From the Ask the Broker inbox:
Hi Jay. My wife and I love your site!! We plan to move to Phoenix by next spring and wish to pay cash for our home. My question is,Is cash still king?? and will it help us get a better deal? Or do sellers and banks no longer care about $cash. Thanks for any help you can give us
First, thanks so much for the kind comment on the site! Glad you find it useful.
Great question. Here’s my take, and if others disagree (or agree) please comment!
There is no question that paying cash for a home is a significant component in presenting a strong offer. With the “lending atmosphere” as it currently is, some sellers are leery of any offer that involves financing (which the bulk of offers do). There are deals that fall apart every day due to the buyers being unable to obtain financing.
However, my experience is that making an all cash offer is not necessarily a substitute for price.
Let me explain…
Cash is not necessarily a substitute for price
Many people think that all sellers consider in an offer to purchase a home is the price. The savvy home seller however will consider other factors as well. Price is of course the primary factor for a seller. Every seller wants to maximize the price they get for their home.
Other factors that are considered are requested closing date, any contingencies (a BIG contingency being whether the buyer needs to sell an existing home), down payment amount and the buyers ability to obtain a mortgage.
In Arizona, a Loan Status Report (LSR) is supposed to be included with any purchase offer that involves financing. The LSR is, in simplest terms, a pre-qualification from a lender stating the terms under which they feel the buyer will be able to secure a loan. These can ease the sellers uncertainty about the buyers ability to secure a mortgage. They are not however, proof positive.
Cash buyers do not need a LSR as they won’t be obtaining a loan.
However, we strongly advise our sellers that receive cash offers not to accept the offer if “proof of funds” is not included with the offer (in reality, a cash offer without proof of funds would likely be countered along the lines of “buyer must present proof of cash funds are available within 5 days of offer acceptance, blah blah blah…). It’s simple common sense to ask for some sort of proof that a buyer has the funds available if they are making a cash offer.
The real gist of the question is, “will I get a better deal if I offer cash vs. financing?”
In my opinion, not really.
If I have a seller that gets two offers, one with financing and one cash, and if all other terms are identical, I would strongly suggest accepting the cash offer. It eliminates the sometimes difficult mortgage process from the equation.
But, the bottom line to most sellers is price. Despite the current mortgage mess, many buyers obtain financing every day. A seller might be persuaded to accept an all cash offer at a slightly lower price than another offer, or at a slightly lower price than they were planning on, but I don’t think you’ll get a much better deal with an all cash offer as opposed to financing (assuming your financing is solid).
As an aside, I would suggest talking to a financial planner before you place an all cash offer. Interest rates are still near historic lows. It might actually be financially prudent to obtain financing and put your cash reserves into an investment that has a greater return than the going interest rate. If you can borrow money (for example) at 6%, and get an investment return of say 8% on your cash, you’d make more than the interest you pay (as well as gain some tax advantages on your mortgage interest).
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Jay – I agree with you on the idea that cash isn't always king. I do believe with a cash offer including 'verifications of funds' from the buyer and a reasonable closing date that works for the seller is definitely a huge plus, however not always the winning leverage. If you have a strong buyer with a completed, verified LSR and higher offer, it's very likely that the seller will pick price over cash. I know I would definitely advise my clients a clean cash offer is pretty golden these days. You do make a very valid point as well to use a better return of interest on your monies and take advantage of the tax exempts. Spot on in my opinion!
Any interesting take on the subject and issues with offering cash i had not considered.
I agree, cash isn’t always king. It can make a very complelling offer, but, it will not compensate for a low offer. I had an offer just last week that illustrated the point.
I think only if a home is being sold "as-is" which still isn’t really as is BUT then the seller doesn’t have to worry about the re-negotiations after inspections. At that point cash is worth a little more but between two offers all other things being identical I think best net to the seller wins because you still have negotiations to contend with and that starts a price negotiation all over in many ways.
I am very confused as to why 'financing' is viewed as a non cash payment.
The purchase takes place whether it is cash out of your pocket, or out of a lender's pocket. Regardless, if you are pre-approved then there is no speed difference right? The seller still gets paid the same amount and the lender is the one that carries the risk, NOT the seller.
So why do so many people see 'cash' as more attractive? It's the same thing right?
