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The real estate market is hot right now and if you want to compete as a buyer, a cash offer can give you the upper hand. Why are cash offers better than financed ones? Let’s examine how cash offers will help you make a more competitive offer, as well as what some of the disadvantages of cash offers are.
What are the benefits of a cash offer?
Typically, buyers need financing to purchase a home, as it’s understandably hard to save enough cash to put an offer in on a home without the help of a mortgage lender. That being said, some buyers do make cash offers (though often not in physical dollars). A cash offer occurs when the buyer has enough liquid assets (meaning cash, or anything that can easily be converted to cash) available to buy a house in full.
- You can close faster. You generally close much quicker on a home as a cash buyer than if you need financing. This quicker timeline can be really tempting to sellers who want to close fast.
- You’ll have more negotiating power. If your buyer is in a rush, being able to expedite the closing process gives buyers quite a bit of negotiation power.
- You won’t have mortgage payments. The buyer will be able to enjoy living in their home without making a mortgage payment each month and will own 100% equity in their home from day one.
- You’ll save on closing costs and interest. Buyers can save a pretty penny by making a cash offer. The costs that you need to close on a loan add up fast, as does paying mortgage interest.
What are the downsides of a cash offer?
Of course, there are some downsides associated with all cash offers that buyers should keep in mind.
- You’ll have fewer liquid assets. This may not seem like a bad thing if you have no large expenses planned in the near future, but owning a home often comes with unexpected expenses. If you choose to make a cash offer, it’s important to have enough cash on hand to fund any necessary repairs or maintenance costs.
- You won’t reap certain tax benefits. When you pay cash for a home, you will miss out on a possible tax deduction for home mortgage interest. Though recent changes to tax policy effectively ended this deduction, it is still technically available depending on how much interest you pay and the size of your mortgage. This tax deduction may not make a difference for some buyers, but for those who would have taken out a large loan, they’ll miss out on savings come tax season.
Why does cash beat a financed offer?
So, why is an all cash offer better than a financed one? Fair question. Let’s look at a few reasons why sellers tend to prefer cash offers over financed ones.
More closing confidence
Confidence is key. Sellers who have had a lot of potential buyers step through their threshold will have more confidence in a cash offer. Unlike buyers who need to secure financing, with a cash offer, you know the buyer has the funds available and that the deal can go through if that’s what both parties desire.
When a buyer needs to get their hands on an actual mortgage approval, even if they are pre-approved, it can take 45 to 60 days to close on the transaction. A cash transaction on the other hand may close in just two weeks, which is a lot less time to spend worrying a sale won’t go through.
Fewer appraisals and inspections
Because you don’t have to deal with lenders and all of their rules required to secure a loan, sellers often save time and money when they have a cash buyer that is less likely to request appraisals or home inspections (even though they should request them). Skipping appraisals also gives the seller the chance to price their home for more than the appraisal price, as the buyer may be willing to pay more and has the cash on hand to do so.
Generally cash buyers are also less likely to request contingencies, which again, gives the seller more certainty that the sale is going through and that it will close in a timely manner.
Simpler closing process
Why is a cash offer better for a seller? One of the main reasons is how much time and effort they save throughout the closing process. Working with lenders comes with a lot of extra paperwork and hoop jumping. Things get a lot simpler when lenders aren’t involved, especially at closing time.
Why is now a good time to make a cash offer?
As of 2021, we’re in a strong seller’s market, so sellers are more likely to see cash offers right now. According to the National Association of Realtors, in March of 2021, 23% of home buyers financed their purchases with cash (up from 19% in March 2020). Because of how competitive the housing market is right now, a cash offer can help buyers stand out in a sea of offers.
If your offer is financially on par with another potential buyer, a cash offer makes you the obvious choice because of the benefits the seller gains when a buyer pays in cash. If you don’t want to get caught up in a bidding war, a cash offer may be tempting enough to convince the seller to accept your offer as is without raising it to match other higher offers.
But remember — right now is only a good time to make a cash offer if you’re able to make one comfortably. If you have emergency savings and can handle any unexpected repairs that come your way, then a cash offer is in many ways an advantageous move.
Why you shouldn't skip the appraisal
Because one of the main perks of a cash offer is avoiding lenders and their many requirements for securing a home loan, you may want to just skip past a lot of the steps lenders would make you do in order to close. That’s not always the best idea. The buyer will still want to hire a title and escrow company and work with an experienced buyer's agent to make sure all of their paperwork is done correctly.
It’s also a good idea to move ahead with an appraisal anyways if time permits, because you want to know if you’re overpaying for the home or not. Home appraisals usually cost about $300 or $400, so spending the extra week and a little cash to ensure you get your money’s worth is important.
How to make a ‘cash’ offer without all the cash
If the idea of a cash offer is overwhelming, or just flat-out not possible, you do have other options available to make your offer as competitive as a cash offer.
A decision-now mortgage approval, also known as underwritten pre-approval or upfront underwriting, is a type of loan that is already funded and the lender has verified that the remaining portion of the sale price is accounted for. This type of financing helps streamline the closing process and makes you as competitive as a cash buyer who is ready to move quickly and who knows they can afford to purchase the home.
You won’t find decision-now mortgage approvals at all lenders, so it’s important to take your time shopping around to find the right fit if this is the path you choose to take.
If you already own a home and most of your assets are tied up in the home, Orchard can help you access your home equity instantly. Orchard allows buyers to unlock up to 90% of their home value before they even list their home, which allows them to make a cash offer on a new home before they sell their existing home.