Everything to Know About Cash Offers in Real Estate
If you are preparing to buy or sell a home, a cash offer could be involved. A cash offering on a home can happen during any transaction and appeal to home sellers.
Any real estate agent will tell you that cash sales are highly desirable. Cash buyers remove many obstacles that get in the way of successful real estate transactions.
A cash deal happens far more frequently in a competitive market with bidding wars on houses. Hot markets will often bring in cash buyers who will do whatever it takes to land their dream home.
Having a cash transaction will remove any worry of a potential buyer having financial issues. It is no wonder home buyers who can’t pay cash are often searching online on how to beat a cash offer.
It can be frustrating to be in a real estate market where you constantly lose out to a cash buyer even though you’ve made a competitive offer. Many home sellers will accept a lower offer to have a cash deal.
Let’s look at what you need to consider when offers for cash are on the table.
What is a Cash Offer on a House?
An all-cash offer, where the buyer isn’t getting financing from a lender, is called a cash offer or cash offering. When you sell your home, offers for cash can look very attractive.
For some sellers, finding a cash buyer can be a goal.
It means you don’t have to worry about the buyer’s mortgage application being denied, and it should mean the closing happens faster. A fast conclusion with fewer days on the market can entice many homeowners.
With no financial institution involved, it gives sellers peace of mind they will get to the closing table. In a traditional home sale, financial difficulties with the borrower can potentially nix a deal.
Are Cash Offers Unusual?
While buyers require a home loan most of the time, cash offers are not uncommon. How common cash offers are, depends on economic conditions and local factors.
For example, in 2021, a cash house sale was more likely, with these types of home purchases accounting for over 30% of all transactions. With nearly 1 in 3 homes being sold with offers for cash, this marked a six-year high.
The number of cash sales is an increase from 22.8% in 2020, though the situation can be very different depending on the area you look at. Detroit, Michigan saw the highest all-cash offers, accounting for almost 60% of all sales.
A significant amount of these cash buyers were real estate investors.
What Increases The Likelihood of Cash Offers?
Certain factors can make cash-only sales more likely:
- If an investor is looking to buy the home
- When it is a seller’s market with meager property inventory
- If the seller has approached an investor such as We Buy Ugly Houses or iBuyer business
- When the home is attractive to property flippers
- Competition in a local area can increase cash buyers
Even if you aren’t selling a home in these conditions, offers for cash can happen during any sale.
How Does an All Cash Offer Change The Home Purchase?
With a cash offering, some things change in the buying process. The home sale will likely reach closing faster, without the need to wait for a mortgage approval from a lender. Therefore, the underwriting process won’t slow things down either, and the buyer is less likely to need an appraisal.
Buyers will still require title insurance and show that they have the money to buy the home. It could be possible for the buyer to be signing the closing documents in just a few weeks with a cash house sale.
This contrasts the time it takes to close a mortgage loan, which could be 30 to 40 days or longer. The closing time typically averages 45-60 days.
What Things Are Different With Cash Offers?
Title and Escrow Companies
Title and Escrow CompaniesYour lender may dictate the title company and escrow services when you get a mortgage. If there isn’t a lender involved, you might be able to get a better deal and reduce your expenses by shopping around for who will provide these services for you.
You will still be required to have a traditional earnest money deposit to ensure an incentive to close. Earnest money is usually one to five percent of the purchase price. With a new home, escrow can be as high as ten percent.
Fewer Contingencies to Deal With
Cash offers typically mean fewer real estate contingencies to worry about. There isn’t going to be a financing contingency because of a mortgage or a sales contingency since you don’t have to wait for the buyer to sell their own home.
However, there could still be other contingencies, like an inspection contingency, so the buyer knows that the house is sound.
There is Usually No Home Appraisals
Sometimes a cash buyer will still want a home appraisal even without a lender being involved. Having an appraisal contingency with a cash offer is rare, but sometimes investors want to ensure they get the expected return on investment.
But most of the time, the buyer will not require an appraisal contingency, further cutting the time it takes to get to closing. There will also be no worry about the potential for a low appraisal when the sale price is way over the asking price.
The Buyer Often Waives The Home Inspection
It is not uncommon for the buyer to also forgo having a home inspection with cash sales. In a seller’s market, not having a house inspection is just another perk to make an offer more competitive.
Given that home inspections often lead to necessary repairs, a reduction in the home’s sales price, or seller’s concessions, it’s favorable for a seller.
While there are no mandatory fixes after a home inspection, a buyer could back out of the sale. Home inspections are a big hurdle to clear in a real estate transaction. The waiving of a house inspection happens quite frequently with cash sales.
Proof of Funds is Normal
When you are pre-approved for a mortgage, the lender checks to make sure you can afford the monthly payments. A mortgage lender will look at your income and debt to determine how much they can lend you.
They will check your credit score, look at your bank statement, go over current interest rates, and make sure you have enough cash to cover the purchase price. With an all-cash offer, this doesn’t happen. None of these things are needed.
With a cash sale, the buyer must provide a letter from their bank that shows proof of funds to cover the cost of the home. When this has been provided, the cash purchase can continue.
Closings Are Usually Faster With Cash Sales
Not only will you get to closing faster, but the actual process to close should be more straightforward as well. There will be less paperwork to check and sign without any documents from lenders.
