Where’s All the Cash Coming From?

“Using cash allows real estate investor Jeremy Rupp to pay less than the asking price, then after the deal closes, he gets a mortgage on the home to free up more cash to keep buying.”

–Jim Buchta, “Cash is Still King“; The Star Trib (11/3/2013)

Call it the real estate version of “ready, fire, aim.”

cashThat is, instead of getting a (purchase money) mortgage on a property, then closing, real estate investors in today’s market are reversing the steps.

So, first they buy — with cash, often at a hefty discount — THEN they’re taking out a mortgage on the home.

They then use the cash pulled out of the property to buy the next one.

Then “wash, rinse, and repeat,” as they say.

Mystery Solved

That sequence solves a major question in my mind (if not others’):  exactly where are all the cash Buyers — at least the ones not directly financed by Wall Street — getting their cash?

While New York-based investors like Blackstone now tap practically free money (and lots of it), courtesy of the Federal Reserve, smaller and/or more local players supposedly haven’t had the same access to cash.

See also, “Cash Buyers, Sight Unseen.”

History Repeating? (or Just Rhyming)

Of course, those of us who’ve been in real estate longer than 10 minutes will recall something similar happening leading up to the 2008 housing bust.

spigotNamely, Wall Street shovelled billions directly into subprime (and non-bank) lenders such as New Century Financial, which turned around and originated millions of dubious mortgages.

Those mortgage were then sold to big Wall Street players like Goldman Sachs, which bundled (securitized) them, and re-sold them to investors worldwide.

Money Merry-Go-Round

Having sold their inventory as fast as they could create it, New Century was flush with funds to originate even more dubious loans to sell to Wall Street’s bundlers.

It all worked beautifully until . .  . it didn’t.

Then, Wall Street virtually overnight turned off the money spigot, causing New Century and its ilk to almost instantaneously implode, lighting the fuse for the housing crash.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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