Ever since the 2008-2009 recession, cash offers have become more prevalent, accounting for 20% of sales as of 2019. Cash offers are more popular in some markets than others; for buyers trying to find a house in an area where cash offers are prevalent, competing against those offers can be a discouraging part of the homebuying process.
If you’re looking to buy a home in such a market, you need to understand how a cash offer on a house works and what makes such an offer appealing to sellers. Once you’ve acquired more insight, you will be in a position to write your own compelling offer.
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 has the funds available to buy the house already in their bank 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 associated contingencies, which come with additional risks for the seller, are where you’ll find most key distinctions between a cash offer and an offer backed by a mortgage loan.
Keep in mind that the number of cash offers floating around fluctuates with the market and at different price points. For example, top-selling Oakland-area agent Andrea Gordon, who has more than 21 years of experience, says that she sees a fair number of homes being financed with mortgage loans when the price is under $2 million, but above the $2 million mark, she sees almost entirely cash offers in Oakland’s persistently hot market. In the current market; however, even after a seller pays in cash, they often refinance a loan because interest rates are so low.
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.
The biggest contingency that sellers and buyers avoid when the buyer is paying cash is the financing contingency — in other words, if you can’t secure a loan, you won’t be buying the house. 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.
Cash buyers have the option of taking these same steps for appraisals and inspections, but they aren’t required to so to appease a lender. So a cash buyer can waive appraisals and inspections to sweeten the deal for the seller if they choose.
Cash buyers also offer a guarantee of payment, while sellers have to wait and see whether a loan is approved for buyers who require financing. Note that issues related to obtaining financing accounted for 41% of delays in contracts in 2019. So if you don’t already have a preapproval letter and the seller has any reason to believe you might not be able to obtain a loan, you might be passed up for the sure deal — the cash offer.
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 18% home purchase delays in 2019. You can counter this concern by making sure you have done research to verify that the house isn’t likely overpriced.
How else can you compete with a cash offer that’s waiving the appraisal? Give yourself some wiggle room:
- If you have the funds to do it, offer to make up any difference in the appraisal amount if it comes in low.
- You could also offer to pay for a second appraisal.
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 don’t want to or aren’t able to get them fixed. Inspection-related issues also account for 17% of delays in home purchases.
So how can you compete with this? You can offer to pay for any necessary repairs, for one. This can remove the fear of having to finance upfront costs. Gordon says one particular contingency that sellers want to avoid is something called a buyer investigation contingency, which covers more than just an inspection.
“Someone can decide they don’t like the neighborhood or they don’t like the color of the house next door or they don’t like the police reports that they’ve been able to look at online or they don’t like the looks of their commute from that location,” Gordon explains. Such contingencies are essentially a “get out of jail free card” for the potential buyer.
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 waiting for that isn’t a factor.
- Be available — this isn’t the time to go on a trip or turn your cellphone 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.
Price still matters
Gordon says that because cash offers can close sooner, cash buyers think they can come in lower. But in her experience, “nine times out of ten, the seller is really looking for the highest price,” and they’ve already prepped themselves for a 30-to-45-day close. In fact, the seller may not even be able to move out that quickly, so a quick close isn’t always an advantage.
The seller gets paid just the same whether you pay in cash or finance with a loan. So 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.
Financial incentives in the seller’s favor are always a plus. Not only can a full-price offer give you an edge over cash if it’s a low cash offer, but you can gain 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 rent-back.
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. Gordon says that one other way buyers can set themselves apart is to “write a very, very good letter associated with your offer.”
This letter can include details about yourself and why you love the house to really get the seller emotionally involved. Gordon says that in one situation, her client had a developmentally disabled son; in the offer letter, the buyer wrote about how the layout of the house would allow for easy navigation. The seller had a nephew with a similar disability and ended up selling the house to the buyers at $50,000 below the next-best offer.
Never underestimate the power of nostalgia. Someone selling their home, particularly if they’ve lived there a long time, may be very attached to it and want it to be taken care of after they move on. Cash buyers are often investors who are going to rent the house out. If your seller has lived in the place for decades, an appeal to their emotions can give you an edge. Talk to your agent about writing the seller a letter — and be careful not to run afoul of any Fair Housing guidelines.
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: (Pixabay / Pexels.com)