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Cash now king when buying island homes

STORY BY STEVEN M. THOMAS, (Week of December 22, 2011)

Cash deals have always played a big part in barrier island real estate transactions, especially at the top end.  But since the market nosedived in 2007, cash has truly become king.

“I can’t remember the last time I saw a mortgage,” says Clark French, broker-associate at Premier Estate Properties. “The vast, vast majority of deals in our price point, over a million, are done in cash.”

Betsy Hanley, president of Windsor Real Estate, Inc., says 90 percent of her closings are cash, with no financing contingency. That figure is echoed by Bob Gibb, owner of John’s Island Real Estate Company and Marsha Sherry, broker at The Moorings Realty Sales Co.

Christine McLaughlin, owner of Shamrock Real Estate, says 100 percent of her deals are cash, a dramatic increase from a few years back.

This greenback gold rush – part of a nationwide trend that’s taken hold since the real estate boom went bust – seems odd at first glance.

With mortgage money cheaper than it has ever been, logic would seem to suggest that people borrow as much as they possibly can when buying property.

“I am surprised more people don’t get mortgages,” says Buzz MacWilliam, owner of Alex MacWilliam Real Estate, whose company does about half of its deals in cash. “2.5 percent money is easy to get.”

But powerful forces are damming up the flow of the practically free money MacWilliam mentions, making cash the preferred alternative for a majority of buyers.

Irrational lending standards and uncertain appraisals are the biggest anti-mortgage factors, according to island brokers.

Banks require excruciating documentation of income, employment history and credit worthiness, often adding additional requirements during the mortgage process. Then, when the ordeal is complete and the deal all but done, they go back and check everything again right before closing and demand still more documentation if there has been any change in credit score, bank balances or employment circumstances, putting closing dates in jeopardy or killing deals outright.

In a time when property values have fallen as much as 50 percent in some places, low appraisals torpedo many financed deals. A buyer and seller agree on a reasonable price for a home and the bank for once likes the buyer’s credit profile, but the appraiser comes back and says the property isn’t worth the
sale price. The bank immediately backs out, leaving the discouraged buyer and seller to start over again.

“Many buyers are discouraged by the rigors of the financing process,” says Michael Thorpe, co-owner of Sotheby’s Treasure Coast Realty where 75 percent of deals are done with cash. “You almost get the sense sometimes that banks are looking for ways not to lend money.”

Buyers also have less incentive to borrow now than during the boom because the chance to leverage bank money in a skyrocketing market has gone away. When prices were going up 15 percent a year, smart buyers wanted to carry as big a mortgage as they could get through the door because the more valuable the property they bought, the more money they made on the rise.

Now, with values flat or still slightly declining, that incentive is gone.

Cash deals also have positive benefits for both buyers and sellers.

For sellers, a cash deal provides peace of mind in knowing the buyer won’t be disqualified at the last minute by an inflexible lending institution. Signing a cash sale contract, the seller can be confident of closing on the specified date and being able to move ahead with their own plans instead of being tumbled back into financial limbo by a unexpected hitch.

Because banks take months to close most deals, a seller’s property is off the market and unavailable to other potential buyers for a long time when a contracted buyer is getting a mortgage, time lost if the deal falls through.

Buyers who pay in hard money also get the peace-of-mind advantage of a quick and certain closing. They don’t have to worry about the roadblock of a low appraisal and, in some cases at least, they gain leverage to negotiate a lower price.

“You can get a better deal if you pay cash,” says Thorpe. “The immediacy of cash gives you stronger purchasing power. If a prospective seller has several people interested in their property and one requires financing with all the associated uncertainty  and the other can pay cash, they may well take a lower offer from the cash buyer to avoid the risk of taking property off market for 30 or 60 days, not knowing if buyers are going to get financing.”

MacWilliam says he isn’t so sure cash means a lower price but agrees the prospect of a certain closing has advantages for sellers that might make them more flexible.

The jump in cash deals has been biggest in parts of the country hit the hardest by the real estate recession.

In Phoenix, which was decimated by the crash, 42 percent of all real estate transactions in 2010 were cash, up from less than 15 percent in 2008, according to Raymond James’s equity division.  In the upper reaches of the market there — homes priced at $850,000 or more — 66 percent were bought with cash.

Similar trends prevail in Las Vegas and the Inland Empire in Southern California where distressed properties and short sales can be particularly difficult to finance and homes going for 30 or 40 cents on the dollar attract investors who have money in hand and want to hedge against possible upcoming inflation.

In Tampa, cash deals made up 51 percent of real estate transactions in the first half of 2011 and the number was even higher in the Miami-Fort Lauderdale area where many buyers come from overseas and face even more difficulties than the average person in getting bank financing.

According to, 62 percent of all Miami-Fort Lauderdale sales in the first six months of 2011 were transacted in cash. “In the million-dollar plus condo market, 42 out of the 47 units sold during the same time period were cash purchases,” according to Miami real estate sources.

One interesting wrinkle to the cash-buying frenzy is that some greenback deals have a mortgage hidden behind them.

Because the cost of money is so low and the tax advantages of mortgage loans so high, a buyer may offer cash and come to closing with that leverage but still borrow the money in one way or another, tapping an existing credit line or taking out a home equity loan on another property.

Whether faux or full-on, cash deals are critical to the real estate recovery.

“Cash buyers are propping up the market, increasing the number of properties sold, decreasing the level of inventory and flushing distressed properties through the system,” said Jim Gillespie, CEO of Coldwell Banker Real Estate in a recent interview with Reuters.

“If cash buyers evaporated tomorrow, real estate would be in a lot more difficult position. They are stabilizing the market even though they’re purchasing 10 to 15 percent below value.”

“The island market would certainly be worse without cash buyers,” agrees Thorpe.