Is Cash Really King?

Have you ever heard the expression “Cash is King”?  Of course you have, but when it comes to buying and selling property is it REALLY true? Does cash open up any different doors than financing? Would a home seller in their right mind actually accept a lower cash offer over a higher priced financed offer?!? They make the same at the end of the day, right?? Whether cash is your competition or your reliable ally, this is what “Cash is King” really means when buying/selling a home.

Concessions

When you buy a home with a loan, it’s going to cost some money.  Loans can cost anywhere from 1%-3% of the loan amount, I know bummer right?  In many situations, a buyer may ask for these loan costs to be paid for by the seller, and hey, why not ask? These costs are called concessions, or “seller concessions to the buyer”.  If the buyer was paying in cash, there will be no loan costs to speak of, therefore no opportunity for the seller to be put on the hook for paying these concessions for the buyer.

Contingencies

This is probably the single biggest reason that a home seller will prefer a cash offer over a financed offer. When using a loan to purchase a property, your contract will contain a “loan contingency”. Don’t worry it’s not as complicated as it’s sounds. A loan contingency in a nutshell says, if for any reason the buyer does not qualify for the loan at any point in the purchase process, the buyer can back out of the transaction without penalty.

Let me repeat that and read it carefully!

If for ANY reason the buyer does not qualify for the loan at ANY point in the purchase process, the buyer can back out of the transaction WITHOUT PENALTY.

Example: Let’s say we have a 45 day closing on a property.  40 days into the process, and just 5 days away from closing, everything has been smooth as can be. The lender then goes to make the final approval and re-pulls the credit of the buyer. Unknown until now, the buyer’s credit card payment got lost in the mail, and now is overdue.  Their credit took a hit, and has dropped below the threshold of qualifying for a loan. Just like that, a lost/delayed piece of mail cost the sale of your home days before closing. Not your fault, or the buyers fault. The buyer, while certainly upset about losing the home,  walks away without loss of any deposits, and you are left starting back at square one looking for another buyer.

These things happen more often than you might realize. I’ve seen it all before….

Buyer finances new car before closes, debt to income ratio is now too high – LOAN DENIED
Buyer finances furniture for the new house before closing – debt to income ratio is now too high – LOAN DENIED
Buyer didn’t tell the lender about their child support until 3 weeks in – LOAN DENIED
Buyer paid off TOO much of their credit card before closing, not enough credit established. LOAN DENIED.
Buyer surprisingly laid off work before closing.  No income??  DENIED!

With a cash deal? Not so much. With cash, a home seller should feel much more confident that the sale will go through. If a cash deal is going to fall through, it’s typically going to be in the first few days, rather than several weeks into the transaction.  It is important to make sure a buyer provides proof of funds for a cash offer. In other words, prove to the seller that that the buyer has the cash to make the purchase.

Timeline

A home sale usually takes between 30-45 days.  What you may not realize is that most of this time is time that takes the lender to finalize a loan. Between gathering all your financials, getting an appraisal completed, and getting a loan through underwriting, it’s easy to rack up a months’ worth of time.

With a cash sale, the transfer of ownership can be completed much quicker, in as little as about 10 days.

Net Proceeds

At the end of the day, most home sellers are primarily concerned with the NET proceeds. If your one and only goal of selling a home is to net the most money, then it shouldn’t matter how the buyer is paying. Not far behind on the list of wants however, is a timely sale and a smooth sale. This is where cash really shines and can tempt home sellers to sell for less than they may on a financed offer.

As a buyer in a competitive market, it can be absolutely soul crushing to be bidding on homes against cash offers. With all the other same terms and price, a seller should take a cash offer over a financed offer any day of the week.  That leaves the buyers having to pay MORE than someone with cash if they really want a home.

As a seller, would you rather take an offer for $500k closing in 10 days and be done with it, or 510k over a 45 day period and hope the financing goes smoothly? That, is the million dollar questions… Err,$10k question.

So is cash really king? I’d say so. But don’t fret if you are part of the 90% of Americans who need financing to purchase a home.  With the right creative Realtor on your side there are plenty of ways to sweeten up your financed deals to make sure you reach your real estate goals.