In a fluctuating real estate market, buyers and sellers can experience both the pros and cons of a cash offer on a house. Buyers with cash can differentiate themselves from competitors since sellers tend to prefer getting cash-in-hand sooner from a cash sale; however, drawbacks also exist for both parties involved. Discover how a cash sale could benefit you.
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What Is an All-cash Offer?
Most prospective home buyers must take out a mortgage for such an expensive purchase. Buyers can apply for home loans through banks or other mortgage lenders, which may take up to several weeks to complete the underwriting and approval process. If approved, the seller receives the full amount from the lender, and the buyer repays the lender for their loan.
Buying a house with cash vs. a mortgage offers a more direct method of sale. All-cash buyers include individuals who can pay for a house without applying for a loan, and “iBuyers,” or instant buyers, represent firms that make offers fast. Cash buyers commonly seek investment or “fix and flip” properties and can be cash positive if they just sold a house.
The Benefits of Making an All-cash Offer for the Buyer
Buyers can enjoy many benefits of an all-cash offer compared to a traditional mortgage. For those that can afford it, offering cash for a house removes the hassle of making mortgage payments to the lender over multiple years. Additionally, buyers may enjoy faster closing times, reduced closing costs, and tax breaks.
Limited Contingencies
In a traditional mortgage, lenders typically offer funds contingent on buyers meeting certain financial requirements and/or a property’s appraisal results. While most banks only finance mortgages within a specified time frame, once a house is appraised at the expected value, a cash-only purchase mitigates those contingencies.
Less Hassle, Lower Fees
Aside from the hassle of completing paperwork and waiting for approval, buyers locked into a traditional mortgage are on the hook for years to pay back their lender, plus interest and fees. Mortgages commonly require an application, underwriting, processing, administrative, and closing fees, many of which can be reduced or eliminated by paying for your house in cash.
Streamlined Closing
The closing process of a mortgage culminates in the borrower and lender signing the mortgage agreement, effectively starting the loan. Buyers may have to wait a few more days for the funds to be released from Escrow and for the seller to receive their money. Buying a house outright with cash eliminates the waiting time, with funds available for immediate use.
Possible Pricing Benefits
Individuals considering the pros and cons of a cash offer on a house may enjoy cost benefits. While the overall asking price of the house does not change based on the method of payment, cash buyers do not require the same closing costs as lenders. Cash buyers may also avoid additional costs, including mortgage interest and insurance.
Tax Implications
Homeowners are able to deduct the mortgage interest on their taxes when purchasing a home with a loan. When the property is sold, the IRS is concerned with any capital gains acquired from the sale if over a certain threshold. No mortgage interest is involved in an all-cash sale, but capital gains must still be reported. In both transactions, local property taxes are still paid by both parties based on how long the property is owned during the calendar year.
Disadvantages for the Buyer
If buying a house with cash vs. a mortgage offers benefits like faster closing times and less hassle, it also presents some disadvantages, particularly when reviving your cash flow after such a sizable purchase. One should consider the potential long-term effects on their finances when wondering whether they should pay cash for a house.
Money Is Tied up in the House
Buying a house outright with cash means all of your money is tied up in the house, whereas in a traditional mortgage, you would make a down payment for a portion of the cost and repay the rest to the lender over time. Cash buyers have less capital left over for repairs and expenses.
Miss Out on Mortgage Tax Deductions
Mortgage tax deductions offer significant savings for non-cash home buyers. Homeowners can claim an itemized interest deduction for home loan debt of up to $1,000,000; however, since cash buyers do not take out mortgages and have not paid interest, they do not qualify.
Loss of Liquidity
Experts sometimes warn buyers against making cash offers due to “liquidity risk,” which means the value of your house as an asset cannot easily be converted into cash if necessary. Buying a house with cash is a common reason for someone to experience a loss of liquidity or available cash on hand to cover their expenses consistently.
Loss of Diversification
Buying a house for cash can diminish your overall financial portfolio by detracting you from other investments. In addition to owning a home, healthy diversification across investments such as savings, stocks, and bonds can help protect homeowners from bankruptcy and loss of liquidity.
Less Free Cash for Homeownership
The federal government offers financial assistance to homeowners through the U.S. Treasury Department and the Federal Housing Finance Agency; however, cash buyers are typically exempt from federal homeownership assistance, which requires applicants to have a mortgage.
