In real estate, the saying goes, cash is king. But in New York City, that became truer than ever last month as the Dow Jones started freefalling.
As investors watched in horror while their stock portfolios hemorrhaged money, many chose to pull their cash out of the stock market and put it into real estate.
While real estate is no doubt softening, too, the market, especially in New York City, is still perceived to be a stable long-term investment that offers something of a reprieve from the stomach-churning daily fluctuations of the Dow.
It’s difficult to quantify the number of all-cash deals, but brokers say they have noticed a sharp increase in cash transactions in recent weeks, even among wealthy buyers who would have no trouble getting a mortgage.
“The stock market’s a scary place to be right now,” said Elaine Clayman, a senior vice president at Brown Harris Stevens. “People who know how to make money seem to see real estate as a place to park it.”
Clayman said she recently received two all-cash offers on a one-bedroom on East 72nd Street, which sold for $625,000. Meanwhile, she said clients have asked her for referrals of real estate brokers all over the country because they’re looking for investments that are alternatives to the stock market.
“I’m asking my buyers and sellers, ‘Are you thinking of investing elsewhere?'” she said. “They say, ‘As a matter of fact, I am.’ It’s people moving money around.”
In recent weeks, “whatever business I’ve done has been all cash,” said Iris Shorin, an associate broker at JC DeNiro & Associates, who recently represented the buyers of a $925,000 one-bedroom at London Terrace Towers in Chelsea.
And Michael Daly, the principal broker at True North Realty Associates in the Hamptons, said some 75 percent of his deals are all cash right now. He recently represented the all-cash buyers of a $2 million Shelter Island home and a house in Westhampton Beach that sold for $7.5 million in cash.
In part, the predominance of all-cash transactions reflects the difficulty of getting a mortgage in the midst of a credit crunch. Struggling banks are reluctant to lend to all but the most qualified buyers, so buyers without impeccable credit are finding it nearly impossible to buy homes, despite softening sale prices.
“The majority of people that I’m seeing are very cash-heavy,” said Jessica Armstead, an associate broker at the Corcoran Group. “The media has pounded it into the brains of people that getting a mortgage is not easy. You need to have your whole package in place.”
But the difficulty of getting a mortgage doesn’t impact all-cash buyers, some brokers say. Even if they wanted to take out a mortgage, they are wealthy enough to easily qualify for financing, Clayman said.
“It’s not a mortgage thing,” she said. “People who buy all cash can get a mortgage.”
However, she said, many wealthy buyers are choosing not to get a mortgage, opting instead to put more of their assets in real estate until the stock market recovers.
“With what’s going on with the market and what we expect to happen over the next 12 to 18 months, it makes sense to put it in real estate rather than sit on it in cash,” she said.
Others have been amassing cash in recent months in anticipation of real estate bargains, Daly said.
“A lot of people have gone heavy into cash over the course of the last year,” he said. “They’re waiting for the bottom — in all types of investments. For those who feel that the bottom is here, it’s time to make a move.”
One reason real estate is an attractive investment in times of financial turmoil is psychological.
When markets are uncertain, some investors look for “hard assets,” like real estate, according to Jonathan Miller, president of the real estate appraisal firm Miller Samuel.
“It’s hard to look at your stock portfolio statement and see 25 percent of it wiped out, whereas housing is tied to a physical asset,” he said. “The asset still functions even if it loses value.”
In other words, “when you buy an apartment, it’s real, you can touch it,” said Shorin, who is representing a pair of all-cash buyers from St. Louis looking for a pied-à-terre in New York. “With stocks, it feels like it’s just paper.”
It’s always been beneficial for homebuyers to use cash, which helps expedite the closing process and allows them to avoid mortgage-recording taxes. But homebuyers in the current market are finding that cash gives them even more advantages than normal.
“There never will be a seller that won’t sit up and take notice from a cash offer,” Shorin said. “It means you can close immediately. And in this market, you don’t know if a buyer will get a loan, even if they’re very qualified.”
S. Hunie Kwon, an executive vice president at JC DeNiro, said he recently accepted an all-cash offer of $875,000 for a two-bedroom apartment at 50 Lexington Avenue in Gramercy. Though the offer was slightly lower than the seller would have liked, the all-cash offer allayed concerns about whether the prospective buyer would be able to get a loan.
“This market gives the all-cash buyer that much more leverage, knowing that it’s more difficult in terms of getting a mortgage,” Kwon said, adding that with cash, “it’s a done deal” when the contract is signed.
The practice is also becoming common because it’s convenient for foreign buyers, who find that paying cash is easier and has tax benefits, said Shorin, who noted that the buyers at London Terrace Towers were British. “It was just easier,” she said. “No red tape.”
International buyers, too, have found it more difficult to get financing as the credit crisis has deepened.
“A year ago every foreign buyer came here and got a loan,” Shorin said. “Those days are over. I don’t know if foreign buyers could get 60 percent. The whole nature of the playing field has changed.”