Without a doubt, buying a home is one of the most exciting times in your life, but also likely the most expensive. When buying a home, many people rely on the use of a mortgage or other type of financing to secure the money they need to complete the purchase.
However, this is not the only option for potential buyers to consider. In fact, it is becoming more and more common for buyers to come to the table with a cash offer when shopping for real estate. A cash offer is simply when a buyer makes an offer to purchase a home with their own money, without the need for a mortgage or any type of outside financing.
Cash offers often come from investors looking to flip properties or “iBuyers”(companies that purchase homes for cash), but technically anyone can make a cash offer on a home as long as they have the funds. But is cash home buying a better option for potential buyers? In many cases, the answer is yes.
Let’s take a closer look at a few reasons cash offers are a great choice for buyers.
Cash Offers Are Often Preferred by Sellers
One major reason that cash offers are better for buyers is that they are often preferred by sellers. Cash offers are generally less risky for sellers, as the deal won’t be contingent on the buyer getting financing from a lender and has a lower chance of falling through in general.
It can take a while for a mortgage application to be approved, and the underwriting process as a whole can often lead to a lot of delays, miscommunications, and other issues that can jeopardize a deal. The contingencies that are also common with a financed home purchase can also lead to delays or other issues. All of these simply pile on more stress to the seller and make this difficult process even more complex.
A cash offer is generally straightforward for everyone involved, and there is little risk for the seller as long as they have verified that the buyer has the necessary funds. If the buyer has the funds and wants the home, a deal can be finalized without anyone needing to get involved.
Because this method is often preferred by sellers, it can give cash buyers a good amount of negotiating power and a leg up on the competition. If you as a buyer come to the table with a cash offer, you can often get a better deal vs. someone who comes with a mortgage.
You will be able to move quickly, finalize details as soon as possible, and close whenever the seller is ready. With many real estate markets being very competitive, this advantage can be an important one.
Cash Offers Will Save You Money
Buying a house with cash also has the potential to save you thousands of dollars when compared to the added cost of interest on a mortgage. When you purchase a home with a mortgage, you are stuck paying interest on the loan for the entire duration of the home ownership.
The amount you end up paying in interest depends on the rate you get, as well as your term and amortization period, but it can often be tens of thousands of dollars or more through the lifetime of the loan. This is especially true today, as interest rates are already high and could continue climbing. For example, a 30 year home loan of $400,000 with a 4 percent fixed interest rate, which is relatively low, could cost the borrower over $287,000 in interest alone—and that’s on top of the $400,000.
Instead of paying interest for decades, many buyers are seeing the value of a cash offer, where they will immediately own the home outright. While the amount of interest you pay on a mortgage per month might not seem like a ton, once you multiply it and work out how much it will be over a matter of years, the number can be staggering.
Cash Offers Are Less Stressful and Time-Consuming
Traditional home sales where a mortgage is used can take months before the deal officially gets done. There is often a lot of correspondence between agents, lawyers, inspectors and other experts that can drag on and make the process difficult. Not to mention the time it takes to wait for mortgage approval, and getting the home appraised can be time-consuming, too. There is always the fear of something going wrong and the whole deal getting terminated.
If you have the money, buying a home with cash is generally very simple. There is no need to involve a ton of outside parties, and buyers can work directly with sellers (and their respective agents) and come to an agreement. All of this means a much quicker closing time and much less paperwork and other stressful duties for all involved to take care of.
Now, delays and issues can still happen, but they are much less likely. If both sides are motivated to get a deal done, a cash offer can often close in a matter of days or a few weeks, as opposed to months.
Potential Downsides of Cash Offers for Buyers
For most people, the downside of a cash offer is just how difficult it is to save up enough money to buy a home. If you have come into some money through inheritance or through the sale of your own home, it can be easier, but if not, you could be saving for a very long time before you have enough.
Also, you don’t want to tie up all the money you have in an illiquid asset like a home, so you will need to save even more to ensure you still have some leftover for emergencies, other bills, and if something goes wrong within your new home.
Many cash buyers will also skip their due diligence (such as home inspections) as it is not required by a lender, which can lead to them overpaying for a home or not ending up with what they thought they were getting. This isn’t always the case, but people have certainly been burnt by not doing enough research before buying a home with cash.
But despite these downsides, many people are still turning to cash offers as a way to stand out above the crowd in a competitive market, avoid the high interest rates, and get the home of their dreams as quickly as possible.
The Process of Making a Cash Offer
If you feel like a cash offer is right for you as a buyer, it is important to be aware of the fact that the process for making a cash offer is slightly different than if you were going to go with a mortgage. The first step is to simply make sure you have enough in your account to purchase a home.
In addition to the home price itself, you also need to factor in things like taxes, closing costs, inspections, and anything else you might be responsible for paying. Many people simply add these costs to the total amount that they end up borrowing, but with a cash offer, you will need to pay for them out of pocket. If you don’t prepare for these, you could be in for a very rude awakening.
If you have enough cash for a home in your price range, it’s a good idea to work with a real estate agent or broker. They can help you craft an offer that is acceptable and can often negotiate directly with the seller. These experts can also help you draw up the various details of your offer to give you the best chance of being accepted.
With a traditional mortgage, one of your next duties would be to find a lender willing to provide you with the funds you need to make the purchase. But when you make a purchase with cash, there is no need to work with the lender as you already have the cash and can simply make an offer. You will have to prove you have the funds in your account, but this is often a quick and simple process.
Once you identify the home you are interested in buying, work hand-in-hand with your agent to make an offer that you are comfortable with. If your offer is accepted and all of the terms have been finalized, it’s as simple as electronically transferring the funds or using a cashier’s check to pay the seller in exchange for the home.
The choice is yours whether to opt for a cash offer or a mortgage, but if you have the means, a cash offer is worth considering in our modern real estate landscape. It has the potential to save you thousands of dollars, is a lot less stressful and gives you a good chance of beating out the competition if you find yourself in a bidding war.