How to beat out all-cash home buyers

High-end home buyers face stiff competition where ‘all-cash’ sales dominate

The rise of all-cash deals in places like Miami has made it difficult for high-end home buyers planning to use a mortgage. In response, many of these borrowers are turning to lenders able to close loans quickly or offer a range of financing options.

In Miami-Dade County, for example, 62% of all closed residential real-estate sales in 2013 had no mortgage, says the Miami Association of Realtors. For homes priced $800,000 and above in Miami-Dade, all-cash sales accounted for 58% of the total sales in that price range. The all-cash share in that range was 27% in 2008.

Nationally, 31% of residential real-estate sales were cash-only in 2013, according to the National Association of Realtors.

Ram Selvaraju had to compete against an all-cash buyer when he set his sights on a four-bedroom Spanish colonial-style home in Coral Gables, Fla. Mr. Selvaraju, 35 years old, is a biotech analyst at a New York investment firm; he owns other vacation and rental properties in South Florida and Europe. He planned to rent the home in Coral Gables after buying it.

Mr. Selvaraju decided to make an offer after two reductions left the price at $618,000, but an all-cash offer above that price was submitted before he secured financing for his bid.

Instead of applying for a jumbo loan, which he feared would take too long and have too high an interest rate, Mr. Selvaraju found a nonjumbo loan from a Florida lender for $417,000; a New York bank lent him an additional $130,000 on a home-equity line of credit from his primary home in New Jersey. After the competing all-cash offer fell through, he bought the home in April for $630,000, using his offer that combined a down payment and the two loans. “I wound up paying a lot lower interest rate on a shorter-term loan, than had I gone with a jumbo loan,” he said.

Mr. Selvaraju’s experience in the Miami market is typical for South Florida, says Dan Hechtkopf, a real-estate agent in Miami Beach. Cash deals, especially for condos, are the norm, and it’s harder and harder for even well-qualified jumbo borrowers, he says. “A lot of buyers play this old-school, low-bid game, but here it doesn’t work,” Mr. Hechtkopf said. “Somebody’s just going to come in and pay cash.”

David and Michelle Hendler, both lawyers in Miami, lost out on a townhome to an all-cash buyer in August. Mr. Hendler, 32, said he and his wife later secured a jumbo loan, but chose to put down 35%—the typical amount is 20%—to land another house in the same Miami Beach development. “It’s a serious all-cash market and that makes it tough for a lot of people,” he said.

Miami led U.S. markets in all-cash deals in 2013, followed by Las Vegas and New York, according to data compiled by RealtyTrac, an Irvine, Calif., real-estate research firm.

Mike McPartland, North American managing director for investment finance at Citi Private Bank, says the move toward cash deals is a holdover from the 2008 real-estate and stock-market bust. “There’s still a lot of thinking out there that if all hell breaks loose, nothing can happen to my house and family because I paid cash,” he said.

Moreover, Mr. McPartland said that many condos in vacation spots like Miami and Las Vegas are still in litigation or foreclosure, and big banks may not want the hassle of financing a condo.

Many of his clients, he says, are opting to liquidate assets and pay cash for properties, and then get a mortgage a few months later to recoup their assets by investing again. “Can you find an investment that will outperform a loan of 3.5%? The odds are pretty good.”

And even buyers who need to finance a home purchase aren’t out of luck, says Angela Hernandez, a mortgage officer with FirstBank Florida in Miami, which made $200 million in mortgage loans last year.

“I’ve closed jumbo loans in seven days,” said Ms. Hernandez. Successful borrowers often employ strategies like Mr. Selvaraju’s, using a combination of second mortgages, home-equity lines of credit, and quick closings to beat all-cash buyers. “There are always options, so long as you go to the right lender,” she said.

Here are tips for borrowers in markets that reward cash.

• Be patient: Some all-cash buyers and their offers can appear and disappear, especially if the buyer is overseas. Your financing-contingent offer still might have a shot, especially if you’re willing to put down a large down payment.
• Flexibility is an advantage: Sometimes a line of credit on another investment property, or a home-equity line of credit, can help make your offer look even better. It may not be all-cash, but more-cash is better than less-cash.
• Know the market: Work with your real-estate agent and loan officer to find sellers that are open to accepting bids with financing. 

Daniel Goldstein is a personal-finance and real-estate reporter for MarketWatch.