1
1
By Cynthia Corzo
Real estate shoppers looking for a deal on low- and mid-priced condominiums can find greater discounts when they come bearing cash, according to new research from FIU Business. The research also found that the time a property is on the market impacts the cash purchase and sales/price relationship.
Published in the February 2024 issue of The Journal of Real Estate Finance and Economics, the study revealed that obtaining financing for properties in the low- and mid-price sector is more difficult and valuable than it is for higher-priced properties. Mortgage lenders often require higher down payments and interest rates for condo buyers than they do for single-family home buyers because condos have stricter rules due to the prevalence of homeowner associations and because these properties are often investment rentals.
Cash becomes more valuable, the study found.
"Buyers can get benefits for borrowing money from the bank, and when paying cash, they will only pay the intrinsic value of the property," said Zhenguo (Len) Lin, professor of real estate at FIU Business and one of the researchers. "The offer prices are higher when buyers borrow more money [from a lender] at a lower rate or for a longer term."
The cash discount, the research revealed, disappears for mid-high and high-priced condos.
"Higher-priced condos typically represent newer condos where it's not so much of an issue to get a loan and cash is not as exciting," said Eli Beracha, director of the FIU Business Hollo School of Real Estate and one of the other researchers.
The study examined 44,870 condo transactions that were either purchased with cash or a conventional mortgage in the Virginia Beach-Norfolk market from 1993 to 2020, analyzing cash purchases and the time properties were on the market (TOM).
Of the total, 23% were purchased with cash.
Researchers found that the fixed cash discount and TOM-variable cash discount varied across price segments. Some markets showed a 9.42% discount for low-price condos purchased with cash compared to a conventional mortgage and an additional 0.1% discount for each day a property is on the market. Others indicated that for a condo that had been on the market for 30 days, the total cash discount was 12.42%, while for one with a TOM of 90 days, it was 18.42%.
"When you have a cash buyer, the probability of closing is higher due to no financial contingencies," Beracha said. "But when the buyer is financing the purchase, the probability of not closing is higher because the lender may decide to not finance the purchase for some reason or has additional requirements that perhaps cannot be met."
This study, Beracha noted, is a starting point for future investigations into different explanations for and components of cash discounts in real estate transactions. The next step is to analyze what happens during different time periods.
"When the market is strong, the cash offer will not make much of a difference. When it is weak, and there are fewer buyers, cash makes more of a difference," he added. "The discount is critical in weak markets."
Beracha and Lin conducted the research with Julia Freybote of Portland State University and Michael J. Seiler of the College of William & Mary.
