Real estate purchases made entirely with cash are rumored to create big benefits for homebuyers. But making an all-cash offer on a house isn’t always a no-brainer. There are actually some pretty compelling reasons why you might not want to offer all cash on a house.
With the help of Brad Graves, a top real estate agent in San Antonio, Texas, and some recent national home purchase data, we’ll examine the pros and cons of all-cash offers. We’ll also uncover some ways you can take advantage of all the pros and none of the cons of an all-cash offer. If you’re a first-time homebuyer — whether you can make an all-cash offer or not — here is what you need to know.
What is an all-cash offer?
According to 2019 data from the National Association of Realtors, 12% of all buyers purchased their home with cash. As the name implies, an all-cash offer means that you, personally, have all the money needed to purchase the house. You won’t literally be paying in hundred-dollar bills, but with an all-cash offer, you must have the funds to purchase the home available in a liquid account, meaning an account that allows immediate withdrawals and transfers. For most people, this means a checking, savings, or money market account.
To be clear, an all-cash offer means you won’t be getting a mortgage loan for any portion of the sale. This is important: if your real estate agent puts in an all-cash offer on your behalf, they will not include a financing contingency. The seller makes decisions based on the terms of your offer, including contingencies. So in many cases, making an all-cash offer means you won’t even attempt to obtain financing at all. (No changing your mind after the offer is accepted!)
Graves points out that other contingencies are also optional with an all-cash offer. These could include:
- The appraisal contingency: Lenders require an appraisal, but if you are paying cash and you’re confident that the price is fair, you don’t need one. This can save you between $300 and $450.
- The inspection contingency: As a cash buyer, an inspection contingency is optional. (However, inspections are still highly encouraged and only cost around $315 on average.)
- The sales contingency: A sales contingency means your current house must sell before you close on this new house. This is the opposite of liquidity, so usually all-cash offers do not contain a sales contingency. Including a sales contingency is not impossible, but it negates the attractiveness of an all-cash offer to a seller.
Bottom line: An all-cash offer means you have the full amount available in a liquid account, you will not be getting a mortgage loan, and you can waive certain contingencies.
What are the benefits of making an all-cash offer?
Pro #1: Limited contingencies
As mentioned above, one of the benefits of making an all-cash offer is the ability to pick and choose your contingencies. Not only will this save you some money, but also, in a competitive market, an offer without contingencies can be highly desirable to a seller.
Pro #2: Less hassle and fees
All-cash offers are also nice for homebuyers because you don’t have the hassle of dealing with lender underwriting. That means no need to gather tax returns, income statements, proof of employment, asset lists, credit scores, blood types (just kidding). You’ll also save on closing costs associated with getting a mortgage loan.
Pro #3: Quick, streamlined closing
With an all-cash offer, you have more control over the closing timeline as well as the title agency. That means you can typically close faster because you’re not waiting for any financing to come through. This can be an important point for sellers who are in a hurry to move.
Pro #4: Possible savings
We’ve already established that sellers may be attracted to an all-cash offer because of the limited contingencies and quicker timeline. As a result, you might be able to make a lower offer — and still have it accepted by the seller — even in a multi-offer scenario.
Graves says that an all-cash offer provides leverage that your real estate agent can use to drive the price down. This adds up to possible savings and an increase in equity right from the start.
Bottom line: An all-cash offer streamlines the homebuying process and can sometimes persuade sellers to accept a lower price.
What are the drawbacks of making an all-cash offer?
Con #1: Loss of liquidity
Liquidity should be your top consideration when making an all-cash offer.
Real estate is a non-liquid asset, meaning it’s difficult to get cash out when you need it. Ask yourself: “If I tie up this much money, will I have enough left over for emergencies?” Many financial experts recommend saving at least enough to cover three to six months worth of expenses. For some, an all-cash offer will cut into that savings.
Con #2: Loss of diversification
If you put a large portion of your savings into your home, that means you lose out on the potential gains that could be realized by investing elsewhere.
Graves mentions that the national average appreciation for real estate usually runs around 2% to 3%. “Your money might earn more elsewhere,” he says.
Consult a financial advisor if you’re unsure about the diversification of your investments.
Con #3: Tax implications
Mortgage loan interest is deductible on your federal income taxes, so without a mortgage loan, you lose that deduction. However, this loss really only applies to those who itemize their deductions (rather than taking the standard deduction). If necessary, ask an accountant for guidance in your personal situation.
Con #4: Less cash for homeownership
Owning a home requires more money than just the purchase price. You still need to budget for closing costs, potential renovations, and general upkeep. Before jumping into an all-cash offer, ask yourself if you have enough to cover taxes, insurance, HOA fees, and any updates or repairs that need to be made.
Bottom line: Think twice about tying up all your money in an all-cash offer — your financial liquidity and taxable income are at stake.
Is there any way to make an all-cash offer and avoid many of the drawbacks?
Products like Cash Close by HomeLight will let you make your strongest (cash) offer on a home from the seller’s perspective, while still financing your purchase long-term. That way, you can maintain your healthy savings and claim any tax deductions available.
Here’s how Cash Close works:
- Approval: Submit an application with HomeLight’s Lender, HomeLight Home Loans, and they will verify your eligibility for the program.
- Enter into the HomeLight Cash Close Agreement: The agreement will describe how the program works and the fees associated with using HomeLight’s Cash to secure your dream home.
- Search: Find the house you want to buy.
- Offer: Your real estate agent submits an all-cash offer for HomeLight to buy the home on your behalf. To ensure the strength of the offer, HomeLight will provide the proof of funds documentation.
- Move in: When you secure and close on a mortgage, you will buy the home from HomeLight for the exact same terms negotiated with the initial offer and you can move into your new home.
Cash Close could be the best of both worlds, especially in a competitive market where “cash is king” to sellers. From the seller’s perspective, they sell their house to HomeLight, then HomeLight transfers ownership to you when your loan closes.
(Pro tip: While you can use Cash Close by HomeLight with any lender, the Cash Close process is cheaper and more seamless if you choose to close your loan with HomeLight Home Loans.)
Bottom line: For qualified buyers, HomeLight Cash Close could give you the pros of an all-cash offer, without having to have the hundreds of thousands in liquid assets needed to make a true cash offer.
Making an all-cash offer is the best choice for some homebuyers and an unwise move for others. Talk with your real estate agent and consult with financial professionals in order to maximize both your buying potential now and your long term financial security in the future.
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