Cash is king for many sellers today
If you are looking for a home today, you are likely competing with other buyers for the same property.
Making a cash offer is often a great way to improve your chances in a bidding war. And today there are even companies supporting a cash offer for buyers who don't have enough savings to go it alone.
But is a cash offer – with or without your own funds – really a good idea? And how does it work in practice? Buyers should know that.
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This is how a cash offer works
A cash offer for your own home is very simple: you find the property you want and then submit an offer to buy, without a mortgage loan. Funds usually come from savings, the sale of an existing home, or gift money.
Note that "cash offers" are usually not paid for with cold cash. Money almost always changes hands by check or bank transfer.
"There is a traditional cash offer in the home purchase agreement without a loan," said Elizabeth Boese, broker at Coldwell Banker Realty.
“The buyer will still put some serious money on deposit when they are under contract as a down payment for the amount they owe for the house. The rest of the money is usually transferred to a title company shortly before close of business, ”she explains.
Before making any serious cash deposit, you will need to present a "proof of funds" – proof that you have enough cash to buy the property.
You will usually need to provide bank statements and a letter of confirmation from your bank or financial institution.
How to make a cash offer on a house
There are several steps involved in making a cash purchase:
- Find a home for sale that you like and make a cash offer. Experts strongly recommend preparing an offer with the help of a real estate agent and / or real estate attorney
- Agree on a purchase price with the seller (this may differ from the offer price)
- Show proof of payment by presenting a written confirmation from your bank and bank statements
- Pay for a professional home inspection and appraisal, highly recommended by experts, to protect yourself from buying a broken property or paying more than the home is worth. In a competitive home buying market, some forego the rating or inspection quota
- Assuming there are no problems after the inspection or evaluation, both parties will sign the offer / sales contract
- Have an escrow account opened by a title company or an attorney and place your agreed serious cash deposit into the escrow account
- Obtain a title report that "ensures a clean title comes out when you close," says Michael J. Romer, managing partner of Romer Debbas LLP. "Once the title is resolved, the parties will proceed with the deal"
- Put the rest of your money in escrow. These funds will be given to the seller upon completion and ownership (in the form of a deed) will be transferred to you
Provided you have the cash to buy a home directly, those sales can be completed quickly – often in a matter of days.
How to make a cash offer – without paying cash
Cash offers are often more competitive in a seller's market. You can give buyers a real edge in today's grueling real estate scene.
But not everyone has enough money to make such an offer. This could be especially difficult for first-time home buyers who cannot use the proceeds from the sale of a current home.
However, there may be a way to go for a cash offer without actually paying cash.
Cash offer financing options
Some buyers hire a company to pay cash on their behalf and then pay the company back with a mortgage loan.
This is how it usually works:
- The company provides the money for your offer from its own resources
- These companies usually promise a quick deal (some in just 72 hours)
- This will likely get the seller to take your cash offer, which can help you avoid a bidding war with other buyers
- Once the transaction is complete, the house will be held by the company while you complete the mortgage financing with a lender of your choice
- The company sells the home to you and you pay for it with your approved mortgage loan
This is a relatively new option offered by companies like Ribbon, Homeward, or Accept.inc.
If you need to sell your existing home first, "these companies can also hire your current home to buy so you can show you have cash if you need to close as a buyer," says Bruce Ailion, a true real estate agent and agent.
Should You Use Cash Offer Financing?
This is not a true "cash offer" as you are still getting a mortgage loan and paying interest on your home purchase. But it can be a way to circumvent some of the buying challenges in today's hot market.
"These companies are similar to coin lenders in that they provide the money you need, but at a high cost," Ailion warns.
According to Romer, the fees that companies like this charge for backing your cash supply are often between 1 and 3 percent of cash.
“The best candidate to work with a cash backing company is a buyer who needs funding to complete the transaction but is competing with other offerings that may be cash only. Companies like Ribbon can convert your conditional offer into a cash-only / snap offer to get yours across the finish line, ”added Romer.
Khari Washington, a real estate and mortgage broker at 1st United Realty & Mortgage, Inc., warns that this strategy isn't necessarily a slam dunk.
“Some sellers don't look at these real cash offers – they see them as questionable hard cash offers. As a result, your offer may not be accepted, ”he says.
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Benefits of buying a home with cash
Cash transactions are usually concluded faster and involve less effort for both parties.
“The seller doesn't have to worry about a bank refusing to finance you. That can give you an edge when buying a home and accepting your offer, ”said Ralph DiBugnara, President of Home Qualified.
Additionally, paying cash can give you the flexibility to remove funding risk from your offering.
That means selling the home doesn't depend on your ability to get a mortgage approved – so it's a safer bet for the seller.
