Kyle Golay saved for nearly two years to come up with the down payment for the $224,000 home he wanted to buy in West Des Moines.
The 25-year-old didn?t need to go far for financing, though. His father, Doug Golay, banked the purchase, with a below-market interest rate, no credit check or closing costs.
?The money could sit in the bank, where it wasn?t earning much, or we could invest it in our son,? said Doug Golay, a Coon Rapids businessman. ?He is repaying us with a better interest rate than we could get from a CD.?
At a time when the housing market is struggling, the number of Des Moines-area homes purchased with cash is more than double that of a decade ago. And 10 months into 2011, cash purchases were 44 percent higher than even 2005, which was the peak of the metro area?s housing boom.
Among the reasons for increased cash buyers:
The distressed housing market ? foreclosures, short sales and underwater sellers ? is driving home prices down and attracting investors in Iowa and the nation who seek discounts, says Walter Molony of the National Association of Realtors. Buying distressed housing is easier with cash, and a strong rental market gives a healthy return.
Tougher financing requirements are prompting parents like Golay to back their kids? first purchase, said Les Sulgrove, president of the Des Moines Area Association of Realtors. ?There?s not a lot of places you can put your money right now to get a decent return,? said Sulgrove. ?Real estate over the long term is still a good investment.?
Homes have become more attractive to investors. Nationally, about 30 percent of sales in distressed markets like Arizona, Nevada and Florida are cash, said Molony. ?About two-thirds of cash activity is investors,? he said. ?Typically investors are renovating them and holding on to them as rentals ? the lion?s share ? or reselling them for profit.?
?In many cases, there?s an immediate positive cash flow, because the rental demand is so strong,? said Molony. ?They?re income producers.?
In the Des Moines metro area, cash sales have climbed from 13.4 percent of sales in 2008, the year the national recession gripped Iowa, to 22 percent of sales so far this year, data show. A decade ago, metro-area cash transactions were only 8.3 percent of purchases.
Other metro areas report growing cash sales, too. The percentage in the Council Bluffs area so far this year is more than double 2005, while Cedar Rapids has seen more moderate growth, with nearly 16 percent of purchases this year in cash, up from 11.5 percent in 2005.
Cash is king, especially in this turbulent market, Molony said, with cash bidders typically winning over buyers who need financing.
Sellers also will provide greater price concessions to cash buyers, since they avoid the difficulty and delays that come with getting loans and appraisals, said Kurt Schade, president of the Iowa Association of Realtors. Wanting to snag the discounts, some buyers are misleading sellers about their ability to buy without financing, he said.
?They?re sneaky,? Schade said. ?Sellers are beginning to require verification that the buyer has the cash.?
Sulgrove said cash often works best when buying distressed properties. ?Banks are not lending to investors like they did in the past. They have larger down payments, higher interest rates. It?s not favorable to investors.?
The national real estate group said the average credit score required last year rose to 698 for Federal Home Administration loans from a previous range of 650 to 660. Loans backed by Freddie Mac and Fannie Mae required credit scores that were about 40 points higher than a historical requirement of 720.
Those tighter lending requirements are pushing parents to buy homes for their children as well.
Golay said his son Kyle has a good job operating computer-controlled equipment at a Des Moines manufacturer, but was still concerned about qualifying for a mortgage and the added costs of closing.
Doug Golay, who sold a software company in California a dozen years ago to move back to Iowa with his family, said he talked with his son about financing the purchase, going over the costs and his son?s budget.
?We made it clear this isn?t a gift. Even though we?re the bank, we made sure he was committed and had a down payment,? said Golay.
An attorney drew up a contract between father and son.
Steven Smith, a Re/Max real estate agent, said he has curbed his cash buying and reselling of Des Moines-area homes, dropping to about 20 homes a year from 100 earlier.
Unlike investors who look for rentals, Smith mostly purchases homes to fix up and resell, a difficult task, given the slower housing market. ?You can buy like crazy but you can?t sell them,? said Smith, who has been personally buying and selling homes for 25 of his 36 years in real estate.
Plus, he said, these days, discounted properties are riskier to purchase than in the past.
Schade, a Coldwell Banker agent, said lenders selling foreclosed homes often refuse to turn on water and power for an inspection, so problems like broken pipes and furnaces are hidden.
?It?s not a reliable inspection. You?re in there with a flashlight,? he said.
And lenders for the purchase are unwilling to provide mortgages until ?they verify the house isn?t full of deficiencies,? Schade said. ?It?s really challenging.?
?You need about eight people in the house, including a plumber and a drywaller, when you turn on the water. You wait for a leak, turn off the water, fix it, and do it all over again,? he said. ?Most buyers can?t assume that much risk.?
Smith said he?s buying houses that are inexpensive, typically less than $50,000. Sometimes squatters have caused damage, copper wiring gets stolen, and water damage lurks.
?You have to sign 30 pages of non-disclosures. Mold, radon, asbestos ? they go on and on,? said Smith. ?You?re dealing with mortgage companies that have had every kind of lawsuit you can imagine.
?It?s not for the weak of heart,? he said. ?There are a lot of surprises. But cash buyers can sometimes get great deals.?
Schade said parents financing their adult children?s purchases are buying homes that cost up to $250,000.
?Gen Y wants new construction,? Schade said. ?They don?t want other people?s dirty carpets. They don?t want other people?s choice of colors.?
Doug Golay said he?s confident his son is a good risk and said he would offer the same deal to his other son once he graduates from college and has a good job.
?You can rent and waste money, or you can buy and wake up in 20 years and find your home is mostly paid for,? said Golay.
