The Shift Away from All-Cash Offers: A Win for Smaller Investors

During the intense housing market of the pandemic years, cash offers dominated, often outpacing traditional buyers. However, the landscape is changing, offering new opportunities for smaller investors and regular homebuyers.

Decline in All-Cash Purchases

According to a recent Realtor.com® report, the percentage of investors buying homes with all cash dropped to 64% in the first quarter of 2024. This is a notable decrease from the fourth quarter of 2021, when nearly 69.7% of investors were making all-cash offers to secure properties in competitive bidding wars. This marks the lowest level since 2008.

For regular homebuyers, this trend is good news. With fewer investors wielding cash offers, the playing field is leveling, making it easier for everyone to compete.

Why Cash Isn’t King Anymore

One significant factor in this shift is the rise of independent investors, often referred to as “mom and pop” investors, who now make up 62.6% of investor purchases. These smaller investors are more likely to use financing rather than cash, despite rising interest rates.

G. Brian Davis, real estate investor and co-founder of SparkRental, sees this as a positive development. He notes, “It’s better for everyone involved that institutional money is withdrawing from the single-family home space. It reduces artificial demand and allows smaller investors to participate.”

Brie Schmidt, owner and managing broker of Second City Real Estate in Chicago, shares a similar sentiment. She explains that financing allows investors to stretch their capital further, buying multiple properties instead of just one. This strategy can be more profitable, especially in markets where property values are rising.

Economic Factors and Financing Trends

The economy also plays a role in the reduced prevalence of all-cash offers. According to Robert Dodson, sales manager and broker at Charles Burt Realtors in Joplin, MO, many people are holding onto their cash reserves, opting for financing to avoid becoming cash-poor. This trend is closely tied to the current economic climate and inflation concerns.

Attitudes toward debt are also evolving. Brie Schmidt points out that the financial independence, retire early (FIRE) movement has popularized using financing to build investment portfolios. This approach contrasts with the debt-averse mindset promoted by some financial gurus, highlighting a shift towards using debt responsibly to accelerate financial goals.

Where All-Cash Offers Still Dominate

Despite the overall decline, some areas still see a high percentage of all-cash investor purchases. The top markets include Portland-South Portland, ME (81.3%), Albuquerque, NM (81.2%), Toledo, OH (80.5%), McAllen-Edinburg-Mission, TX (79.5%), and Ogden-Clearfield, UT (79.0%). These markets often feature lower property prices or appeal as vacation home destinations.

Benefits of Financing Home Purchases

Financing offers several advantages, such as potential tax deductions on mortgage interest and the ability to leverage capital for additional investments. Programs like Fannie Mae’s 5% down payment for two- to four-unit properties, if owner-occupied for a year, are particularly attractive. Investors can live in one unit while renting out the others, gradually building their portfolio.

Financing also provides more time for due diligence during the buying process, offering investors a chance to thoroughly inspect and evaluate properties before committing.

As the market continues to evolve, the shift away from all-cash offers opens doors for smaller investors and regular homebuyers alike. It’s an exciting time for those looking to enter the market or expand their portfolios with more flexibility and less competition from big cash-rich investors.