“Sellers don't like contingencies because they don't want buyers to cancel. Especially in this market, where a seller may receive several offers, it can be difficult for the seller to bring the house back on the market if the chosen buyer is denied a mortgage loan, ”adds Boese.
As a buyer, making a cash offer means you don't have to go through mortgage pre-approval, contract signing, and other time-consuming steps in the home buying process.
When buying a new home out-of-the-box, factors like your creditworthiness and credit history don't matter.
Cash buyers also often save money on closing costs. With cash payment:
- You don't have to pay any fees to a mortgage lender
- You are not required to pay for an appraisal
- There is no interest on a mortgage loan
- Fees paid to a title company and / or attorney may be lower as there are no loan documents
Cash buyers can also shorten their closing time. Many lenders typically take 30 days to close. But cash buyers can sometimes close within a few days.
“A cash transaction can be completed once the title is confirmed. This can happen within seven to ten days, ”notes Ailion.
Disadvantages of a cash offer
Of course, there are some drawbacks to going cash-only. The biggest challenge is finding the money that can drain your savings and financial resources.
“The main disadvantage for the buyer is that it reduces his liquidity. They may be tying all or almost all of their available funds into this purchase, which can leave them financially vulnerable if they need cash quickly, ”says Ailion.
Remember, your home ownership costs don't stop when you close the sale. You have a lot of ongoing expenses, such as:
- Property taxes
- Homeowner insurance
- HOA fees (if applicable)
And you want to be sure that you still have cash in an emergency fund. If you run out of your savings buying a home, you could be at risk from unexpected medical bills, for example.
Paying cash also means you won't be able to take advantage of the mortgage interest deduction from your federal income tax (which is only allowed if you list your deductions).
One final drawback is that you will be tying up all or most of your money in real estate. While this isn't necessarily a bad thing, it could limit your options for investing in higher-yielding assets.
Currently, most mortgage borrowers pay an interest rate below 4%. Stocks, bonds, mutual funds, and other assets often have returns well above this level.
Many homeowners choose to finance their home purchase and instead invest their savings in such investments because they can get a higher net return.
The right step, of course, depends entirely on your personal finances and long-term goals. If you are not sure what is best for you, consult a trusted financial advisor.
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Frequently asked questions about cash offers
Is a Cash Offer Better for a Home?
In general, a cash-only offer is almost always more competitive than an offer with funding. Attorney Bruce Ailion says, “A seller would rate a cash offer positively because there is no risk that the buyer will not be able to complete the transaction. A cash sale is therefore generally worth more to a seller than a higher-financed offer. It means a higher level of security. ”However, a cash-only offer can reduce your liquidity and potentially leave you financially vulnerable if you need cash quickly after the sale for an unexpected reason.
Can a cash offer fail?
Yes, all-cash offers can fail. This can be the case, for example, if you have a professional home inspection carried out and deficiencies are found, or if problems with the title of the property need to be resolved. A seller can also decline a cash offer if they do not trust the source of the money.
Are there closing costs for a cash offer?
Fully comprehensive buyers pay the closing costs in the same way as buyers with mortgage financing. “Common closing costs for a cash offer include title insurance and searches, legal and / or fiduciary fees and, if applicable, transfer taxes on the buyer's side. However, buying in cash is usually cheaper than buying with financing, as there are no mortgage-related fees to be paid upon completion, ”says attorney Michael Romer.
Can you pay for a house with real cash?
Buying a home with physical cash is permitted by law if the seller accepts it. However, it is not the rule. “With the exception of the IRS reporting requirements, no specific laws prohibit a cash property transaction, although this is very unusual and not recommended. Cash is king, but salespeople almost always want it from a bank and not out of their suitcase, ”explains lawyer Michael Romer.
How quickly can a cash buyer complete the sale?
A cash transaction can be completed once the title and title insurance are confirmed. This can happen in just seven to ten days, according to Bruce Ailion, a real estate attorney.
Do you need a home appraisal if you pay in cash?
No appraisal is required when buying a home with cash. However, experts often recommend paying for a valuation that can give you peace of mind that you haven't paid too much for the property. If you forego an appraisal, "work with an experienced real estate agent and ask the agent for an analysis of the last sales in order to avoid overpayments," recommends attorney Michael Romer.
Can I pay for a house in cash and then take out a mortgage?
You can buy in cash and take out a mortgage loan upon completion if you wish. This agreement is common when you are with a cash fronting company like Ribbon, Accept.inc. or Homeward work together. Note that most lenders require that a mortgage loan be taken out within 90 days of closing. You also pay back the closing costs when you finance or refinance the home.
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