You’ve probably heard that making a cash offer on a house can give you a leg up when it comes to having your offer accepted or rejected. Considering the fact that 78% of recent homebuyers financed their purchase in 2022, it may seem frustrating to get into a market where a cash offer typically beats one that relies on financing. In this post, we’ll take a closer look at what a cash offer actually is and some options to make your offer look more attractive to home sellers in 2023.
The number of cash offers typically hovers around a quarter of all home sales. Way back in July 2013, cash sales accounted for 29% of all home sales. Fast forward to September 2020, and cash sales made up 18% of sales. In October of 2022, cash sales made up 24% of all home sales.
To understand today’s market, it’s important to compare it to the market of the last few years. The beginning of 2020 saw a sharp drop in home sales due to COVID-19 lockdowns, with existing home sales in April 2020 falling 17.8% from the previous month, but that number quickly rose. In October 2020, sales of existing homes had risen 26.6% from the previous October. In 2021, home sales and competition for homes continued to rise along with prices, but 2022’s rising interest rates are cooling down the housing market, with many areas seeing prices leveling out or dropping, and supply increasing.
While the previous unprecedented two years have taught us that we can’t predict everything, looking forward into 2023, it is likely that cash offers will still represent an advantage in the homebuying process.
Cash offers: The basics
When imagining a cash offer, you might be envisioning someone coming to the seller with a suitcase full of neatly stacked bills, saying they’re ready to hand it over right then and there — but how a cash offer is actually presented isn’t quite so cinematic.
A cash offer simply means that a buyer already has the funds available to buy the house and can pay for it without securing a mortgage loan. From the seller’s point of view, it doesn’t make much difference whether the cash comes from the buyer’s personal bank account or from a mortgage loan. The difference is the associated contingencies that come with a mortgage loan which can pose an additional risk for the seller.
The most obvious contingency with an offer that requires financing is, of course, the financing itself. Though you can (and should!) submit your purchase offer with a pre-qualification or preapproval letter from a lender, these funds aren’t a sure thing until the loan is fully approved.
From a seller’s point of view, if there are two offers that are otherwise identical, and one buyer can pay cash, the cash offer is likely to be viewed as the stronger offer because it means the buyer definitely has the money and won’t risk not getting approved for financing which can make closing on the house move quickly.
Warren Barnes, a top agent in Fort Wayne, Indiana says that while he does see investors bringing cash offers, “it’s [also] been middle aged to older folks that had some time to grow their net worth and they want to own something outright and not have any debt on it.”
If sellers get paid at closing either way, why is cash better?
When you buy a house with cash, the risk is all yours. If you have to get a mortgage loan, however, the lender shares the risk, and they often want to take steps to make sure the investment is a good one — like including inspection and appraisal contingencies.
The lender usually also requires additional contingencies before they’ll approve the loan, such as an appraisal contingency to make sure the home is worth the amount they are loaning you to buy it, and an inspection contingency to see if there are any potential problems.
If the house has major issues or the appraisal comes in low, the financing may fall through. And, ultimately, if you can’t secure a loan, you won’t be buying the house.
Cash buyers have the option of taking these same steps for appraisals and inspections, but they aren’t required to do so to appease a lender. So a cash buyer can waive appraisals and inspections to sweeten the deal for the seller if they choose.
Barnes sums up the benefits of a cash offer, saying “[the sale] can close more quickly, closing costs can be slightly less, there’s less risk of the financing not working out and having to [put the home] back on the market.”
In short, cash offers are enticing to sellers for these reasons:
- The funds are a sure thing — but this should be verified
- There’s no financing contingency
- A cash buyer is more likely to waive appraisal and inspections
- A cash buyer can close faster since there’s no waiting on funding
Let’s take a closer look at each piece to get a better understanding of how cash offers affect the process.
The fact that a cash purchase might not require an appraisal can be great for the seller because they don’t have to worry about what will happen to the offer if the house doesn’t appraise high enough. A loan contingent on appraisal could fall through, and the seller would have to find another buyer or reduce the price.
Issues pertaining to appraisal accounted for 26% of home purchase delays as of April 2021. But with prices leveling out, appraisal issues only accounted for 8% of delayed settlements. You can counter this concern by talking with your real estate agent and making sure you have done research to verify that the house isn’t likely overpriced.
If you’re financing and trying to compete with cash offers, Barnes says his clients “were most successful with financing and trying to beat out a cash offer [when they] offered an appraisal guarantee.” He recommends being willing “to pay up to a certain amount above the appraisal if it comes in low or be willing to pay whatever the gap may be.”
You could also offer to pay for a second appraisal if you think the first was too high.
Mortgage loans require an inspection to make sure the house is habitable and in good shape. Again, cash buyers can forego this step since they are taking on the risk themselves. This may be especially appealing to a seller if they know their home has issues and are attempting to sell “as is.”
