When it comes to offers on your home, cash is king for a reason. Your sale is more likely to close and close faster with a cash offer than with an offer that hinges on a mortgage approval.
While all-cash offers used to be relatively rare, they now make up 25% of all home sales. But just because you receive a cash offer doesn’t mean you should sign the dotted line without careful consideration.
“A cash offer won’t always be the best deal,” says Enas Latif, a top real estate agent who sells homes 62% quicker than the average Harris Hill, New York agent.
We asked Latif to break down how to evaluate cash offers from both traditional homebuyers and direct buyers like investors.
OK, but what exactly is a cash offer?
Good question. If you’re picturing suitcases full of bills, it’s not quite like that.
A cash offer is an offer made by a homebuyer who wants to purchase a piece of residential real estate without borrowing money from a lender. This means that the buyer has the funds to purchase the home in full.
As the seller, you reap multiple benefits by accepting a cash offer. Cash offers are more likely to close and close faster than those backed by a lender.
Where do cash offers come from?
You may receive a cash offer from a direct buyer who purchases properties at scale as a form of real estate investing or from a private buyer who plans to live in or flip your home.
“Cash offers are becoming more common, especially in this extremely competitive market,” Latif says.
“Cash offers do often come from investors, but they also come from first and second-time homebuyers.”
A cash offer may come from a homebuyer with liquid funds who wants an edge over the competition. Cash offers are especially likely if your home is a vacation rental, for which cash sales make up 53% of all purchases (in contrast to 22% of all home sales).
Investors and flippers
Investors are responsible for 20% of residential real estate sales in the U.S. There are several types of real estate investors, each with their own strategy to buy your home for cash and turn a profit.
Buy-and-hold investors purchase and remodel homes to transform them into rental properties. These investors maintain rental properties as a long-term investment strategy to generate passive income.
House flippers, on the other hand, pay cash to purchase homes that require major repairs, renovate them, and then resell them for a profit. Selling to a house flipper is an attractive option if you want to skip repairs and staging, but beware — home flippers turn large profits on houses by buying them for well below their market value.
iBuyers, or “instant buyers,” are direct real estate buyers who purchase homes at scale. iBuyers typically make less money per flip than traditional home flippers and instead rely on purchasing and reselling many homes at a smaller profit margin to generate revenue over time.
This long-term investment strategy benefits sellers: iBuyers often buy homes at up to 98% of fair market value, with a deduction of a 10% seller’s fee and the cost of repairs.
Compared to selling your home on the open market, working with an iBuyer is a seamless process because it allows you to avoid the hassle of cleaning, staging, and listing your home. This process is ideal if you need to sell quickly and want a simple and certain sale.
How do I know if I should accept a cash offer?
Now that you know the basics of the cash-offer real estate world and its players, you need to understand the particulars of cash offers and how they differ from conventional offers with mortgages. Not all cash offers come with the same conditions.
Compare the offer against your home’s fair market value
Cash offers are often lower than the market value of your home. To determine whether a bid is reasonable and meets your bottom line or whether you’re looking at a loss, you need to know what you could sell your home for on the open market.
Review the terms of the deal for contingencies
Cash offers typically come with fewer contingencies than conventional offers. Contingencies are conditions that must be met for a real estate contract to remain binding. If the contingencies aren’t met, the buyer isn’t under obligation to proceed with the purchase of the home.
Since many of the contingencies of conventional offers are required by lenders, you can often avoid many contingencies when considering a cash offer on your home. Still, an all-cash bidder may include some contingencies in their offer.
Before accepting an offer, check for the following contingencies, and determine whether you find the contingencies acceptable or wish to negotiate them out of the deal.
If you’re selling your home for cash, you won’t have to deal with the hassle of a financing contingency, as these contingencies only apply to mortgages. This is one major reason a seller will opt to go with a cash offer, according to Latif. Financing issues can cause closing delays up to three weeks — or worse, kill the deal entirely.
Another compelling reason to accept a cash offer is to avoid an appraisal contingency, in which the buyer’s offer is only obligated if the home appraises for equal to or more than the purchase price. When a buyer finances their home purchase through a lender, an appraisal is required before closing. The lender contacts a third-party appraiser to evaluate the value of the home. If the appraiser’s valuation of the home is lower than the buyer is requesting to borrow, the lender won’t provide the full loan amount.
When an appraisal comes in low, the seller can lower the price, or the buyer can make up the difference in cash. The buyer can also choose to withdraw their offer. This is a good safety net for buyers but can be unfortunate for sellers, as appraisals are lower than listing prices up to 20% of the time in hot markets where bidding wars drive up offer prices.
In an all-cash real estate transaction, you can typically avoid an appraisal contingency (and an appraisal, for that matter) entirely. Appraisals are typically required by mortgage lenders, but all-cash buyers rarely require them. This effectively removes one of the greatest obstacles to closing.
