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Competing With Cash Buyers in a Tight Housing Market

Susan Johnston

As the housing recovery continues in many parts of the country and mortgage rates inch upward, homebuyers are seeing their window of opportunity narrowing if they want to snag a deal.

In competitive real estate markets such as Boston, New York City and San Francisco, homebuyers not only have to contend with high prices but also competition from all-cash buyers. In Massachusetts, for instance, 40 percent of condo sales and a quarter of single-family home sales in April were purchased without a mortgage, according to the Warren Group, which compiles data on New England's real estate market.

Some of these cash buyers are baby boomers who've managed to build up equity through previous real estate purchases. Others are investors, many of them flush with money from China and other ventures overseas. Riccardo Ravasini of Rava Realty, who handles properties in Florida and New York, says Manhattan in particular sees a lot of cash buyers, since it's a "special market that appeals to the entire world."

[See: A Step-by-Step Guide to Homebuying in This Tricky Market.]

Some sellers like all-cash offers because they remove some of the barriers in mortgage financing, allowing the deal to close more quickly. Still, cash transactions don't always go smoothly. "Just because somebody shows me a bank statement that they have all the cash doesn't necessarily mean they're going to have all the cash when it comes time to close," says Brian Horan, broker and owner at Kilbourne Properties in Southern California, explaining that the money could be illiquid, earmarked for other things or the bank statement could be forged.

For homebuyers who can't afford to pay entirely in cash, here are some strategies for staying competitive.

1. Get preapproved. Getting prequalified is the first step in the mortgage process. However, it doesn't involve an in-depth analysis of your credit, so prequalification doesn't mean much to real estate agents or sellers. Most will want you to take that next step and actually get preapproved for a mortgage.

Bruce Ailion, an associate broker with RE/MAX Greater Atlanta, says he only works with buyers who have been preapproved by a lender he knows and trusts. "Unless you are looking at $500,000-plus homes, a buyer will be competing with all-cash buyers," he explains. "The buyer is at a definite competitive disadvantage, and when it comes to earning a fee for my work, I, too, am at a competitive disadvantage working with a buyer that cannot successfully compete and then complete a transaction."

In addition to a preapproval, supporting financial documents like a credit report can help make your case. Not all mortgage lenders are created equal, so try to find one who knows your specific market and can help you close quickly to keep the seller (and the seller's agent) happy.

[Read: Returning to the Housing Market After a Short Sale or Foreclosure.]

2. Consider properties that might be overpriced. All-cash buyers often expect to score a deal, so they'll look for properties that are priced to move. Ravasini suggests that buyers who plan to get a mortgage look at properties that seem priced a little high. "These listings receive less attention from the market and cash buyers," he explains. Once you find a property you like, you might be able to negotiate the price. However, if the appraisal comes in too low, the deal could fall through.

3. Make a competitive bid. With tight inventory and multiple offers on properties in many parts of the country, low-ball offers might not get a second look. "With my serious buyers, I try to get them on the same page that we've got to be aggressive," Horan says. "A lot of my buyers, the ones that are actually landing the properties, are going over the asking price."

While most people make offers in increments of zero and five thousands, Horan goes one increment over by a thousand in his offers. For instance, offering $526,000 instead of $525,000. "That type of thing doesn't make much difference on the payments but can edge somebody else out," he says.

4. Send a love letter. Investors typically buy real estate to renovate and resell or rent out for income. But if the seller feels emotionally invested in the home, he or she may prefer the idea of another family making memories there. "If it's not a lender-owned property, we write a letter complimenting them and the property and I guide [buyers] through that process and the letter," Horan says. He might also enclose a cute family photo, and if possible, a photo taken in front of the property to tug at the seller's heartstrings.

[Read: Secrets of Successful House Flippers.]

5. Free up additional cash. A down payment of 20 percent or more allows buyers to avoid private mortgage insurance and qualify for a better interest rate. Freeing up even more cash could help seal the deal. Cheryl Farley, a San Jose-based financial adviser for Bank of the West, has worked with homebuyers who used an investment line of credit in lieu of a mortgage to secure a new home. "It gave them the temporary ability to use a cash bid and then turn around and put a delayed mortgage behind that," she says.

Farley points out that even buyers who can afford to pay cash may choose to get a mortgage so they qualify for the tax deduction and take advantage of low interest rates while investing their money elsewhere.

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