Home buyers find themselves aced out by investors

After getting the good news on a Friday night that their offer topped all the others on a foreclosure in Vacaville they wanted as their retirement home, Jack and Donna Pfister spent the weekend packing.

But the following Tuesday they were told the bank had decided to go with an all-cash buyer, whose offer was $25,000 less than the $475,000 offer from the Pfisters.
"My husband was heartbroken," said Donna Pfister, of Rodeo. "I was heartbroken because he was heartbroken. ... Right now, we both feel kind of let down."
The Pfisters are far from alone. In the Bay Area, about one-fifth of all homes sold in July were purchased by absentee buyers, mostly investors looking for rentals or properties to fix up and then sell, according to DataQuick, a real-estate reporting service. About six out of 10 absentee buyer transactions (which can also involve second-home purchase) were all-cash purchases. In July 2010, absentee buyers accounted for 17.4 percent of home sales, and the average for all months since 2000 is 13.8 percent.
While no reliable figures are available, Bay Area real estate agents report dozens of people like the Pfisters have lost their dream houses, edged out by a steady increase in homes bought by those who don't plan to live in them.
Investors are gravitating toward low-end properties, the same homes that first-time and move-up buyers want. The median price paid by all-cash buyers in July was $230,000, down from $270,000
Most sellers, including banks that own foreclosed homes, prefer all-cash buyers because the deal can close faster than a transaction involving a loan, say real estate professionals.

Landlords

In the past few years, many regular buyers have turned to government-insured Federal Housing Administration loans after conventional and jumbo loans became harder to get as a result of the housing meltdown.

"Over the past two years, cash has been king," said Dominic Carano, an East Bay Realtor with ZipRealty. "Then next comes a conventional loan with 20 percent or better down, and the next is the FHA loan with 3.5 percent down."

Carano's territory is eastern Contra Costa, where low home prices have made it a ground zero for investment buyers. "Silicon Valley (buyers) are buying up properties in Antioch and Pittsburg to become landlords," he said.

"Most of the investors are buying into the first-time homebuyer price range of $200,000 to $400,000. A lot of investors are going into Martinez, Walnut Creek, the better parts of Oakland," said Linnette Edwards, an East Bay associate broker with Better Homes and Gardens Real Estate.

Cumbersome loans

All-cash buyers are also purchasing a lot of homes on the East Side of San Jose, said Sami Asfour, a South Bay broker with Keller Williams Realty. "Most of them will buy them, fix them up, and flip them," he said.

He said that one of his clients, who is looking for a home in San Jose for under $300,000, has lost out several times to all-cash investors.

"We made six or seven offers; in some cases it was above the asking price. (The buyer) that comes in with all cash takes it," Asfour said.

As his client and the Pfisters discovered, sellers will often take all-cash offers that are less than the bid from someone using a loan, say real estate professionals.

"They have cash and can close immediately," said Alex Villasensor of J. Rockcliff Realtors, an East Bay brokerage.

Loans require time-consuming appraisals before a sale can close. Also, FHA loans have property inspection requirements that can slow down the process even more.

"The investor has the cash wherewithal to be able to close on the property without the risk of the seller worrying about whether the buyer can get the loan or not," said Mike Sibilia, another South Bay broker with Keller Williams.

Market boost

But while all-cash buyers are dashing the homebuying dreams of regular buyers, the trend is also helping to move along the glut of foreclosures dragging down home prices, real estate experts say.

"You have to see both sides," said Ivonne Valdes, a South Bay Realtor with Coldwell Banker. There are many times when a bank won't make a loan to a regular buyer because the property is "in a state of disrepair or sometimes there are safety issues," she said.

"(The homes bought by investors) are getting a face-lift and are getting rebuilt," said Jeff Pereyda, a broker with Tri-City Real Estate Brokers in Fremont. "Usually, the all-cash buyers are out there looking for a flip. They're going to use all cash to buy it, fix it up, turn it around, and sell it."

Fierce competition

And while many first-time buyers do purchase bargain-priced foreclosures, the process can be intimidating, especially if the home needs to be fixed up, he added.

Still, that doesn't relieve the frustration of regular buyers competing against all-cash buyers.

Over the past two years, Dan Brandt lost out on several properties purchased by all-cash investors in Walnut Creek and Pleasanton before making the winning offer. In August, the 45-year-old butcher and his wife moved into a $370,000 house they purchased in Concord with an FHA loan.

"It's not easy around here. There is a lot of competition and so many people want to be here," he said.

"They got beat out six different times and it was by investors. They were all cash," said Villasensor, the couple's Realtor.

Swimming with sharks

But while sellers seem to prefer all-cash offers, that is not always the case.

First-time homebuyers Kathryn and Mark Bressem ended up buying a house in Hercules for $320,000 a year ago after beating out an all-cash offer.

It happened after the Bressems and their then-4-year-old son were running late for an appointment to see the house and ended up meeting the sellers.

"They saw our son and wanted a family to have their home and enjoy it," said Kathryn Bressem. "They had a cash offer that was higher than ours and they went with us. ... Their real estate agent was kind of upset with them."

Previously, the Bressems had made seven offers for homes in the East Bay over an 18-month-period and figured they had lost out four times to all-cash buyers."It was really frustrating because we felt there was no way we'd be able to pay cash for a house. Everyone says it's a great time to buy and everyone wants the cash offer. We definitely felt like we were swimming with the sharks," she said.