All this being said, foregoing a home inspection is a risky move for you as a buyer. Unless you’re buying for investment purposes and planning to completely renovate the house in order to rent or resell it, you’ll probably want to know what you’re getting into.
Fortunately, you can ask for an inspection and have a competitive offer. Home inspections are often used as a negotiation tool to ask for a lower price or for the seller to pay for repairs, but it’s also very possible to conduct one simply for peace of mind without asking the seller for anything.
This may work especially well in today’s market where Barnes says sellers’ attitudes toward what they can get for their home are behind the current trends. “We’re still seeing some sellers that want to get a good price and not have to fix anything,” he says. “They want to sell quickly with multiple offers, and they’re kind of lagging six months behind where the market is because they still think we’re in a red hot seller’s market.”
Using an inspection for informational purposes rather than as leverage for repairs can help make a financed offer more attractive.
Because cash buyers aren’t obligated to get an appraisal or inspection, these deals may close more quickly. This can appeal to a seller who is looking to move fast and wants to avoid their next mortgage payment.
In order to compete with this, you can offer to let the seller control the timeline and do everything you can on your end to expedite the process:
- Work with a buyer’s agent who can help you navigate the process and paperwork quickly and efficiently.
- Make sure you’re already preapproved for your loan (or go through pre-underwriting, if possible) so the actual approval process can move faster.
- Be available — this isn’t the time to go on a trip or turn your phone off. If you’re ready to answer the seller’s questions at a moment’s notice, you may very well come across as easier to deal with than a cash buyer.
What kind of buyers offer cash?
While technically anyone with available funds can offer cash when buying a home, cash buyers do tend to fall into one of a few different categories.
Investors commonly offer cash when buying homes to either flip or rent out. High-volume investors tend to buy and sell homes frequently, so they’re likely to have the kind of cash on hand that allows for paying out of pocket rather than having to secure a mortgage loan for each purchase.
Homebuyers who are downsizing may be inclined to pay cash. While the size of a home doesn’t necessarily dictate its value, it’s not uncommon for the sale of a large house to yield enough profit to turn around and purchase a smaller property without the fuss of financing.
Additionally, buyers who are backed by a cash-purchase product can present a very attractive cash offer on a home they love. HomeLight Cash Offer, for example, gives qualified buyers the power of cash by making an offer on your behalf — even if you still have a home to sell, and even if you actually will need financing.
Price still matters, and it pays to be competitive
Though it’s true that a cash offer may lead to an easier, faster-closing sale, cash isn’t always king in the eyes of a seller. The seller gets paid just the same whether you pay in cash or finance with a loan.
Sometimes cash offers come in low because the buyer knows the advantages for the seller. But if the timeline and contingencies aren’t much of a concern, the seller has no reason not to take the best offer, regardless of where the money comes from. This means that, even if you are using a mortgage, you can absolutely still submit a competitive offer.
Financial incentives in the seller’s favor are always a plus. Not only can a full-price or above list price offer give you an edge over cash if it’s a low cash offer, but you can gain an additional advantage by offering to pay closing costs. If the seller has a longer timeline in mind, you could consider sweetening the deal by offering to throw in a rent-back agreement — where you allow the seller to continue living in the home for a specified period of time after closing.
You can also offer more earnest money to show that you’re serious about the home purchase. Barnes notes that offering higher earnest money could affect the offer. “It’s pretty typical to do about 1% of the purchase price, but doing two, three, four, or even five times that amount can be helpful.” And while he doesn’t necessarily recommend it, he says that offering non-refundable earnest money can be an advantage as well.
If you really, really want this particular home, consider writing in an escalation clause, which provides a built-in action that increases your offer to a stated dollar figure above the highest competing bid. This is helpful in multiple-offer scenarios where you won’t know what other buyers are offering, but if you’re willing to add an additional, say, $5,000 to the highest competing offer, it’s the fastest way to put your offer back in front of a seller.
Finally, consider writing a personal letter to the seller. If you have extenuating circumstances or a special emotional attachment to the home that might tug at a seller’s heartstrings, this can work in your favor.
Bottom line: A higher price, as few contingencies as possible, and an emotional appeal can put you far ahead of any cash offer a seller might be considering.
Handling cash offers as a buyer
There are many reasons a seller might prefer a cash deal, and you won’t know what part of the cash deal is most appealing to them unless you try to negotiate. A good agent should be able to assess the seller’s position and give you advice on how to write the best possible offer.
At the end of the day, it might be easier than you think to outshine a cash offer. The key is to make things as easy for the seller as possible.
Header Image Source: (Mshake / Depositphotos)
- "Realtors® Confidence Index Survey," National Association of Realtors® (April 2021)
- "REALTORS® Confidence Index Survey," National Association of Realtors® (September 2022)
- "Buyer and Seller Characteristics: Cash Sales," National Association of Realtors® (August 2013)
- "April 2020 Existing Home Sales," National Association of Realtors® (May 2020)
- "October 2020 Existing Home Sales Climb to 6.85 Million," National Association of Realtors® (November 2020)