Cash Offers on Houses are Popular, But What If I Don't Have the Cash?
A few decades ago, purchasing a house was arguably easier and more affordable when compared to today. The cost of properties has been on a gradual rise in the recent past. And while that doesn't automatically mean you can buy a house in today's real estate market, it is more complex.
Recent data shows that people rely on mortgages to buy a home has drastically increased over the last five decades. This means buyers have to go through the long and arduous process of being approved for a mortgage loan. On the other side, property sellers have to deal with slow or gradual payments and virtually endless procedures.
But is there a more straightforward way to buy your home? Is there an option where both the property seller and buyer profit? The simple answer is yes. This goal is best achieved when the buyer purchases the house with a cash offer.
Below, let's delve into what a cash offer means when buying real estate property, how it can give you an edge over other prospective buyers, and what to do if you don't have the cash. Read on for practical cash offer house purchase options.
What is a cash offer?
As in most other regards, cash is king. And in real estate, this saying couldn't be any truer. Making a cash offer for a house means purchasing the property in liquid cash funds. This means you are not dependent on a mortgage or other types of property financing options to make the cash offer for the house.
The easiest way to buy something is with direct cash. For example, you can walk into any store, pick whatever items you wish, and pay the equivalent amount in liquid cash. However, in real estate, things are not so easy.
For starters, buying a home is one of the most significant purchases you can make. Because of the growth mentioned above in the real estate industry, most people can't just outrightly afford to make a cash offer house purchase deal.
To help purchase the property, most people will take out a mortgage. On the other hand, if you're making a cash offer deal for the house, you won't need third-party financing options.
However, this doesn't necessarily mean a direct cash tradeoff between the property buyer and seller. You'll likely have to transfer the cash as a cashier's check or a direct wire transfer, even in cash offer house deals.
Are cash offers preferred over other financing options?
At one point, all house sales were made through liquid cash transfer. That, however, was probably hundreds of years ago. Today, mortgages are the most common method of purchasing property instead of making a direct cash offer house deal.
When property sellers accept offers on their houses, they are more likely to consider cash offers over mortgage financing deals. This is because the seller does not have to wait until you're approved for a mortgage loan, which can take anywhere between 45 to 60 days or even longer.
The demand for a property today is higher than the supply. If you want your bid to stand out, you're better off making a cash offer house purchase deal. The alternative is having your bid buried together with the numerous other similar offers.
In addition, there's likely someone who will bid for the house and can get preapproved for a mortgage. In such a case, this person will have a higher purchasing power than the rest. However, if you're making a cash offer, your bid will be among the first to be considered.
If you want a winning chance at buying your dream home, your best bet is to make a cash offer. Cash offer house buying deals are considered safer and low-risk than other financing options.
Moreover, the other reason cash offers are so popular is that they are quick, and you can close the deal in weeks or even days. When someone is looking to sell property, they are usually looking to offload it as soon as possible.
And since a mortgage could potentially mean having to wait for more than two months, a seller would rather accept a cash deal. There are numerous instances where the property owners accepted a lower amount than they were initially asking for.
This works as a win-win situation for everybody. The seller closes the deal quickly and can move on to the next project, and you get a house in a relatively short while.
Does it make sense to purchase property with a cash offer?
In most cases, making a cash offer house purchase deal seem lucrative for the property seller. However, there are various benefits you also get to enjoy when making a cash deal.
The most notable benefit, perhaps, is you get to forego monthly mortgage payments. Most mortgages have an average payment period of 25 years. With a cash deal, you outrightly own the house. Additionally, mortgage loans can grow to tens of thousands of dollars. By making a direct cash payment, you could potentially save this money and repurpose it.
Another benefit of a cash offer is that the seller will take your bid more seriously. People think about buying a house at different stages. Ultimately, not everyone interested can afford a house, even with a mortgage plan.
You are obligated to place a good faith deposit or earnest money. This is an agreed percentage payment of the house you are required to put down as a demonstration of your seriousness. However, if you are making a cash deal, the seller knows you are serious about making the purchase as soon as possible.
Who can realistically make a cash offer?
Before purchasing a home, you have to ask yourself whether you can make a cash offer. As established above, there isn't any physical cash being exchanged in the process. However, you still have to wire transfer or write the seller a check.
This means that you must have the money, and it must be available for quick liquidation. In most cases, people with a high net income can afford to make a cash offer house payment plan.
People who've been saving up cash for a while and have the amount needed in an account can easily make the cash offer. However, this still locks out many people who would still like to enjoy the many benefits of a cash offer but may not have the cash at hand.
Are you a prospective homeowner who wants to make a cash offer house deal but doesn't have the required total amount? This next portion is for you. Continue reading to learn how you can effectively compete with a cash offer.
3 Effective ways to compete with a cash offer
Making a cash offer gives you the best chance of becoming a homeowner. However, as discussed above, this might not be feasible for many people. Fortunately, there are various creative ways to put in a serious bid without necessarily having the cash on hand.
