Finding out that the property you’re selling has received an offer is fantastic news. But then comes another offer. It’s less, but it’s all cash. But what is a cash buyer in property, anyway? It certainly sounds like a tidy solution to financing risks, meaning you can take that worry off your plate. Right?
Maybe. There are several advantages to cash offers, but also some potential problems. Here’s what to know about cash buyers in property and how financed buyers can compete.
What is an appraisal?
As soon as a buyer accepts an offer the race to close kicks into high gear. One of the most important aspects of a successful real estate deal is the appraisal because it validates the purchase price. During the appraisal, a licensed professional inspects and photographs the property, and compares it to similar, recently closed deals. This process helps the appraiser determine the home’s fair market value, and ideally, the accepted sale price should be at or slightly above this value.
If you need a mortgage, then the result of the appraisal is of critical importance because lenders won’t lend when the appraised value is too low. That’s because in a mortgage, the property is the collateral that protects the bank in case the borrower doesn’t make payments. With cash buyers, the lender is taken out of the equation—but that doesn’t mean the appraisal won’t happen or doesn’t matter.
What is a cash buyer?
All-cash buyers agree, in writing, that they don’t need financing to close the deal. But the reasons people pay cash—and even whether they stay mortgage-free after the transaction closes—can vary. And sellers that accept all-cash offers will likely need to trade a lower selling price for speed.
“With cash buyers, closing takes place in less time [but] usually the price is discounted to account for the lower risk associated with an all-cash transaction,” said real estate investor and attorney Rajeh Saadeh.
The hurry-up offense that cash buyers deliver might leave a bad taste in the mouth of a seller who suspects wrongdoing, but all-cash real estate deals can occur for nearly any reason and in any market or price point. In some cases, sellers expect cash buyers.
“I’ve been selling real estate in New York City for two decades and this is a town ruled by cash,” said Seth Levin, a licensed associate real estate broker with Keller Williams NYC.
“Where a cash purchase is a rarity in certain markets, when the market swings in favor of sellers in this city, the majority of purchases get done with no financing. This is particularly true for our condo market as a whole and even more so in our luxury sector, where cash purchases are the norm. Often they amount for over two-thirds of transactions.”
But just because a buyer presents an all-cash offer, that doesn’t mean the buyer will stay mortgage-free.
“Not all cash buyers really buy and hold with cash,” Levin said. “Many use their cash to win the bid, waive a mortgage contingency and pull together some financing before the property closes.
“Even more cash buyers secure a loan after the property closes, often using a technical refinance instrument,” Levin continued. “This enables them to be competitive, win the property and close quickly, but then pull money back out with a typical prevailing interest rate.
“Some pull as much as 70% to 80% after the fact. Many pull out 750K, since that is the current cap on mortgage interest deductions. With mortgage rates as low as they are currently, many buyers who could buy for cash see the benefit in letting their money earn higher returns elsewhere.”
New York City may abound with cash buyers, but no-finance transactions can occur anywhere.
“The most likely person to submit an all-cash offer is someone who recently sold their current home or property and are buying a new one with the cash that they received on the sale,” said Ashley Baskin, a licensed real estate agent who serves on the advisory board for Home Life Digest. “Other times all-cash buyers are those who work with developers or foreign buyers.”
Pros and cons of cash buyers
Not having to worry about bank financing and a speedy close are certainly reasons to consider an all-cash offer. But before you sign on the dotted line, consider the pros and cons—there may be other opportunities for buyers or investors to both finance and get cash at close, without an all-cash offer.
Pros of cash buyers
Besides speed and less worry, all-cash property buyers often seem to care less about the home’s overall condition, and that can save the seller aggravation and money.
“This is because the home buyer is buying a house in an ‘as-is’ condition, and is therefore going to be responsible for fixing all the repairs to the house, such as remodeling, any foundation issues, landscaping and utility upgrades, and thus have a financial burden with purchasing the property,” said Chris Collins, a licensed realtor in Nashville, Tennessee.
The more time the buyer and seller spend haggling over the cost of repairs and the value of the home, the greater the likelihood is that a financed deal won’t close at all.
Sydney Holmes at Triplemint, a New York City real estate brokerage, said “We’ve seen several financing deals in this market take north of 120 days to close. With underwriting backlogged, getting a clean commitment letter from the bank can sometimes take upwards of 45 days, adding another possible two months to the closing timeline. With an all-cash deal, a buyer can generally close on a property within 30 to 60 days.”
Cons of cash buyers
The all-cash offer sounds great until the seller realizes how much more money they could have made had they negotiated with financed buyers.
“Typically your biggest con as a seller is most cash buyers look for a discount as they are assuring the seller they will close on the property without issues,” said Miami Beach real estate agent Jose Laya.
If the wholesomeness of the buyer matters, you may find financed buyers more appealing.
“Does it matter to them what kind of person buys their home? Sellers get surprisingly sentimental about their properties, and many want their legacy to continue there,” said Brian Davis, a real estate investor and co-founder at Spark Rental. “If they raised their kids there, that often means selling to another family with young kids.”
How can I compete with cash buyers?
The best way to compete with a cash buyer in property transactions is with prompt timing and a great offer.
“Buyers who require a loan and are in competitive situations with cash buyers need to bring a very strong offer up front,” said Jeremy Browne, Senior Vice President at TTR Sotheby’s International Realty in Arlington, Virginia.
“That means a larger earnest money deposit, a strong pre-approval from the lender, their highest and best price, and meeting as many other terms for the seller as possible, such as settlement dates.”
Cash isn’t always king
Tropes like “cash is king” don’t always apply to real estate.
“Some cash buyers believe their position warrants them a larger discount. Unfortunately, this is not always the case, particularly in Manhattan where the market is very efficient,” said Holmes.
“At the end of the day, if a buyer has sound financials and the building is solid, the risk of getting a mortgage is fairly mitigated.”
The choice is typically between the convenience of a fast but lower-priced close and a longer, messier wait with a bigger payday. Ultimately, it’s up to the seller to decide what matters most.