, it could very well be best to pay cash and obtain a mortgage after the deal closes. You can reach me at firstname.lastname@example.org for questions, comments, suggestions, criticisms, etc.