Buying your first home—should you make a cash offer?

When you’re talking about making a cash offer in this real estate market, what do you need to know? Well, that’s what we’re going to talk about today.

 

I want to talk about the topic of cash in today’s real estate market, mainly because a lot of people want to ask how many cash offers are there. How many people are just throwing money at houses to succeed? How can I compete if I don’t have that cash? Or, should I use my cash because it will help me compete if I have it available? Let’s start by talking about the really obvious differences between a cash and a financed offer.

1. Having cash speeds up your process of getting your offer accepted.

First on the list is the difference in the time it takes to close a deal. When you have cash, you obviously don’t have to get a loan. It absolutely speeds up your process of getting your offer accepted and closed by a number of weeks, in most cases. On average, you would expect a cash offer to close in something like 7-10 days. The most it would go is about 14 days. On the other hand, it would take around 25-30 days to close that deal for a traditionally financed offer. That is pretty standard right now here in the Bay Area.

 

So when you compare the two scenarios, you’ll see that there’s a pretty substantial difference in time. Although, it is not like it’s months and months different.

2. You don't need a loan contingency and an appraisal contingency with a cash offer.

Now, one thing a cash buyer does have a leg up on some other people in a financed offer is the need for a loan contingency. If you’re a cash buyer, there is no need for a loan contingency because there isn’t one in the first place. Moreover, you don’t need an appraisal contingency because your cash is there. You’re just going to put it in, and you don’t necessarily need that appraisal.

 

However, you may want to consider refinancing out once you close. So you might care about it for a different reason. But for the purpose of that transaction, you don’t.

3. When stacked up against other financed offers, a cash offer looks good.

Aside from that, there’s a psychological difference here that is important to weigh the cost and benefit of. Consider you’re on the negotiating day, and you submit your cash offer. There’s a great chance your cash offer will look good when stacked up against all these other financed offers. That is especially true when your offer price is similar in the ballpark of said financed offers.

 

But don’t get too cocky even if you have a cash offer.

 

Don’t get ahead of yourself thinking that just because you have cash, you can shave $20,000 or $40,000 off the price and still compete. The situation is no longer the same as before. Refinances are no longer clogged up in the system. Remember, the difference in the time it takes to close a deal is on the scale of weeks only. It takes 21 to 25 days for a traditional loan to close a deal. If you compare it to the 10 to 14 days for a cash offer, the difference would be about two weeks only.

 

So if a seller is looking at two offers, where one has a really good down payment with a strong lender, totally clean, and no contingencies at all, and the other is a cash offer, they are going to start looking at the price difference.

 

Look at it like this. If I’m a seller, and I’m looking at two offers, I would say, “Okay, if I have to wait another ten days, but I can get another $20,000 because this other financed offer is higher and is a sure deal, it’s probably not a bad idea at to wait.” After all, that’s $20,000 more in exchange for just ten days of waiting. That’s a pretty good deal!

 

In addition, typically, in my experience, a cash offer is worth somewhere in the world of $10,000 less than the asking price. Maybe as high as $15,000 to $20,000, but most often, the difference is just about $10,000. Since you have that separation in price, people may just opt to wait a little longer to get more money. So don’t think that cash offers always rule the day. Just because the money is already available doesn’t necessarily mean sellers will always choose that offer.

 

How can you compete with someone who has a lot of cash? Leverage your cash by showing a large down payment.

 

Now, how can you compete with someone like that? Well, let’s just assume you don’t have all cash, but you have a good chunk for a down payment. One thing you absolutely need to do is to show a larger down payment than just 20%. It would be better for you to show it on paper so your lender can verify that those funds exist and are available. That is something you need to consider when you’re going into a competitive bidding situation. The less loan you’re seeking, the more financially stable you look, and the less challenge it’s going to be relative to the value of the house. It’s going to look like a more sure deal to the seller.

 

Let’s have an example. Suppose you’re looking at, say, $500,000, and you’re going to buy a house worth $1.5 million. You know you’re over 30% down at that point, and you can absorb appraisal shortfalls. Moreover, you really aren’t getting a huge loan compared to the size or the cost of the house. With all those things combined, it just looks like a sure deal. You start to traipse into that world of the sureness of cash if that makes sense.

 

If there’s one thing that’s really critical to remember, it’s just because you have cash or your competing against cash doesn’t mean you can’t win and prevail over it.

 

For those considering writing an all-cash offer but who want to take advantage of those low, low interest rates, take note: purchase rates are typically better than refinance rates. This is especially true when you’re doing a cash-out refinance. The underwriting criteria are different. They look at them differently. You’re not going to get quite as good of a rate from a refinancing as you would for a purchase. As to the reason behind this, it’s better to talk to a lender, but it’s something that I know from experience. Having done this personally and for many clients, the refinance rates are never quite as good as the purchase rates.

 

Now, if you’re considering leveraging your cash, and using it to buy a house, do note that there might be a bit of an opportunity cost to do so. You might have to pay a little bit of a premium on the rate. Or you might have to consider doing a longer escrow and trying to get some loan involved with your cash. I see this fairly regularly where people write a 21-day close on an all-cash offer. What that really signals is they couldn’t do cash. They’re actually going to get a loan and get this closed in three weeks. So if you’re one of those people, that is something to note. You can leverage the power of the cash but not actually have to use all of it. That may be a strategy worth exploring with your financial advisor, lender, and your agent.

 

In addition, make sure you consider the opportunity cost of the difference in rate and the value of that cash in the house versus an investment or whatever you’re going to do with it.

 

Think through that very seriously. It’s one thing to win, and it’s another thing to have the house for a long time and be set up financially to succeed after you close.

 

Consider how long you expect to be in this house.

 

Lastly, one other consideration is how long do you expect to be in the house? Make sure you consider how long you intend to be there.

 

If you’re only planning on being there for three to five years, financing and paying all the interest and points upfront may not make sense. It is because it may not amortize well over the course of the loan. In this case, you may want to put your cash in there. You may also want to use your cash if you feel good about where the market is going or the price you’re buying it at, then sell it in three years, pull it out, and go on to the next thing.

 

However, if you’re sure you’re going to be there 10 or 15 or 20 years, it may make more sense to get a cheap mortgage and use your cash to leverage yourself into the lowest interest rate you possibly can. So seriously consider that before you make that purchasing decision. Even just five to 10 minutes of thought and conversation will already help you make a better decision.

I hope my tips on making a cash offer when it's you're a first time homebuyer has helped you.

If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below. 

Here’s to all your success!

Best,

Hans Struzyna

Buying your first home—should you make a cash offer?

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