Should you make an all-cash offer on a house?

David McMillin | (TNS) Bankrate.com

With limited inventory in the housing market, homebuyers in especially hot markets are still experiencing intense competition. To make themselves more attractive to sellers, some aren’t bothering to deal with borrowing any of the funds to make the purchase — instead, they’re making all-cash offers.

Here’s everything you need to know about making a cash offer in real estate.

What is an all-cash offer in real estate?

All-cash offers are just as they sound: a home offer where the buyer intends to pay cash out-of-pocket with no outside funding. This takes the need for securing a mortgage out of the homebuying equation, thus expediting the sale by eliminating the potential challenges of working with a bank or lender.

Not everyone who pays all-cash for a home intends to live there, though. Some all-cash purchases are income properties, and those owners are often looking to be landlords, paying no interest to a lender while earning money from tenants or travelers.

How common are all-cash offers?

All-cash offers are far from the most common way to purchase a home, but there are plenty of buyers who can afford to do it. According to a study from real estate data company ATTOM, all cash-purchases accounted for 34.2% of all home sales in the first quarter of 2022 alone.

More recent data from the National Association of Realtors (NAR) shows that all-cash sales accounted for 26% of all existing-home sales in July 2023, a 2% increase over the previous year.

Buyers who are able to buy a home outright, without a need for financing, also avoid dealing with today’s high mortgage rates. Unsurprisingly, those who can afford it tend to be older. An April 2023 NAR study points out that more than half of older Baby Boomers and Silent Generation homebuyers paid for recent property purchases with cash, while just 7% of older millennials and 6% of younger millennials were able to do the same.

Pros and cons of an all-cash offer

If you can afford to buy a house without borrowing a mortgage, you’re likely in a good spot with your bank account. However, make sure you weigh the potential upsides and downsides of making an all-cash offer:

Pros

— You’ll save a lot of money in the long run. The biggest upside for having no mortgage is the long-term benefit of paying zero interest, which can add up to big savings — especially considering how high mortgage rates have been lately.

— You’ll have a more attractive offer and more bargaining power. Since hiccups can happen with securing financing from a lender — the appraisal can come back too low, or the buyer’s finances can change, for example — a buyer with cash looks especially appealing to sellers. And when your offer is more attractive, you have more negotiating power.

— You’ll lower your closing costs. Since you won’t be getting a loan, you won’t have to pay a lender to review your application, check your credit or any of the many loan-related fees often due at closing — which can translate to significant savings.

— You’ll speed up the closing process. With no lender hold-ups or underwriting process to wait on, your path to the closing table will proceed much more quickly.

Cons

— You could stretch yourself too thin by tying up all your cash in the property and not having enough liquid assets. If you find yourself house poor, with little money available for repairs or other life expenses, you may wish you’d held onto some of that money. Make sure you have a solid emergency fund for “just in case” scenarios, and consider how stable your employment and income are in the event of a recession.

— You might wind up waiving some important steps in the process. When you get a mortgage, a lender will require an appraisal. With no lender to require it, you might be tempted to skip that step, leaving you susceptible to paying a lot more than the property’s value.

— You’ll pass up some potential tax perks. When tax time arrives, homeowners with mortgages can benefit from writing off the interest on their home loan. If you pay in all cash, you won’t get that deduction.

All-cash closing vs. traditional closing

All-cash offers tend to close faster than deals where a mortgage is involved. However, it’s not as simple as forking over the money and shaking hands. There’s still work involved, and the seller will need to check some items off the list. In Chicago, for example, the seller will need to receive zoning survey certification, water certification, association documents if buying a condo, title documents and other formalized information about the property.

Cash buyers will still have to deal with some paperwork, too, but the amount of documents required is significantly less than what is required for a traditional, financed closing. Enlisting the help of a real estate agent is a good idea, even if you intend to make an all-cash offer. Not only can an agent help you find the right property and negotiate a fair price, they can also deal with the necessary paperwork.

Paying all-cash does not eliminate the need for a real estate attorney, either. Some states actually require an attorney, but even if yours doesn’t, it’s smart to have legal expertise on your side for such a big-ticket transaction.

How to make an all-cash offer

— Not sure if you can afford a cash offer on your own? Consider hiring a company that can facilitate one. Outfits like Flyhomes and Homelight will pre-underwrite your loan and set you up with a short-term loan that allows you to make an all-cash offer. Knock and Orchard can also help buyers make cash offers

— Budget for both the property and extra expenses. In addition to having enough money for the purchase itself, you’ll need to make sure that you can cover other costs such as property taxes, homeowners insurance and moving expenses.

— Prepare to prove your personal finances. A seller isn’t going to simply take your word that you have the money. Get proper documentation from your bank that shows you have the funds ready for the transaction.

— Be ready to be more earnest. All-cash offers are about the cash. With no lender involved, the seller might ask to see a larger amount of earnest money when you sign the contract.

— Get a professional to look at what you’re buying. You’re paying a lot of cash, so once your offer is accepted, pay a tiny bit more for a home inspection to verify there are no hidden flaws with the property. And if possible, have a contractor walk through it with you to help you identify potential projects and how much they could cost you.

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