Benefits for the Seller
Like buyers, sellers can also experience a range of pros and cons of a cash offer on a house. Sellers can enjoy perks from a cash sale that do not exist in mortgage-based transactions, including less hassle, faster closing times, and a lower risk of a failed sale.
No Appraisal
In a traditional mortgage agreement, an appraisal is required to ensure the home’s actual value is reflected in the loan amount. Since cash offers do not require a mortgage application or lender involvement, sellers can avoid the hassle of scheduling an appraisal.
No Repairs
Individuals considering buying a house outright with cash often look for fixer-uppers or fix-and-flip prospects. This takes the pressure off of sellers to sink extra money into staging and repairs when they may prefer to sell the property as is.
Faster Closing
Faster closing is among the top benefits of buying a house with cash vs. a mortgage. The mortgage-underwriting process can take 30-60 days, and this is just the first step in eventually receiving your funds as a seller. By contrast, sellers can close on a cash offer in 7-14 days.
Less Risky
Cash offers tend to present a lower financial risk than a traditional mortgage. Sellers are at the mercy of a lender to complete the underwriting process to potentially see funds from a buyer, whereas a cash offer allows for a more direct point of sale between the two parties.
Eliminate the Risk of a Failed Sale
For sellers, a mortgaged sale takes more time than a cash sale and can more easily fall through at any time. Sellers cannot be certain the deal is completed until the individuals are approved by underwriting, which depends on many factors and lending terms that are out of the seller’s control.
Avoid the Negotiating Table
Even the most experienced seller may prefer to avoid the back-and-forth of haggling and fussing over details with buyers. Cash offers allow sellers to avoid the negotiating table by considering firm, reasonable offers in more of a take-it-or-leave-it context.
Reduce Stress
While some steps of selling a house are more stressful than others, accepting a cash offer can reduce the stress of tasks like waiting on approvals, setting appointments, and making repairs. Shifting to a cash model can help sellers focus on making the sale.
No Piles of Paperwork
The paperwork required to sell a house involving a lender includes multiple applications, agreements, and contracts, real estate agents, and appraisers. Cash buyers help cut down on unnecessary paperwork and emphasize the closing documents.
Save on Commission Fees
Real estate agents may take a commission of up to 6% of the selling price of your home to represent you in a transaction with a buyer. By contrast, considering a cash offer may eliminate the need for an agent and thus keep those commission fees in your pocket.
Disadvantages for the Seller
There are many advantages for sellers in a cash transaction, but there are some pitfalls. In exchange for benefits like less hassle and quicker turnaround times, sellers who deal with buyers paying cash may experience disadvantages, including low offers, less competition, and limited curb appeal.
Less Money / Lower Offers
Many individuals looking to buy a house outright with cash are seeking the lowest purchase price to be able to turn a profit. Cash buyers commonly look for undervalued houses that can be purchased quickly, remodeled, and resold, which means a no-nonsense, lowball offer for you.
A Sale is Still Not Guaranteed
Applying for a mortgage to buy a home comes with its own uncertainties; however, cash offers can be equally precarious. Mortgage approvals can fall through, just as events like losing a job or a medical emergency can impact a pending offer made by a cash buyer.
Deduct Repairs & Improvements from Your Price
While a typical seller can cite home repairs and renovations as reasons to increase their asking price, sellers considering cash offers must be willing to deduct such improvements. Plenty of cash buyers are happy to take the home as is, cutting into your bottom line.
You Don’t Get Competing Bidders
Whereas traditional sellers often hire realtors to market their homes to multiple mortgagors, sellers open to cash offers tend to have little to no competition for their sale. Getting the word out may require more effort and result in limited take-it-or-leave-it offers instead of a bidding war.
Do Cash Buyers Have an Advantage?
While a cash offer on a house has pros and cons, cash buyers tend to hold an advantage over traditional buyers using a mortgage. Buying a house with cash vs. a mortgage often leads to faster closing times, lower purchase prices, and less hassle. A cash offer is also typically very attractive to sellers and can help set you apart from the competition.
Among the top benefits of buying a house outright with cash is avoiding a mortgage altogether. Buyers who go the traditional route can wait weeks to find out if their application is approved by underwriting, delaying the closing process. Cash buyers enjoy faster, more direct transactions, often for a lower cost than a mortgage, without unnecessary hassles like appraisals and negotiations.