The convenience and certainty of all-cash offers appeals to sellers so much so, that they pay on average 10 % less than mortgage buyers, according to a new study from the University of California San Diego Rady School of Management.
Buying a house “with cash” can benefit both the buyer and the seller with a faster closing process than with a mortgage loan. Paying in cash also means no interest and can mean lower closing costs.
Don't stress if you're not able to make one: 80% of buyers finance their home purchase with a mortgage. Beating an all-cash offer isn't impossible. If you're a prospective homebuyer who plans to take out a mortgage, consider these ways to make your offer competitive against all-cash bids.
Cash offers are appealing to sellers because they eliminate financing uncertainties and potential delays inherent in mortgage approvals. Cash transactions typically close faster and with fewer complications, reducing the risk of the deal falling through.
The Problem with Cash Offers
The primary reason? Sellers are reluctant to accept offers that significantly undervalue their properties. Even with distressed properties, owners are often unwilling to sell for “pennies on the dollar.” "Even if their property is falling down, they still are not going to give it away."
Yes, a cash offer can collapse if you cannot furnish sufficient proof of funds or come up with the money needed to close the deal. Or, the homebuyer can cancel the deal within the agreed-upon due diligence timeframe if they change their mind due to concerns over an inspection report or other issues with the house.
Builders, like BOLD Construction, highly value cash buyers because they provide immediate funds for the project, significantly reducing the builder's risk. This newfound trust often leads to more flexible pricing and additional perks.
An all-cash purchase offer can do exactly that. Sellers may even accept less than asking price for an all-cash offer since a real estate transaction untethered to lender financing typically means a quick closing.
A homebuyer who makes a cash offer intends to pay in full, with no mortgage or other type of financing. Cash deals are more appealing to sellers than financed deals, because they close faster and are less risky.
It is technically possible to close on a home in 30 days, or even less, particularly if you are paying all-cash rather than getting a mortgage or dealing with a homebuying company or iBuyer. But in general, according to data from ICE Mortgage Technology it takes about 44 days to close on a home.
In addition, a cash buyer must show proof of funds, or the deal can crumble. “For sellers, the biggest risk is the buyer not having enough funds to purchase the property,” Kelly says.
Cash buyers sometimes use a financing company to buy a property for them. Afterwards, they repay the company with mortgage financing. Cash home financing works something like this: The cash financing company invests its own money on your behalf.
Some cash home buying companies will pay as little as 50% of the after-repair value (ARV) of your home, while others may offer up to 85%. Use the 70% ARV formula (estimated sales price x 70% - repair costs = max offer) to see what you might expect.
Cash buyers expect some negotiation, and their initial offer may not be their best. Sellers often hesitate to counter, thinking they might lose the deal, but it's important to assert your position.
To cut to the chase, it really depends. Cash offers can benefit sellers by ensuring quick closings and fewer contingencies. But, if maximizing profit is your goal, financed offers may be better. The best choice depends on the seller's priorities and specific circumstances.
Various risks are associated with making cash payments to contractors, including fraud, liability, and tax risks. Although it is legal to pay contractors in cash, these risk factors should encourage you to pay contractors by another method to provide a paper trail.
If your house-to-be appraises for exactly the cost to build, you'll be able to get a loan for 80% of the cost… and you'll need the other 20% in cash.
Cash buyer cons
Scams can happen: While rare, scams are unfortunately part of the cash buyer landscape. Happily, avoiding them is pretty easy, but people have fallen foul of scammers in the past, so be aware that it does happen.
The Advantages of All-Cash Offers
Seller Appeal: Cash offers provide certainty and speed, often making them more attractive to sellers. Negotiation Leverage: Buyers offering cash may find sellers more open to discounts, potentially saving money on the purchase.
There is no legal need of an appraisal for a cash home buyer. Thus, if someone is paying cash, an appraisal is not required. However, a buyer may choose to have a home appraisal even if they're not opting to do any type of traditional financing. For peace of mind, an appraisal may be a good idea.
Cash offers can be appealing, as they close more quickly and are less likely to fall through because there are no lenders involved. But it's important to do your due diligence when dealing with cash-homebuying operations.
If the home is overpriced to start with, and has been sitting. You could offer an % under asking based on where the comps say the home should be valued at - market value. The strong points about cash is no appraisal needed, and can close quickly. Always ask what is important to the seller.
If you're genuinely interested in the property, it could be a good idea to ask why they are listing it as cash buyers only. For example, they may have inherited the property and wanted a quick sale. You could negotiate and see if they'll accept a higher offer for a mortgage applicant.