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).