First of all, an all-cash offer to buy a house is a bit of a misnomer. If accepted, there will very likely not be suitcases stuffed with C-notes delivered to the seller at closing. No, bidding to buy with no financing is simply a come-on to owners who’d like to complete the transaction quickly and with few or no contingencies.
Buying a house for cash, meaning no mortgage, can seem like the most strategically savvy and best way to gain an accepted offer. But there are subtle pros and cons to such a maneuver, more so for the buyer, but also for the seller.
These days, with rising mortgage rates and expensive financing, buyers who can afford to pay with cash are doing so. Longtime Broker Associate Jeffrey Decatur, with RE/MAX Capital in Latham, New York, notes that all-cash offers of course are pluses, but do not always win.
“If a client tells me they are going to be paying cash, I joke and say, ‘oh, thank goodness, that puts you in somewhat of a better position, because only about 25% of sales were cash last year,’” he says. “That typically throws people off because everyone thinks cash is king. This is a good time to manage a buyer’s expectations and explain that although 25% of sales were cash, there are more cash buyers now than at any other time in history.
“Additionally, I explain that sometimes a seller will be motivated by a higher offer with a mortgage, especially if that buyer is pre-qualified, their credit pulled and such. Nowadays there are a number of banks that offer 24- or 48-hour underwriting, so the buyer and seller know quickly. Other times a buyer may have already gotten a mortgage commitment because they pre-applied or had a prior deal go south.”
Pros and cons for sellers
There’s no question that cash sales are fast. Paperwork is reduced significantly, there is no financing contingency, and with no lender involved, very often no appraisal or inspection.
Drawbacks? Unless the cash offer is highest, sellers may have to settle for a little less. If they’re in financial straits, perhaps without a job or involved in a divorce, that may be acceptable.
Pros and cons for buyers
Buyers have advantages as well, but take on more risk than sellers with cash transactions. In their favor is saving a great deal of money on mortgage payments, especially when rates are high, as they are now. Closing costs will also be much less than with a mortgage, with the aforementioned appraisal not needed, along with no application and loan origination outlays.
On the other hand, liquidity will take a big hit for most people. Plus the loss of diversification, wherein funds could be invested elsewhere. And it’s a gamble to skip the appraisal and an inspection if the seller insists on it. Tax benefits are also lost with no mortgage.
“For cash buyers, I run a closing costs estimate for a typical property and let them know proof of funds will be needed when they make an offer,” explains Pam Rosser Thistle, a REALTOR® with Berkshire Hathaway HomeServices Fox & Roach, REALTORS® in Philadelphia.
“Insurance and taxes will be included in the closing costs estimate provided by the lender. I explain other costs like renovations and offer contractors as they need them. As we look, I will explain the value of a ‘done’ home with low taxes over a fix-up listed for less. The fix-up may be more appropriate for a cash buyer. A contractor doing the renovation will want all of their money upon completion. Cash flow is an important concept to understand.”
Decatur stresses that it is vital for REALTORS® to get on the same page with buyers who plan to make cash offers, pointing out the pluses and especially the minuses they may not have considered.
“Our job as agents is to help our clients, manage expectations and educate them, so they can make a comfortable and educated decision,” says Decatur. “The interesting thing about real estate is that it is like a pendulum; it swings both ways. If something like a cash sale affects the buyer this way, it will affect the seller that way, and vice versa.
“Cash is great, don’t get me wrong, and cash is still king in a lot of instances, but not all,” he continues. “Many years ago, a cash deal was a once-a-year occurrence, and many times sellers would accept less for cash to do a quick closing. Now not so much. More people are paying cash, and most buyers are savvier now and have all of their ducks in a row.
“Also, you need to tell the cash buyer exactly how it works, that they are going to need proof of funds. It is best to tell buyers exactly what you are looking for. Many times the manager at the bank or their financial planner can write a letter on letterhead or show account balances without account numbers as proof of funds. Better to do it in advance instead of when you need it two hours ago.”