Here are the pros and cons of making or accepting a cash offer.
What should you think about when dealing with a cash offer? According to Atom Data Solution, 26% of homebuyers used cash in 2020. A cash offer means there is no financing in regards to the mortgage of a home. There are a couple of reasons why a buyer might put up a cash offers:
• They might be an investor with lots of cash to spend.
• They may have sold another home and used the equity to buy this home without a mortgage.
• They may want to stand out by using cash.
• The home may be a fix and flip, meaning they have to use cash to buy it due to the condition.
• They might have a tight deadline to close the home.
For sellers, there are a couple of advantages to a cash offer. The timeline for closing with a cash offer is much shorter. According to a recent study, most mortgages take 37 days to close. A cash offer can close in 14 days or less. These offers don’t require a loan contingency since there is no underwriting and less paperwork associated with it. Cash offers don’t need an appraisal either. This will make the offer more likely to close since the valuation will never be in question.
The downside is that cash offers will want to pay less, but if you’re on a tight timeline of if the cash offers are comparable to the financed offers, it might be advantageous.
Seven homes we listed this year have sold with cash offers. Again, it is good for the seller if the timeline is a big concern, but we’ve also seen these offers be a little more flexible with other terms. One of our clients negotiated a nine-month leaseback since the buyer was an investor who was planning to rent the property out anyway.
As a buyer making a cash offer, there are some obvious benefits: it’s faster, there are fewer contingencies, and it gives you a competitive advantage. Even if you’re going to use a cash offer, you’ll still have to work out the title and sign loan documents, but overall, there are fewer moving parts.
However, with mortgage rates being as low as they are, cash offers have a downside: You’re going to be tying up a lot of your cash into an asset that’s hard to sell, meaning it’ll be tied up for a longer amount of time.
It may be better to put in a combination of cash and mortgage. You can do the same as a few of our investor clients who have put down 50% instead of paying all cash. With these, they diversified and bought a couple of extra properties this same way. As long as the numbers add up, this is a great strategy with the cost of money being so low right now.
As with anything in real estate, there are pros and cons to cash offers, both for the buying and selling sides. However, as long as you’re aware of them and the numbers add up, you might find that cash offers actually work best for you. If you have questions about this topic or anything else real estate-related, please give me a call.