Ever since the 2008-2009 recession, cash offers have become more prevalent, accounting for 33% of sales as of 2021 — that’s up from 20% in 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 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 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.
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 the buyer 1) definitely has the money, which means that they can 2) close quickly.
Keep in mind that the number of cash offers floating around fluctuates with the market and at different price points. Jason Bragg, a top-selling agent in North Carolina’s Winston-Salem area, reports that cash offers are especially common in 2021 among buyers who are downsizing.
“I’m seeing a lot of cash offers where people are selling their larger four- or five-bedroom house to downsize into a three-bedroom, one-level home,” says Bragg.
He explains that because the real estate market in 2021 is so competitive, these downsizing buyers — who would have otherwise probably financed their next home — are opting to pay cash to make their offer more attractive.
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, as we mentioned above. 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.
In short, cash offers are enticing to sellers for these reasons:
- The funds are a sure thing
- 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.
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% home purchase delays as of April 2021. 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.
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 10% of delays in home purchases.
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.
So how can you inspect a home and still have a competitive offer? You can avoid asking the seller to pay for any necessary repairs. Home inspections are often used as a negotiation tool, but it’s also very possible to conduct one simply for peace of mind.
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 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, as Bragg noted, 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. 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. Which 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 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 — where you allow the seller to continue living in the home for a specified period of time after closing.
This may especially be of interest during a frantic seller’s market like we’ve seen in 2021, where a fast closing is only a benefit to the seller if they already have their next home lined up.
And, aside from offering to waive the contingencies we’ve already talked about, in states like North Carolina where a due diligence fee is common, you’ll have another option for moving your offer to the top of the pile even if you aren’t paying cash.
“Due diligence is the time that a buyer has to investigate a property,” explains Bragg. “During this period, the buyer pays a due diligence fee and they lose that money if they terminate for any reason. So, the two things sellers here are looking for are a nice purchase price, and a high due diligence fee.”
Bragg shared that he’s seen due diligence fees as high as $10,000 from eager buyers who are willing to demonstrate their commitment to a home. In other states, a similar fee is often referred to as earnest money. While there are situations in which you can get your earnest money back, it’s possible to waive that right if you’d like to make an ultra-competitive offer on a home. Your agent can help guide you through these financial extras during the offer process.
If you really, really want this particular home, consider writing in an escalation clause. 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.
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