Should you always accept a cash offer for real estate?
According to wall street, cash-offer deals made up an estimated 28% of all home sales across the world in 2018.
There seems to be a lot of misconceptions and misunderstandings when it comes to a cash-offers. Does the buyer just walk into the room surrounded by security guards holding cash stuffed duffle bags to drop them in front of the seller to buy the home? Is it a once-off bank transfer of enormous sums of money as you see in the movies? just what exactly is a cash offer and why does it happen?
I’ve been curious about just that and decided to conduct some extensive research on the matter to give you the definitive all-encompassing guide to understanding cash-offers in the world of real estate.
To begin with, the definition;
What is a cash offer?
An offer made to purchase real estate submitted by a buyer who does not require any financing to make the purchase. There is no mortgage involved in the payment. This type of transaction is faster to clear as fewer middlemen are involved.
From the above, you can take out the following facts from the definition:
- Cash offers are specifically for the purchase of property – rentals have their payment options.
- Cash-offers represent a buyer who has shown (beyond a reasonable doubt) that they can purchase a property without the assistance of a 3rd party money lender – usually paid through bank transfer or cashier’s check.
- Cash offers do not involve any 3rd party money lenders – Agencies from both parties will still be present, so will a title company.
- Securing proof of funds in one of the most crucial factors of even considering a cash offer – personal and or business bank statements and other financial documentation.
Below, I will be drawing out and explaining the potential advantages and disadvantages of cash-offers for both the Seller and the Buyer of a property.
The Benefits of Cash-offers for the seller
1. Contingences are gone.
Moneylenders do not like to add unnecessary risks to their deals. One thing you can be assured of when a buyer has to take out a mortgage to purchase a property is that the mortgage company is going to be very thorough in making sure this is a good deal for them.
Appraisal, Mortgage financing, Inspection and Sale of Current home contingencies can all be involved in a contract that has a lender involved. Each contingency posing a risk to the fallout of the contract.
2. Less time-consuming.
As you might have assumed from the above point; negotiating, writing out and executing a lenders’ contingencies can be a long and grueling process that can take weeks to months to complete.
By comparison, after qualifying the buyer making the cash-offer and their desired contingencies (typically an inspection contingency); the transaction can be closed in less than 14 days.
3. The less potential risk of fallout.
Property transactions fallout (get canceled) more often than home sellers would want. 1 of the most common reasons for this to happen is due to buyers’ reliance on a lender’s approval for the transaction to take place and there are many reasons for lenders to pull out of a deal.
When a buyer makes a qualified cash-offer, it removes all lender contingencies that could have hindered a deal from the table.
A cash-offer becomes the closest thing to a complete guarantee of the transaction of property.
4. Potential to sell as it.
More often than not, cash offers are going to be made by real estate investors who have taken a preference to your property due to its attractive location and structure design. The investor is looking to either flip the property, rent it out or fully remodel it for another use.
For all the above potential avenues an investor might want to take your property, they will have to guarantee the execution of specific renovations and repairs to a certain standard.
More often than not, they would prefer to undertake these processes through their own trusted channels which would remove the stress of action from you.
The disadvantages of Cash Offers for the seller.
1. Negotiation leverage.
It should come as no surprise that property buyers are well aware of the benefits to risk avoidance they are giving to you as a property seller when they guarantee a cash-offer. The catch to their generous offer is that they are well aware they can discount the value of the property when they are at the negotiation table.
The more convincing they allow you from the other duties and obligations of selling a home, the more leverage they have to discount the sales’ price.
2. More prone to scams.
Off all the time, money and hassle that money lenders cost; you can rest assured that they will do everything in their power to ensure to shady business will happen on your part as the seller or the part of the buyer.
The majority of cash-offers will be conducted ethically and within the law but you should be aware that the less involvement from legal entity 3rd parties such as banks and mortgage brokers – the more opportunity it is for people to be taken advantage of due to negligence and unawareness.
It is always best to partake in cash-offers through the use of a knowledgeable agent and agency who can cover potential blind spots that leave you vulnerable to being taken advantage of.
The Benefits of Cash-offers for the Buyer.
1. Faster transaction.
If the buying party is a property investor, its financially advantageous to close the deal faster. This allows the buyer to move towards completing all remaining tasks needed to get the property to market faster.
The longer it takes to close a deal, the longer it will take before renovations and repairs can be started and completed and the longer it takes before any income can be generated from the property. For an investor, time is money.
For the normal average buyer, they may simply not want to go through the hassle of a drawn-out purchase that would come from working with a money lender.
2. Less periodic risk.
For a property buyer, periodic risk comes in the form of future market uncertainty for them personally and economically.
Involving a money lender involves the introduction of periodic mortgage payments on the part of the property buyer for years to come (5 – 30 years). During which period, on a personal level; if anything should happen to the buyer’s income – they risk losing the entirety of the property to the moneylender.
On an economic level, there is a risk that if a crash in the real estate market was to happen; the property owner would be stranded paying comparatively high-interest rate payments for a property valued far less than was appropriate for the mortgage.
3. Home equity security.
From the onset, the property is completely valued as a complete asset for the buyer.
In typical property transactions that involve mortgages, equity (ownership) is split between the buyer and the lender whereby the property buyer only has equity in the property equal to the amount they have paid off their mortgage.
This can limit specific renovations and actions a buyer can do to a property as well as making the buyer pay their mortgage off with the proceeds of a home sale before they can do anything else with the generated income.
4. Interest savings.
For one thing, most opinions state the largest disadvantage is the loss on the tax breaks you’d get from taking out a mortgage. This is based on a few misconceptions.
For 1, they are unaware of the fact that most households not only don’t qualify for them at all but also that the tax deduction is not a tax credit ($1 for $1) and is much less and is based on the tax bracket of the individual.
Paying cash will immediately save you thousands on the fact that you don’t have to worry about paying interest that accrues during the mortgage.
Disadvantages of cash-offers for the buyer.
1. No tax reductions.
When a buyer uses a lender to purchase the property they are attached to a mortgage, mortgage payments and mortgage interest. Tax breaks are available on mortgage interest, this is not a benefit a buyer can take advantage of if they pay cash.
It should be noted that tax breaks are state-specific and it has been argued by Investopedia that a buyer is more likely to benefit more from paying cash than from applying for tax breaks
2. A lost opportunity from fund restriction.
When cash-offers are paid out, they usually result in a massive depletion of a buyer’s disposable income.
This affects their ability to invest in prospective future deals as well as their ability to act on high-cost emergencies.
When done right, cash-offers are almost always the best path to take for both buyers and sellers.
If you are inexperienced with the procedure; never go into it alone and higher an experienced agency to help you through the entire ordeal.