Are Housing Solutions Really Part of the Real Estate Problem?

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Cash is King

If you’ve been paying attention recently to the drivers of the real estate market, you may have noticed that there is a decided uptick in the number of ‘Cash Purchases’ taking place throughout the country.  Some estimates put the actual number of cash transactions at over 100,000 monthly across the U.S.  This development though has raised some interesting questions among industry experts as to whether or not this is a good thing.  Some actually want to place blame on cash buyers, who are overwhelmingly investors, for driving the values of real estate down.  Others see cash buyers as providing needed capital and resolve to purchase, but are not happy with the discounts given to these buyers.  In the end, I believe, there are too many different ‘problems’ in the real estate market for any one solution to fix and placing blame on cash buyers for contributing to the lingering crisis is silly.  The long-term solution to the housing crisis encompasses fixing two main problems:

  1. Eliminating excess inventory
  2. Allowing for prices to stabilize and increase under normal market conditions

Institutional Buyers

The federal government has been slowly and very calculatedly releasing plans to sell large tranches of REO properties.  These transactions are going to be sold to large buyers who are closing within 96 hours of accepted price point and the deals will be valued between .43 cents on the dollar and .47 cents on the dollar.  (Which dollar they are using for calculation is a whole different topic!)  Suffice it to say, the dollar value that will be attached to these properties before discounts will not be top value and will most likely reflect present day value.

If that is in fact the way the government chooses to dispose of the REO inventory they currently have, which amounts to near 50% of the total number of U.S. homes in REO status, then those homes will be sold to cash buyers at significant discounts compared to today’s pricing which is already depressed after years of stagnation.  Do not expect this to increase any home values anytime soon.  That is the main argument that many industry experts are using when they argue against such a plan.

They would rather see these homes sold very slowly and the highest price possible and would like the government to offer some sort of financing option for new buyers.  This slow approach, while possibly slowing down the slide in real estate values, will actually prolong the recovery and keep prices depressed for years to come.

What is the real ‘Fix’?

Today, investors are accounting for 1 out of every 3 transactions occurring.  Out of that 30%, nearly 3 out of every 4 are transacted with cash.  The simple fact remains that investors are ready to enter the real estate market in a big way and the cash to do so is simply sitting on the sidelines waiting to be put to work.  There is no possible way to eliminate cash buyers without prolonging the housing crisis into 2017-2020 or beyond.  There is not enough demand for securitized mortgages for private mortgage holders to get back in the market in a large scale way and the government clearly does not have the appetite to continue to underwrite U.S. housing.  Without underwriting in place – and discouraging cash buyers either directly or indirectly by not discounting – the housing crisis will absolutely drag on and easily could extend into and beyond 2017-2020.

On the other hand, discounting pricing – even at the .42-.47 cents level – attracts more cash buyers and even the institutional buyers who can purchase thousands of properties at a time.  Being pro-active on reducing the inventory and clearing up the back-log of vacant REO properties will lead to an eventual stabilization of pricing.  While it will be bad for current home values, when the REO sales are gone, they will no longer be calculating into the values of homes and pricing will be able to naturally increase as demand increases.

When I read that real estate industry experts are bemoaning the number of cash buyers and the downward pressure they put on pricing, it makes me wonder whether they really grasp the enormity of the REO problem and exactly how damaging the slowdown in processing and selling excess REO’s has been.  The faster we clear excess inventory, the quicker banks can re-establish a lending standard and the real, long-term solutions to the housing crisis can begin.

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.


  1. Jeff Brown

    Hey Chris — “The faster we clear excess inventory, the quicker banks can re-establish a lending standard and the real, long-term solutions to the housing crisis can begin.”

    Surely it doesn’t shock you that so many ‘experts’ don’t or won’t grasp that truth, right?

    It’s like saying that if you jump off the garage roof you’ll fall down, not sideways. Good stuff, Chris.

    • Chris Clothier

      Jeff –

      It is never a surprise to me when I read/hear what “experts” have to say. It seems so logical and especially in an economy built on free-market principles. It is really shocking that there is even a solution out there to offer more government money and subsidy to prevent any more foreclosures. Get out of the way, let the market sort it out and let’s move on. The faster we do – the faster we reach a true recovery.

  2. We’re seeing it here in Bend. I’d say 50% of my deals lately have been cash deals. It makes sense for investors right now. When you can spend $90,000 on a home that was valued over $200,000 at the top of the market and get $1,000 a month in rent… why not!

    • Chris Clothier

      Dylan –

      Doesn’t surprise me. Hopefully you are using a very calculated method to identify great opportunities and purchasing for a long-term buy and hold scenario. Investors today have an unbelievable opportunity to lay a solid foundation for future wealth.

      Good luck – Chris

  3. In our area properties which are in poor shape (sitting on sink holes, foundation issues, electrical issues, trees at risk of falling on the homes, etc.) are being sold for cash and quickly given a cosmetic rehab and rented out. Without the lending process, there is no requirement that the properties be brought to codes, made safe. This is the only downside I see with cash sales clearing the inventory. Renters are being put into properties that may be unsafe to live in. The investor can get their money back if the property holds up a few years; but then there will be a substandard house in the neighborhood still in need of proper (expensive) repairs. The longer these properties sit, the worse the condition of the homes.

    • Chris Clothier

      Lisa –

      You make a very good point about some of the people buying these houses. I am quite sure that is common in a lot of areas. Of course, the alternative is that those properties do not sell and continue to remain vacant, dangerous and a public eye-sore for neighborhoods. It would be great if there were not people with slumlord mentalities, but I am not sure if we can get away from that without local enforcement from code authorities. Here in Memphis, with so little building activity, the code enforcement authorities are doing a very good job of checking in more and more on renovation projects. Short of local enforcement, I am not sure if there is any other answer. That is going to be a downside to clearing the inventory.

    • Chris Clothier

      Dennis –

      Gov. institutions are already doing this on a smaller scale and not open to the general public. They are already selling to large institutions and I work with them on strategy and the deliverables like renovation and management on a large scale. So from those institutions, I know exactly what the parameters are today and one of those is discount the government is willing to give. Makes sense that FNMA and Freddie will follow the lead of the FDIC and structure something similar.

      • Chris Clothier

        As a side note – I currently am buying REO’s both from gov. programs and from banks and I am paying well below .43 cents on the dollar. As an example, I average paying between $24 and $26 per square foot depending on the source of the property. In the article I noted that a future discussion would be on how the gov. is determining value. In my case, if value is imply what the properties could be sold for in today’s market, I am paying about .35 cents on the dollar on average.

        Every market is different and some will be much higher, but when you are buying in bulk from the gov., so far, they have not made it easy on buyers as the property tranches have been spread out and have included worthless properties as well as gems. In that scenario, .43 sounds high and risky unless the buyer has deep pockets and excellent, excellent skills as an investor.

  4. It’s important for both the government and those involved the market to truly grasp the problem and what they do to dispose of and take advantage of. True enough, something needs to be done about the excess inventory. The real market is facing a long road ahead.

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