Below are some practical ways to improve your bid, even without a cash offer house purchase deal.
Getting an underwritten preapproval
As seen above, buying a house can be a lengthy and tedious process. Unfortunately, you can go through all the steps to be turned down for a more lucrative offer from a competitive buyer. A great way to triumph over the competition is with a mortgage underwritten preapproval.
An underwritten preapproval is a statement from a mortgage lender approving a loan amount beforehand. If you find a house within the time covered by the preapproval, the mortgage can quickly secure the money.
When a seller is dealing with a cash offer, they don't necessarily know if the prospective buyer has the rest of the money, how soon they can get it, or the source. As a result, since you can use the preapproval as confirmation, a seller may be more willing to choose your bid.
Additionally, most sellers and their agents are more willing to sell to preapproved buyers as they have taken the initiative and are not just looking for a house to add to their Wishlist.
Countless service providers help you with your underwritten preapproval application process, and taking the time to get preapproved will increase your chances of getting your dream house.
Making an offer with a cash guarantee
Cash guarantees have become relatively common for many prospecting homeowners. A cash guarantee is a type of guarantor loan where the guarantor gives cash instead of the property to be used as security for the home loan.
Depending on various circumstances, you can borrow up to 100% of the property value and the cost of purchase completion. This amount is used as security, and if you're unable to complete payments on the loan, these funds are then deposited with the loan guarantor. This is also commonly known as a deposit guarantee.
This is another excellent option for you as a homebuyer. The sellers are also more likely to accept this agreement because they get paid and don't have to relist the property when a buyer can't finish their payment.
Putting a property back on the market is arguably a homeowner's worst nightmare. In most cases, the sellers depend on the sale's money to either move, purchase a new property, or fund their inbound projects. Placing the property back on the market can significantly interfere with the seller's timelines and overall plans.
Moreover, houses that are listed again typically sell for lesser. Other prospective buyers may believe there's something wrong with the house and will subsequently stay away or make a lowball offer. It is also noteworthy to mention that houses that don't sell after a while are viewed as less in demand, making selling them even more challenging.
Deposit guarantee services are available throughout the country. Once you find a service provider, the seller will have more confidence in your ability to buy the property. If you're unable to finalize payments, the sellers could still make money and close the house.
Common qualifying reasons for cash guarantee include;
- The demise of the borrower or co-borrower before closing the deal
- Loss of income of the borrower or co-borrower which disqualifies them for the loan
- The borrower or co-borrower is unable to meet their credit requirements to qualify for the loan
Making an offer with a deposit guarantee assures the seller they will receive compensation for the property in almost any scenario. They would be more willing to sell the property to you.
Working with a company that will pay cash on your behalf
The other option you can employ when you want to make a cash offer house purchase essentially gets another party to do it for you. Different services are based on where you are, but most can be broken into effective options.
The first option is where a third-party company provides a backup solution if the mortgage loan doesn't come through. The company can close the deal, and then you can be left paying the company. Sellers are not opposed to this plan as they still make their money and close on the property.
The second option is where the said company buys the house and then rents it directly to you for an agreed period. After this period has elapsed, you can use your mortgage loan to purchase the property from the company.
As a prospective homeowner, it's essential to go through all the details before agreeing with the company that'll help you purchase the house. Ideally, you want enough time to plan and get your finances in order before you can start paying back or buying the property.
Are there disadvantages to making a cash offer?
There's no denying the clear-cut benefits of making a cash offer house purchase deal. However, before you rush to hand in your offer, you should understand any risks.
For example, if you are taking money out of your savings to make a cash offer, you could get the house but then be left in financial ruin. You should make sure your finances will not significantly suffer even after taking the significant amount needed to purchase your next home.
There's also the case of losing your earnest money if you cannot close the deal. The real estate sector is awash with prospective homebuyers who lost vast amounts of cash because they couldn't finalize the payments to close the deal.
Another disadvantage is you will not be eligible for a mortgage interest deduction on federal income tax. This is because you'll have financed the purchase through a mortgage loan. Others still may argue that the money used to purchase the house could have been better. These better investment opportunities may include buying stocks or mutual funds.
Before buying a house, you need to evaluate your financial position and capability. As identified above, there are several avenues you can use even when you don't hand the cash on hand.
However, only you would know your ability to buy the house, and if you're honest with yourself and take the time to evaluate your options, you'll likely come out on top.
Should you make a cash offer when buying a house?
Ultimately, this is the question you have to ask yourself long before starting. If you conclude that you can comfortably make a cash payment, you should go for it. Making a cash offer house purchase plan far outweighs the risks.
If you opt for any other options, you should consult widely to get the best deal. Talk with your accountant or a financial expert to learn how to approach the property purchase.
Some of the available options may differ depending on your state and local laws. Ensure you understand these processes before you can even start house hunting. Doing so will significantly ease the process and help you get the most without damaging your finances. You should also consult a real estate expert to understand these options better.