The challenge of home buying has been increasingly complicated by all-cash offers.
(Photo illustration by Kevin Painchaud / Lookout Santa Cruz)

The rise in all-cash offers for Santa Cruz homes — what can regular people do?

Anyone trying to purchase a home in Santa Cruz County recently might have seen their dream-home desires thwarted by a competing all-cash offer. Why is this happening ... and what can non-millionaires do about it?

As Santa Cruz home prices spiral ever higher and bidding wars ignite over virtually every listing, a person might wonder — how are so many buyers making all-cash offers of more than a million dollars?

The answer to that question — grim news to folks working outside of the tech industry — is that folks with stock options connected to their workplace have advantages in financing that go far beyond earning a six-figure salary.

A category of financing tools known as “securities-based lines of credit,” typically offered by investment management firms, can allow buyers with stocks — purchased at a discount from their employers — to bypass traditional banks and write substantial checks secured by the value of their stock holdings.

In today’s corporate world, especially locally, employees with stock options are overwhelmingly those working in technology firms such as Google, Meta, Apple and Amazon.

“People with tech portfolios quite frankly have options available that others don’t,” said Trevor Strudley, a concierge wealth manager at Raymond James Financial Services in Capitola. “They are able to make cash offers [for real estate] that put them at the front of the row.”

But the cash offer is only part of the securities-based credit advantage. Interest rates are competitive with bank-issued mortgages. But because the loan is secured by the value of the borrower’s stocks, the buyer may own the home outright with no lien on the title.

Securities-based borrowers are not required to sell their stock to qualify for a loan, allowing them to enjoy potential future growth in their stock portfolio. And if the value of that retained stock rises more than the percentage interest charged on the loan, it’s the home-buying equivalent of having one’s cake and eating it, too.

If this is depressing news to the average local, salary-earning, mortgage-seeking, home shopper — I’m sorry, but there’s more.

If this is depressing news to the average local, salary-earning, mortgage-seeking, home shopper — I’m sorry, but there’s more.

There are also possible tax advantages to securities-based borrowing. Let’s say a founding employee at (imaginary) Vertical Aviation bought company stock at 6 cents per share, and that value has since risen to $10 per share. Selling Vertical stock to finance a home purchase would trigger a costly capital gains assessment, but holding the stock and using it to secure a loan does not.

In fact, some workers receive stock options more valuable than their cash salaries, Strudley noted.

“Some tech employees get two or three times their salary in stock,” he said. “A lot of them might not qualify for loans from traditional banks, where they just look at your annual salary. A brokerage firm will look at all your assets, and you don’t have to sell your assets to finance a down payment.”

There is one caveat: Stocks held in a tax-deferred retirement fund may not be used to secure a loan.

Securities-based financing isn’t new, but the rapid growth of Silicon Valley employment and the fact that stock options are widely offered to non-management tech employees means there are a lot more buyers out there with the ability to write a check for a million bucks — or two, or three.

If it’s any consolation, Strudley noted that today’s technology wealth flows to a younger and broader demographic than wealth in previous generations.

“I experienced exactly that,” he said. “My parents were in the military in the U.K., and I went into tech. The people working in tech these days are astronomers and physicists and librarians and Greek scholars — really all kinds of people. It’s not just engineers.”

Strudley agrees that securities-based financing might contribute to the rise in Santa Cruz housing prices —while noting that prices in Silicon Valley remain substantially higher. But he thinks the pandemic-driven option of working from home is more of a factor in the trend of tech workers moving to Surf City.

For the past six months or so, median single-family home prices in the city of Santa Cruz have hovered in the $1.4 million range. What can an average wage earner, or even well-paid non-tech professionals do to gain an advantage in the home-buying free-for-all?

“I hate to say it but there’s not much to do,” said Wayne Shaffer, a lifelong Santa Cruzan and real estate agent with 49 years in the business. “In years past you might offer a down payment and ask the seller to carry the loan, but that’s not happening much anymore.

“I would ask if the (potential buyer) has family members who could help financially, or if they’d consider finding a partner and buying a property to share,” he added. “A lot of people are giving up on Santa Cruz and moving to Watsonville. I’ve seen ups and downs in the market over the years, but I’m having a hard time grasping these very high prices. I wish I had better advice to offer.”