Are There Advantages To An All Cash Offer When Buying or Selling Real Estate?

Part Two of our Three-Part Series On Making an Offer When Buying A Home

When it comes to buying a home, an all-cash offer can be a pretty powerful tactic, especially if there are multiple bids on a piece of property. However, making (or accepting) an all-cash offer is not always a no-brainer, either for the buyer... or the seller.

One big difference between an all-cash offer and a financed offer is that the cash offer can close quicker. As a general rule, while an all-cash offer might seem suspicious, if it's from a valid buyer, it is usually easier, with a lot less red tape.

In this post, we'll look at the pros and cons of the all-cash offer from the perspective of the buyer and the seller.

Defining the All Cash Offer

Recent data from the National Association of Realtors for 2019 found that 12% of all buyers purchased their homes with cash. As the name implies, an all-cash offer means that you have the ability and liquid cash available to purchase the house outright.You don't literally pay with a briefcase full of hundreds, but you'll need access to all of the funds in a liquid account that allows immediate withdrawals or transfers. For most people, that means a checking, savings, or money market account.

An all-cash offer means that you will not be getting a mortgage loan for any portion of the sale. This is important to the seller because it eliminates the financing contingency of the purchase agreement. A seller makes their decisions based on the terms of your offer, including contingencies. An all-cash offer also makes several other contingencies optional. That can be a powerful tool when engaged in a bidding war with multiple buyers. These can include:

• The Appraisal Contingency

Lenders require an appraisal, cash buyers do not. If you're confident you're getting a good price, you can waive the appraisal contingency.

• The Inspection Contingency

As a cash buyer, an inspection contingency is also optional. However, this is one contingency you might want to keep in your agreement.

• The Sales Contingency

A sales contingency means that your current house must sell before you close on the new property. This is pretty much the opposite of liquidity. While you can include this contingency, it diminishes the attractiveness of an all-cash offer.

The bottom line? An all-cash offer means you have liquid funds available, so you will not need a mortgage loan. You may also waive certain contingencies to make your offer even more attractive to the seller.

The Pros and Cons of an All Cash Offer: For The Buyer

An all-cash offer offers homebuyers some significant advantages. Here are some of the pros and cons of an all-cash offer:

The Pros:

• Limited Contingences

As previously mentioned, one key benefit of making an all-cash offer is the ability to pick and choose which contingencies to include. Not only will this save money, but in a competitive market, this is very desirable to most sellers.

• Less Hassle, Lower Fees

All cash offers are also good for the homebuyer because you do not have the hassle of dealing with a lender. That means no need to gather paperwork like tax returns, income statements, proof of employment, credit scores, or asset lists. You will also save on closing costs associated with getting a mortgage loan.

• Streamlined Closing

As a buyer, an all-cash offer gives you more control over the closing timeline. This means you can close faster because you are not waiting for bank approvals. This can be significant for sellers who need to move quickly.

• Possible Pricing Benefits

As mentioned, sellers are often attracted to an all-cash offer because of fewer contingencies, fewer hassles, and a faster timeline. As a result, you may be able to make a lower offer and have it accepted, even in a multi-offer situation. An all-cash offer can give you leverage to negotiate a better price that can mean savings and increasedequity right from closing!

The Cons:

There are some drawbacks to making an all-cash offer. You need to consider all of the positives and negatives before you commit to any deal. Here are some negatives to be aware of.

• Loss of Liquidity

This should be a top consideration before making an all-cash offer. Real estate is a non-liquid asset which means it can be challenging to get cash out when you need it.

• Loss of Diversification

If you place much of your liquidity into a home purchase, you may lose out on potentially larger gains that could be realized elsewhere. Real estate typically earns around 2 or 3% annually.

• Tax Implications

If you itemize deductions, mortgage loan interest is tax-deductible on your federal income taxes. Without a mortgage loan, you lose that deduction.

• Less Free Cash for Homeownership

Owning a home requires more money than the purchase price. You still need to budget for closing costs, any renovations, and general maintenance and upkeep. Make sure you have enough money to cover taxes, repairs, and other items.

The Pros and Cons of an All Cash Offer: The Seller

As with buyers, there are pros and cons for sellers when an all-cash offer is made for your property. Several situations encourage an all-cash offer. In recent years a new phenomenon has emerged: direct homebuying online. Companies like Open Door, Redfin, and most recently Zillow are buying homes directly from sellers.

Let's take a look at the pros and cons of an all-cash offer as the seller.

The Pros:

• It's FAST

The traditional route of using an agent and listing on the MLS, or going "FSBO" offers no guarantee your home will sell. Assuming you've priced it right, it should sell, but it can take months to get the deal you're looking for. Realtor.com data suggests that it takes about 65 days to sell (which can vary widely by location). Once under contract, escrow can last 30 to 60 days, or longer. That being said, if you need money fast, going the traditional route has drawbacks. Online direct homebuying, for example,can get you an offer in a fraction of the time.

• No Repairs

If you're in a hurry or don't have cash on hand, the idea of repairs that might be needed to maximize your home's value may not be doable. Cash sales are typical "as-is." You'll still need to disclose defects, but if your home needs repairs, and you're not in a position to do them, an all-cash offer may be the way to go.

• Fewer Contingencies

This was also a pro for the buyer. A traditional sale often comes with a list of contingencies. If it's a buyer's market (not applicable right now!) your buyer might even request a home sale contingency which can drag out your sale for months.

The Cons:

While it seems like there are a few great benefits of receiving and accepting an all-cash offer, there are a couple of drawbacks to be aware of:

• Less Money / Lower Offers

This is the big one! If you're looking for top dollar for your home, then an all-cash offer will often disappoint. In a seller's market, like today,an all-cash offer is a good tactic for a buyer to win a bidding war if you're selling to an individual who is looking to live in the home. However, investors are buying homes to resell them. They will offer less if they are coming to you with an all-cash offer. If you're selling to a company like Zillow they may offer less and give you great terms like a 10-day close and no contingencies. It depends on your situation as to whether it's a good deal.

• Make Sure The Money is "Real"

If you're dealing with a reputable company like Zillow or Redfin, or a REALTOR® or agent who has vetted their client this isn't a concern. However, if you received a "We Pay Cash" postcard in the mail, make sure they have the cash they're offering. Ask to see a bank statement or "proof of funds" letter. In these types of deals, since all-cash offers often have a short escrow (sometimes as short as 7 to 10 days) you may want to negotiate a lease-back so you don't have to rush into a move. This is a smart tactic. In the event the deal falls apart, you'll have fewer worries.

The Bottom Line On An All Cash Offer

The all-cash offer brings with it both benefits and drawbacks for both buyers making the offer and sellers who accept it. The bottom line is that for buyers, the all-cash offer is an interesting tactic in a hot market that can help make them stand out from among the crowd in the event of multiple offers on a property. There are some considerations including contingencies and closing dates you'll need to think through.

For the seller, the all-cash offer can mean a quick close and fewer hassles, but unless it's a seller's market, it's likely to be below the market value of your home. But it is fast and convenient. In the end, whether you're the buyer or the seller, you need to consider all of your options including which factors are most important to you in your unique situation.

If you missed part one of this three part series on Making an Offer when Buying a Home, here is the link to part one: https://www.masiello.com/news-and-updates/2021/06/16/the-logistics-of-a-seller-backing-out-of-a-purchase-and-sale