A cash offer can be extremely appealing when selling your home. From 2020 to 2022, cash offers became a popular way for buyers to beat out the competition in the hot real estate market. An all-cash sale differs from a sale with a mortgage in several ways, though. If you’re planning to buy or sell a home, you should understand what exactly a cash offer is and what its advantages and disadvantages are.
What Is a Cash Offer Exactly?
A cash offer is a bid to purchase a property entirely with cash. The buyer pays the full expense on their own without the use of a mortgage or any other form of financing. Typically, the buyer pays with a check or a wire transfer. Paying in cash offers a number of benefits for both the buyer and the seller, so sellers often accept cash offers when they receive them.
Cash offers aren’t as common as offers with mortgages because few buyers have the liquid funds to pay for a home in full. However, about one-fourth to one-third of homes are currently bought with cash. The percentage of homes bought with cash varies significantly based on location. Cash offers are more common in areas with lower costs of living than in expensive regions like the Bay Area or New York City.
Who Makes Cash Offers?
Cash offers can either come from individuals or companies. Some people have the ability to save up enough funds over time to purchase a home in cash. In many cases, buyers use the equity from their own home sale to fund the purchase of their new home. This is especially common when the new home is worth less than the old home. For instance, a couple may decide to downsize after their children grow up and move out of the house. Because their new, smaller property costs less than their previous house, they can cover the full price with the proceeds of their home sale.
Investors frequently make cash offers as well. An individual could purchase a home in cash with the intention of fixing it up and flipping it. Investment companies also buy homes in cash to flip them or to rent them out. Companies have much more cash available than the typical home buyer, so a significant portion of cash offers are made by real estate investment firms.
How Does a Cash Offer Affect the Home Buying Process?
A cash sale still involves certain contingencies and closing costs. However, the process tends to be much faster and simpler than it is when you involve a mortgage lender. Underwriting is one of the lengthiest tasks when buying a home with a mortgage, so skipping this step can cut 30 to 60 days off of your timeline.
Cash transactions also don’t require an appraisal because there’s no mortgage company that needs to verify the value of the home. Some cash buyers request an appraisal to ensure the home is worth what they’re paying, but many choose to skip this step.
The closing costs and fees are different with a cash sale, too. The transaction still involves several expenses, such as title insurance, title search fees, processing fees, and notary fees. You avoid the costs associated with a mortgage, though, such as credit check fees, mortgage points, and origination fees. The buyer usually pays the majority of the closing costs, but the buyer and seller can always negotiate a different arrangement.
Advantages of Cash Offers
There are numerous benefits to cash offers for both buyers and sellers. Cash sales are almost always faster and simpler than sales involving mortgages. You don’t have to wait for a lender to approve your mortgage, which dramatically reduces the pending time. Buyers also don’t have to do as much paperwork or gather as much documentation because they don’t have to prove their income or employment to a lender. There are fewer parties involved and fewer fees, so the closing process is more streamlined.
Buyers benefit from cash sales because sellers are likely to accept lower offers. The seller knows that the transaction will be faster and easier when the buyer pays in cash, so they’re often willing to sell for less. Buying in cash also offers long-term financial benefits. You don’t have to pay thousands every year in mortgage interest, so you save money in the long run.
Cash offers are great for sellers because they’re far less risky than offers with mortgages. When a buyer requires a mortgage, there’s always a chance that they’ll be denied at the last minute. If the buyer proves that they have enough cash for the purchase, you know that the sale won’t fall through.
Disadvantages of Cash Offers
Many sellers and buyers find that the benefits of a cash sale outweigh the drawbacks. There are some disadvantages to consider, though. For sellers, the biggest downside is that a cash offer is almost always lower than an offer involving a mortgage. In a hot seller’s market, it’s sometimes better to choose a higher offer from a buyer working with a lender. If the sale falls through, there are plenty of other buyers ready to make offers.
Sellers also have to be wary when evaluating cash offers. No banks or mortgage companies are vetting the buyer, so you have to do it yourself. You must verify that the buyer actually has the cash to complete the transaction. Unfortunately, fraudsters sometimes use fake cash offers as a scam tactic.
Buyers should consider the financial implications of a cash sale, too. When you buy a home in cash, you part ways with a sizeable amount of money. Losing this much liquidity could put a financial strain on your household. You must make sure you can comfortably purchase the home without completely draining your bank account. Some buyers also prefer to diversify their funds in a variety of investments instead of putting all their cash into one asset.
BOTTOM LINE
Cash offers make real estate transactions quicker and easier for everyone. You don’t have to involve a mortgage lender, and you can skip some of the time-consuming steps in the closing process. Although a cash sale isn’t always the best option, it offers a number of advantages. If you’re considering making or accepting a cash offer, consult with your real estate agent or financial advisor about whether this is the right choice for you.
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