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A home for sale in San Diego. Photo by Alexander Nguyen

Homebuyers who can afford to purchase property with cash typically pay an average of 10% less than those who need to take out a mortgage, according to research revealed Tuesday by UC San Diego’s Rady School of Management.

According to the study, sellers prefer all-cash offers due to lack of risk from default and the speed with which they can close the deal.

“When sellers accept a mortgage offer, it comes with risk,” said Michael Reher, study coauthor and assistant professor of finance at the Rady School of Management. “There is a risk the deal will fall through because there’s a third-party mortgage lender who needs to approve the loan for the borrower and there are other caveats such as issue the appraisal, or inspection, which is why around 10% of transactions fail when the buyer is paying with a mortgage.

“We find sellers are willing to leave money on the table to avoid the risk,” Reher said.

Adding another blow to those who cannot pay cash for property, the risk is not equal in all areas. According to the researchers, mortgage buyers with a relatively good borrowing profile pay only 6% more than all-cash buyers, especially if the sale is taking place in an area where most real estate transactions are successful. In areas where there may be more low-income buyers and mortgage transactions carry greater risk, a mortgage buyer can expect to pay up to 17% more, if the seller has a competing offer from an all-cash buyer.

“Considering that about a third of home purchases are all-cash deals, these differences are highly relevant for real estate market participants,” said Rossen Valkanov, study co-author and professor of finance for the Rady School.

The findings compound the difficult housing market for the other two- thirds of buyers, who face steep housing prices and high interest rates. According to real estate site Zillow, the average price of a home sold in the city of San Diego in the past year was $994,023, 9.4% higher than the previous year.

“In policy terms, U.S. taxpayers subsidize $8 trillion of mortgages to promote homeownership,” Valkanov said. “If policy makers made it easier for mortgage buyers to close escrow, it could be a more cost-effective route to promoting homeownership than subsidizing mortgages for first-time homebuyers.”

An example Valkonov provides is requiring listing agents to make sure that home sellers are well-informed about the amount of risk and the time to close when accepting an all-cash versus a mortgaged offer.

According to national figures, most first-time home buyers have to finance the purchase with a mortgage and the 10% “cash discount” all-cash buyers receive represents another hurdle in a competitive market. In California, the average age of the first-time homeowner is now almost a decade older than in the 1980s.

The increase in buyers with deeper pockets choosing to purchase homes with cash also means a greater number of them are getting real estate at prices below the property’s actual value, the authors note. Therefore, a liquid housing market with more all-cash buyers might erode the value of real estate as a savings vehicle.

Reher and Valkanov embarked on the study after they both experienced mortgage offers to homes being rejected because sellers went with an all-cash offer instead. They replicated the findings in three different studies with the first assessing data from 2 million home sales across more than 90% of U.S. counties from 1980 to 2017. The data from county recorder offices revealed that mortgage buyers paid on average 11% more than all-cash buyers.

The second study used data from Redfin on more than 200,000 home sales as well as offers on homes that were sold from 2013 to 2021. This data set revealed mortgage buyers paid 8% more than all-cash buyers.

Finally, the third part of the study involved an experimental survey in which the authors asked 3,000 independent homeowners to imagine scenarios where they had to sell their home and received two competing offers — one from a mortgage buyer and one from an all-cash buyer. The responses revealed that the participants would only accept the mortgage buyer’s offer if they had paid on average 10% more than the all-cash buyer.

–City News Service

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