For cash buyers to ensure they aren’t investing more in a home than they’re likely to get on return, some write an appraisal contingency into their offer. You should, therefore, check the terms of any all-cash offers carefully for any mention of appraisal.
Home inspection contingency
Conventional offers which rely on mortgages virtually always rely on a home inspection contingency, in which an inspector looks for major issues like water damage, structural problems, electrical system problems, and more. Home inspection contingencies may lead to further price negotiations, depending on what issues turn up.
Be sure to weigh whether or not a cash buyer is requesting a home inspection contingency in their bid when evaluating their offer. Some cash buyers may engage in a dishonest bait and switch practice of offering an attractive price for a home only to significantly reduce the bid after the home inspection.
While it isn’t the case that cash buyers who ask for a home inspection contingency plan to leverage the inspection to lower their offer, a cash offer with a waived home inspection may carry less risk overall, and the bid with the least risk is often the best one.
Consider if the offer is compatible with your selling objectives
The most appealing part of a cash offer is the speed and certainty of closing on your home. If you sell to an iBuyer, you may be able to sell your home in a matter of days. But this doesn’t always mean a cash offer is the best deal for you.
If your selling objective is to sell your home for as much money as possible and time isn’t a concern, a cash offer may not be right for you. Cash buyers have paid about 12% less than conventional buyers in the last 40 years. That’s the difference between a $300,000 sale and a $264,000 sale — a loss of nearly $36,000 to the seller.
This isn’t always the case, however. In an extremely competitive market, even cash sellers may be matching your home’s fair market value and putting in bids that are just as high as conventional offers. You have to evaluate every deal on a case-by-case basis.
If you receive an all-cash offer from an investor that’s well below your asking price, consider your primary selling objectives before proceeding. Only you can decide if the convenience of selling your home quickly is worth taking a profit hit.
“Cash sales can take approximately half the time to close as conventional sales,” Latif says. “But fast closing isn’t necessarily attractive to all sellers.”
If you don’t wish to move within 60 days, you might actually find the lengthy closing process of a conventional sale advantageous. If not, you can also negotiate the closing date in a cash offer to give you more time to move.
Ensure your buyer has adequate funding and a good reputation
“Compared to a sale that’s contingent on financing, where anything can happen during the closing process, an all-cash deal is more of a guaranteed sale,” Latif says. “Still, there’s risk in any real estate transaction.”
In a conventional sale, a buyer typically bids on a home after being pre-qualified or pre-approved by a lender. This means that by the time you receive an offer from the buyer, they’ve already been vetted and found to have the means to pay back the home.
An all-cash buyer, on the other hand, has not been vetted by a bank. It’s up to the seller and their agent to eliminate the risk of a deal falling through by ensuring that the buyer has provided adequate proof of funds, typically in the form of a letter from their bank.
“When analyzing the proof of funds, we need to make sure that the bidder really has enough money for purchasing the home, moving, and for other expenses,” Latif comments. “Every penny of what’s in the bank can’t go towards the purchase.”
Is your cash buyer buying as-is?
If you’re depending on receiving a cash offer organically on the market to avoid the hassle of home repairs, staging, and listing photographs, you may be disappointed to hear that it isn’t so easy.
“You can’t skip any of that stuff if you list your home on the market,” Latif says. “It’s the same process, because you won’t know you have a cash buyer until you’ve actually put your home on the market and attracted as many buyers as possible.” This means you’ll still need to deep clean, declutter, and stage your home, maintaining it in pristine condition until you close a deal.
Not what you want to hear? If you’ve heard that all-cash sales are easy because they require none of the aforementioned hassle, then you’re likely picturing the closing process for a sale to an iBuyer or flipper who’ll purchase your home as-is.
iBuyer sales are becoming increasingly popular among sellers who want to opt-out of the time-consuming and costly aspects of the home selling process. Selling to an iBuyer doesn’t require paying for repairs, staging your home, or listing your home on the market.
Is accepting a cash offer my best option?
So, should you accept a cash offer for your home? The answer is, it depends.
Despite common conceptions of cash offers, cash offers won’t always be the most competitive offers. Sometimes an offer with a mortgage at or above your asking price with a large down payment will be your best bet.
However, the commonly held belief that cash offers are always lower than conventional offers is also false. In a competitive market, buyers will do whatever it takes to stand out, especially if you’ve put a highly desirable property on the market. You may receive a cash offer that not only outbids all other offers but also stipulates no contingencies and carries very little risk. Or, you may receive a cash offer latent with contingencies at a low price.
If you’ve received multiple offers on your home, work with a top real estate agent to evaluate the strengths of each offer and move forward with the one which meets your needs. If you are determining whether to list your home on the open market or seek out an iBuyer, consider fielding offers from multiple cash investors before committing.
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