Financing Diversifies

Affluent buyers’ push to diversify their real estate assets will also likely come with a desire to lessen their exposure to higher interest rates in the short-term. As a result, cash transactions are expected to increase this year. Other creative financing options – like margin or stock portfolio loans and private bank loans – which are more commonly accessed by ultra high-net-worth investors – will gain more mainstream appeal among the mass affluent population, which grew in size during the pandemic. Additionally, adjustable rate mortgages and seller carry second mortgages could also see an uptick.

All-Cash Transactions

During the pandemic, cash transactions increased. The National Association of REALTORS® reported that the share of all-cash sales to existing-home sales surged to 25% in April 2021 – a notable increase from the 15% share in 2020 and 20% share in 2019. Cash sales also rose with more vacation sales and with a higher fraction of vacation homebuyers paying all-cash. By August 2022, all-cash sales accounted for 24% of transactions for the month, the same share as in July, but up slightly from 22% in August 2021.

The responses from our proprietary survey also support these findings. According to the majority of high-net-worth respondents, they are more inclined today to use cash vs. a traditional mortgage to finance a future property purchase.

Luxury Property Specialists across the country are reporting similar findings. “Almost all of our high-end buyers are purchasing with cash,” said Pettingell. “Buyers may be getting financing, but in the luxury market, offers contingent upon financing are still not enticing sellers. This is similar to last year. However, when interest rates were very low, buyers often borrowed against their investment portfolios and financed the property privately.”

The term “cash” can be misleading. Often times, an all-cash offer to a seller eventually turns into a loan prior to closing. Or, cash is really a loan from a private bank or investment firm, if a buyer is borrowing against their stock portfolio.

”During the pandemic, buyers would make all-cash offers that were non-contingent to try and make their offers more appealing to sellers,” said Jade Mills, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Beverly Hills. “Many times, during their contingency period, they would still get a loan.” After all, it’s in their favor to use the loan payment as a tax write-off and keep their capital liquid for other investments. “They are always looking to leverage,” added Mills.

Still, many high-net-worth buyers prefer to use cash to buy homes, particularly Millennials or Gen Yers, if they have received a gift or inheritance and tend to not have the deep portfolio of investment assets that their older counterparts would have. They would also not want to pay the currently higher mortgage rates because the interest return on their cash is less than the cost of the mortgage interest rate.

Leveraging Portfolios

Ultra-high-net-worth investors have always had access to greater wealth building tools and tappable lines of credit with lower interest rates since their wealth makes them a lower risk to lenders. The difference now is that these practices are trickling down to the mass affluent population. Assetbacked lending – i.e. borrowing against portfolios – became increasingly popular during the pandemic when interest rates were low and the stock market was at a record high.

Typically, affluent buyers pledge stock as collateral and get what is considered a “margin loan” at a low interest rate and flexible repayment terms. This allows them to tap the cash they need without having to sell investments whose value could have kept rising. These loans also allow them to avoid capital gains tax if they were to sell the investment.

their stock is down. “People are banking on the fact that the market is going to recover as inflation gets under control in the next 12 to 15 months,” he added.

NonTraditional Bank Loans

Financing options have changed considerably over the last year with private banks and wealth management companies now offering more exclusive financing options, such as zero deposit mortgages, multiple loans, and interest-only mortgages, to target the aspirations of the mass affluent. According to McKinsey. com: “Five years ago, nonbank lenders accounted for roughly half of total originations; two years ago, that figure was nearly 60%. In 2020, the share of originations by nonbank lenders leapt to nearly 70%.”

Source: McKinsey.com

Even as interest rates have risen and the stock market has cooled, the benefit of these types of loans may still outweigh the disadvantages for some investors. “You can simply pay yourself back within the account and there is no monthly payment that you need to make,” said Shant Banosian, Executive Vice President of Sales for Guaranteed Rate. “The other advantage is that you can access the money quickly. You can act and feel like a cash buyer to a seller.” Additionally, investors don’t want to take a loss on a sale if

Adjustable-rate mortgages, known as ARMs, have also seen an uptick in popularity recently as homebuyers try to secure a lower interest rate. “One of out of every five mortgages is an adjustable-rate mortgage, and on the luxury side, it’s much higher,” said Banosian. These loans are typically fixed for five, seven, or 10 years and then they adjust to wherever rates are in the market. He continued: “As rates have gone up, you’re taking into consideration how long you plan on owning the home so you can align it with your financial goals. My experience is that very few clients get to the other side of these loans. They can usually refinance the loan before the rate adjusts higher. Or they will sell the house within that fixed period.”

Seller Carryback Financing and Rate Buy-Downs

Real estate agents report that some affluent buyers have negotiated seller carryback financing – where a seller acts as the bank or lender and carries a second mortgage on the property that the buyer pays down each month along with their first mortgage.

In Los Angeles, Mills has noticed more buyers asking sellers to carry back a portion of the sale at a lower interest rate. “They may try to get a traditional bank loan at 50% down, and the seller will carry a second for the additional 20% to make it a 70% loan. So, the buyer might end up with an interest rate that is in between the 3% and 5.5% rate. They are trying to balance out the interest rates.”

In Colorado's Steamboat Springs, buyers are asking sellers to buy down their interest rate during negotiations. This is a notable difference from the last two years when nearly every property sold for over asking price, said Robert Yazbeck, a Luxury Property Specialist affiliated with Coldwell Banker Distinctive Properties. “Instead of that $1 million property selling for $1.15 million, it might sell for $980,000,” he said. “The seller could take that extra $20,000 or $35,000 and buy down the rate for the buyer to get it back to the rate it was a year ago.”