While I wouldn't say it's "KING", it definitely helps. I know that during short sales, one of the main problems is getting the money from the invester/buyer to the bank before time limits expire or a deadline is missed.
Granted, nobody should accept a CHECK for a house (although if you're willing to do so – please email me! =P) anytime soon, but I'd definitely agree that buyers with cash on hand (as mentioned above, verified cash that is) stand a much better chance of picking up the property they like.
If you look on the "Search MLS" tool for example, the Gilbert neighborhood I keep a close eye on for the price range I track, probably consists of about 70-80% short sale, pre/post-foreclosure properties. In those cases you're dealing with competing investors so the sooner you can have everything needed to the bank for approval, the better chance you stand I'd imagine.
On a tangent, I always thought that coming into a car dealership with an approved loan from a credit union or cash in hand would make the salesmen salivate. As I learned later in life, these buyers are not only more trouble than their worth (especially due to IRS/fed regs if it's cash), but most of the money is actually made from the financing which offers more leverage to the buyer than cash ever could.
Although if you've got cash to burn.. George Washington will always be King of Craigslist 🙂
In Silicon Valley, their is a perception that cash is king, especially during an offer presentation. However, getting the verification that a buyer's cash is available can be worrisome. Many Silicon Valley buyers have all their "cash" tied up in stock and only sell the stock when they get a ratified contract. This can create problems if the stock value has gone down (as it has recently). Good listing agents need to make sure the cash (stock) is truely cash (in liquid form).
Many buyers represent all cash (or huge down payments) in order to get into contract. Once in contract, the buyer obtains financing. This can become a problem for the seller because of the time frames involved in a buyer obtaining financing in today's market.
I can tell that you have obviously had success with the mortgage companies you have worked with in the past as far as them coming though for you.
Now, if a seller had four contracts fall through because of financing turn downs, then…
Wouldn't it depend on the terms of the offer? A quilified buyer is a quilified buyer – cash or mortgage. Certain things can make the cash guy king, like no inspections, no appraisal, no survey, no title insurance. I haven't met any would be buyers willing to accept that kind of an arrangement. And, for most of the sellers – they know the appraisal will work and the inspections won't reveal much, if anything. Of course, we all get surprises. That's what makes life exciting!
Jay – I recently had a seller prove that cash is not always king. We had two similar offers, one cash and the other with financing through a national lender and solid as a rock. The cash offer came with a bank letter from another country. Bottom line – we felt the offer with financing overall was the best and ended up closing without a hitch. The agent with the all-cash buyer was shocked that we took the other offer, and last I heard they had not purchased another home.
I don't know about you, but I can sell the house, I can negotiate repairs and addendum BUT I never know what the mortgage company is going to come up with anymore. It seems like every day a new requirement needs to be met. Cash is becoming king but who has any?
Jay,
I will have to agree with you that if the seller has multiple offers and one of them is a cash sale, the sellers will probably choose the cash offer as it eliminates a huge contingency from the transaction.
Great post.
As Tax Lien Investing said, as far as the seller is concerned financng and cash are the same. The seller walks away with cash either way.
Real estate investors are often told to say "I can offer all cash and close quickly" but is that important to the seller? To most sellers this just isn't improtant for the reason above.
However to some truly motivated sellers, speed and the assurance that the deal goes through are more important than top price. In that case all cash or a very large down payment can be important to them.
Cash is Cash… Financed transactions are not cash, they are financed transactions. Financed transactions can close on time, but any underwriter can blow the deal because lets say the spouse charged too much on her credit card too often and then the underwriter asks the buyer to put down a little more, so they now cannot do so and teh offer folds. Speaking of Cash, boy now you have to fill out forms to send to the IRS, otherwise the Patriot act kicks in.
I don't get it. Whether it's from your pocket, or from somewhere else, it's still cash, isn't it? You still have to pay for it in the end.
Well I can say from very recent experience that I just had a client take an offer that was to be funded with a VA loan over a lower cash offer. The big worry here was actually the appraisal. My client had done a lot of work to the unit and made it by far the best in the complex but we did not know if the appraiser would see that. Fortunately he did and the deal is now closed. Really there is not answer to this question that will work across the board and there are other factors to consider.