Cash Buyers beware—the landscape is changing. Being a “cash” buyer is becoming an increasingly popular avenue to win a bidding war for a home, as this article from the Washington based discount brokerage REDFIN announced in it’s latest study, as it quadruples the buyer’s chance of being the successful bidder.
Not all these buyers have enough cash to purchase a home, but rather they have a lender or hard money loan (hard money translates into a high interest rate), so that they can submit what appears on the paper contract to be a cash deal. Once the home closes escrow however, a loan is put in place to pay back the short-term loan they used for their “cash offer”. HomeLite is one of these lenders that is specializing in helping buyers make a cash offer.
A cash offer is appealing to a seller because it removes the risk that the buyer may not be able to complete the transaction if something were to go awry. What could possibly go wrong once you’re pre-approved? One or both buyers who are qualified for the loan to purchase the home could be laid off. Lenders will verify employment before releasing the necessary funds to close escrow, and if the one of the buyers are no longer on the employer’s payroll, everything comes to a screeching halt. Since any offer that stands a chance of being accepted won’t have a protective loan contingency, the buyers stand to lose their earnest money deposit, typically 3% of the purchase price.
An all-cash buyer also means that there is no appraisal of the property by the lender because there is no lender. This can be important when home prices are rising rapidly, and the sales in the neighborhood that the appraiser might use to justify the buyers offered price are historical sales—often going back six months. If the past sales are not high enough to substantiate the current values, the home may not appraise. Once again, a successfully accepted offer will typically not contain a contingency that the home appraised at the offered price, so if it falls short, the Buyers are forced to either put more money down, walk away from the transaction forfeiting their deposit, or scramble to find another lender with a different appraiser and hope that this can be completed within the time frame specified in the contract to close escrow.
And lastly, as morose as it sounds, a buyer may not live to see the close of escrow. That may seem like an insensitive thing to mention, but it can and has happened. Lenders obviously will not lend to a person who is no longer alive, and the deal will fall apart. Since cash deals typically close escrow in anywhere from three to ten days, the risk of a tragic event like this occurring is mitigated to some degree by the shorter close of escrow.
Most good agents will advise their sellers of the risks of an offer that contains a loan, even without a loan or appraisal contingency—the reason sellers frequently snap up all cash offers even before a published offer date. For the seller, there’s always some risk of “leaving money on the table”, as they may do better if they were to wait for a bidding war to materialize, but in our experience, sellers are often willing to take $50,000 to over $100,000 less for their home if it’s an all-cash offer, or non-contingent.
And therein lies the takeaway. If a seller is willing to forgo an offer that’s $100,000 more and accept a lower offer that’s all cash, than we can quantify the cost of having a loan—the buyers will need to offer that much more above the cash offer to have their offer considered. Having a contingency in an offer has the same cost association which we discussed in a past blog post. Though getting a hard money or alternative financing option in place to make a cash offer can be expensive, it can be far less than raising an offer price high enough over a cash offer to be the winning bidder.
If you need help finding the ideal home and being the successful bidder, or selling a home and need the right guidance, please reach out to us so that we may continue to help our community.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 25 years of experience in helping sellers and buyers in their community. As Diamond recipients, Drew and Christine are ranked in the top 50 RE/MAX agents nationwide and the top 3 in Northern California. They may be reached at (650) 508.1441 or emailed at firstname.lastname@example.org.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, insurance or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.