The buyer still needs to sign a settlement statement, title documents, and the deed.
In this case, less to sign also means less to pay. There will not be any lender’s fees to add to the other closing costs. The monies owed can be paid by cashier’s check or wired before the buyer will receive the keys to the home.
You’ll Need a Cashier’s Check For The Entire Sale Price
Since there is no financing involved, you will need a bank check for the purchase price. You might also decide to wire transfer into the closing attorney’s or title companies account.
There Are No Monthly Mortgage Payments With Cash Sales
The most obvious difference when paying cash for a house is that you won't have a mortgage payment.Click To TweetYou Don’t Need Homeowners Insurance When Paying Cash
With no financial institution involved, cash buyers can forego paying for home insurance. A word to the wise – don’t do it. Not having homeowners insurance could be one of the biggest mistakes of your life.
Anyone with the financial means to make a cash offering on a house should have insurance.
Is it Always a Good Idea to Put in a Cash Offer if You Can?
If you have the money available to offer cash, should you? While you might assume it’s an obvious choice, it may not be that clear-cut in your situation.
Understanding the advantages and disadvantages is essential before deciding whether a cash-only bid is correct for you.
The Benefits of Buying a Home With a Cash Offer
- Speed: The buyer and the seller might benefit from a faster home sale.
- The buyer’s credit score doesn’t matter since there is no mortgage.
- A cash offer could make the seller more likely to accept.
- Home appraisals and appraisal gap coverage can be avoided.
- It’s cheaper in the long run for the buyer without any mortgage interest to pay.
You also need to consider the housing market where you’re located. If it is a very competitive market, with lots of buyers and not enough homes for sale, a cash offer can be more crucial.
It can put you ahead of other buyers, making buying the property you want more accessible, even in difficult buying conditions.
The Downsides of Cash Offers
There are fewer negatives to making cash offers than positives, but they could still be significant.
- Buying a home without a loan requires a lot of money.
- It could mean you’re putting most of your eggs in one basket with an asset where you can’t quickly free your equity.
- You can’t benefit from tax deductions related to mortgages. You can take a tax deduction for mortgage interest that won’t be available.
When deciding if you should make a cash offer, make sure you have the funds to cover all the costs. It isn’t only the house price that you need to think about.
Don’t forget about property taxes, moving expenses, HOA fees, closing costs, and more. Buying a home isn’t a cheap experience, and there are often more expenses than you expect.
When you are looking at making an all-cash offer, be sure that you have sufficient money beyond the price you are offering to cover the buying expenses and ongoing costs after you’ve moved in.
The Advantages and Disadvantages of Cash Offers When You’re Selling a Home
If your home is located in a hotter seller’s market, or your property could be attractive to investors, you stand a greater chance of receiving cash offers.
As well as investors who might be looking to find a property that they can renovate and quickly sell on or rent out. There are other potential cash buyers:
- Buyers that have the proceeds from a previous sale to spend
- Seniors that are using their savings instead of paying financing fees
- Wealthy home buyers
- iBuyers
Though your cash buyer falls into whichever category, you need to think about the advantages and disadvantages of accepting that offer. The home selling market in your local area is also crucial to your decision.
The Advantages of Accepting a Cash Offer
Cash offers can look more attractive when you are selling your home, and benefits might include:
- The sale should go through faster.
- It is unlikely there will be an appraisal or appraisal contingencies.
- The sale will fail because of buyer financing problems or dealing with a bad credit home loan.
- There will be fewer other contingencies to worry about.
- Your real estate agent will be able to mark the home in MLS as a pending sale vs. contingent sale status.
The Disadvantages of Accepting Cash Offers
- Cash offers tend to have a lower price than lender-financed offers; because of the advantages, buyers frequently offer less.
- The buyer’s finances aren’t checked as thoroughly.
While a cash offering will be good for sellers in many situations, if you aren’t concerned about how quickly the sale closes, a higher mortgaged offer might look better.
No Mortgage Contingency Doesn’t Necessarily Mean a Cash Sale
One thing worth mentioning is that a buyer’s offer could be written without a mortgage contingency. Real Estate agents should not automatically assume it is a cash sale.
To make a strong offer, some home buyers will write a bid without a mortgage clause. In this instance, the buyer is taking the risk of having no problem getting a home loan.
A seller’s agent should still do proper due diligence to ensure the buyer is adequately qualified.
Closing Thoughts
The question of whether to offer all cash or accept that type of offer when you are selling isn’t as straightforward as you might imagine. You should consider what is best in your situation after weighing up the positives and the negatives.
When you’re buying a home, putting all of your available money into the purchase could leave your finances stretched to cover other costs.
On the other hand, it should save you a lot in interest payments on the loan.
When you are selling and looking to get the best price possible, a cash offer might not provide it. If you have time to wait for better offers to come along, that will make a difference to what you decide.
Though if you’re looking for a fast sale, a cash offer will likely be the best offer.
Cash buyers can remove many of the worries and stress with selling a home. They are almost always a sure thing as the buyer would stand to lose a significant amount of money.
You now should have a much better understanding of how cash offers work when buying or selling a home.
About the author: The above Real Estate information on what are cash offers in real estate is provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 35+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and would love to share my marketing expertise!
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