Buying a home and other real estate properties in America has already developed into its own art form. There are so many factors to consider, regardless of whether you’re the one buying a new home or selling your property. There are also times when one of the buyers would say that they’d like to pay for the total price of the property upfront. This can be a really enticing offer, but it doesn’t mean you’ll have to take it each time you get a cash offer sale.
You might want to read on if you wish to gain a better understanding of what transpires in real estate transactions where the buyer offers to pay for the total price of the property in cash. Here’s how a cash offer on a house works:
What Is A Cash Offer On A House?
A cash offer on a house is a bid by a potential home buyer to purchase the house and pay for it with cash instead of getting a home loan mortgage or other forms of home purchase financing. This means that the seller won’t have to wait for the buyer to have their home loan mortgage application approved and released.
Some sellers find these cash offers highly attractive because it takes out the risk that the home buyer might not be able to get their desired home loan mortgage. When this happens, oftentimes the deal won’t push through because the buyer hasn’t found a way to finance the purchase.
It doesn’t necessarily mean that the buyer can’t afford to purchase the house. It could be that they find the current interest rates of their approved loan mortgage too high. It could also be because they’re also waiting for their own home to get sold, which is why they can’t pay in cash yet. A case offer on a house also abbreviates the negotiations process by doing away with other tasks associated with the loan mortgage application process such as background checks and credit score evaluations.
How Does Cash Offer Work?
The process of buying and selling a house is a little bit different in a cash offer purchase, especially compared to when the buyer has to apply for a house loan mortgage and wait for its approval. In general, the process is faster since a cash offer purchase does away with several steps that are required in a home loan mortgage purchase.
The buyer would no longer have to apply for a home loan mortgage, thus taking out the application period and the time spent processing and waiting for the results. It also does away with a lot of the documentation under the writing process procedures. If the parties agreed about the price, an appraisal by an accredited real estate appraisal firm would no longer be needed.
The results of a formal appraisal are primarily used by the banks, financing, or lending institutions. It’s no longer needed because the financing entities have been removed from the purchase and sell transaction.
Here are some of the other ways and aspects that make a cash offer home purchase different from a typical home loan mortgage purchase:
- Contingencies – There’s no need for substantial financing contingencies in a cash offer purchase. The buyer won’t need financial contingencies since they’re paying the entire purchase price with cash upfront. A financing contingency is only required in home loan mortgage purchase in the event that the home loan mortgage applied for falls through or is rescinded. There would also be no more need for a sales contingency.
However, some buyers would still moist on an inspection contingency, especially if it’s not a newly-built home and it looks to them that the house might have to be inspected thoroughly by a consulting engineer.
2. Appraisal – A cash offer purchase would no longer need a formal appraisal by an accredited third-party real estate appraisal firm. A real estate appraisal is often only required by financing and lending companies. It’s their way of making sure that the method and process of ascertaining the appraised value of the property follow industry standards.
Banks and lending institutions have to follow standards and acceptable practices before they assume the business risk of granting a loan to an applicant borrower. Aside from their duty to comply with banking and loan regulations, it’s also part of their due diligence protocols to make sure that the transaction is credit-worthy.
However, there are instances when some buyers would still insist on a formal real estate appraisal. They need it if they’re investors and they want to compute their forecasted returns, but they have to know the fair market value when they buy the property.
3. Closing – The procedure for closing a cash offer purchase is much simpler than a purchase and sale that involves a home loan mortgage. In a cash offer sale, the buyer will just have to sign the paperwork—which is basically just the settlement statement the deed of sale—and the title to the property. The buyer then hands over the payment. They can give a cashier’s or manager’s check. Some wire the money. The seller would then hand over the keys to the property.
Without the need for a financing or lending entity to take part in the process, the whole process is significantly shortened and the amount of paperwork that needs to be done is substantially reduced. There would also be lower closing costs involved since the transaction won’t have to pay for lender fees, processing fees, and other banking or financing charges.
4. Title And Escrow – A cash offer purchase and sale would still require the services of a title and escrow company, in the same way that their services are required in a purchase that involves a home loan mortgage. But the big difference is that you won’t need to involve a financing or lending entity anymore in each step of the process
Cash Offer When You’re The Buyer
Cash offer transactions can be looked at from both ways, either from the side of the buyer or the side of the one selling the house. There are both advantages and disadvantages if you decide to purchase a home and pay for it all in cash.
Here are some of the advantages and disadvantages of buying a home in cash:
- Won’t require an appraisal of the property for sale
- Sellers would have more confidence in the buyer
- Allows buyers and sellers to close the sale faster
- Doesn’t look into buyer’s credit score
- Buyers would be able to save money in the long run
- The paperwork and procedure involved are significantly reduced
- Takes a considerable amount of money
- You won’t be able to claim mortgage payments as tax-deductible items
- You’ll be able to limit the risk and liquidity of your assets into one asset
There are other important factors and considerations that you have to keep in mind. If demand has been going up in the real estate market, and the specific property you’re planning to buy has received multiple offers, submitting a cash offer will pole-vault your proposal to the front of everybody else’s offer.
Keep in mind that real estate transactions seldom get closed with the buyer spending only the dollar price of the real estate property. Oftentimes, the buyer still has to make several other payments for administrative fees and processing charges, long after the deal has been closed. Some examples of these charges and expenses include real property taxes, homeowner’s insurance, HOA dues, earnest money, moving expenses, and many other miscellaneous expenses.
Cash Offer When You’re The Seller
The other general situation is when you’re the seller of the property and one of the prospective buyers offers to buy the property and pay everything in cash right away. Here are some of the advantages and disadvantages when you’re the seller and someone wants to make a cash offer.
Advantages Of Accepting Cash Offers
- There’s no risk that the buyer won’t be able to come through with their mortgage financing payments
- There would be a shorter process in closing the sale
- It’s unlikely that you’ll have to deal with a formal appraisal since there are no lenders
- Most of the contingencies won’t be required anymore
Disadvantages Of Taking The Cash
- The offer of the one who wants to do all in cash won’t necessarily be the highest bid on the property for sale
- You’re most likely skipping the vetting process because you won’t require background checks and credit score evaluations of the buyer
How Often Does It Happen
There might be a prevailing notion among American home buyers that most home purchases are done through a home loan mortgage or other financing and that cash offers are hard to come by. It might come as a pleasant surprise to many, therefore, that cash offers on a house are actually commonplace in the real estate industry.
A research study done by a private consulting firm found that a little over 25% of all purchases of single-family homes and condominium units were closed through cash offers and payments. This research looked into the data for all single-family home and condo sales throughout the United States.
This was a little bit higher than the average cash offer percentage from 2000 to 2007, during the years before the subprime crisis hit America. But it’s also far from the 38% cash offers that the real estate industry enjoyed in 2011 when cash offer sales reached their peak.
Data from the same research shows that cash offers were more often made in metropolitan areas, though the numbers vary from one city to another. The research covered around 200 cities which have a population of at least 200,000 and had available data on cash offer home purchases. The places and cities where all-in cash purchases were the most common were Alabama (54%) and Montgomery (54%), Naples (53%) in Florida, and Macon (51%) in Georgia.
Buying cash offer homes is quite a commonplace business transaction in America. A little over a quarter of all sales and purchases of single-family homes and condo units in America involve a cash offer sale transaction. Its main advantage is that it removes some of the documents and paperwork that are often required in purchases involving home loan mortgage financing. If you’re unsure about this process, this article should serve as a guide on how a cash offer on a house works.