Suppose I’m selling my house for $800k in California. I have a buyer with a traditional financing arrangement (30 year loan) and a cash buyer. As the seller, I get my money regardless of whether a bank pays me or an individual cash buyer. Why do people get excited over the cash buyer?
In: Economics
Cause the cash buyer has all the money ready to go. They don’t have to then go ask the bank for the money.
That’s an extra step that could go wrong. The bank might decide they don’t like the house or think it’s worth that much. It might take a long time and leave you tied up. There’s a number of things that could go wrong.
Cash is just easy. Why risk the headache when you can just get your money now?
Answer: mortgages can be revoked/fall through. Someone with cash is seen as more attractive as they can literally fork over the cash.
Cash buyers don’t need to go through the steps with a bank or underwriter. They can just come in and buy what they want without any fuss.
After an offer contract is signed for a house, the buyer and seller goes into an escrow period before the deal closes. If a buyer is getting a mortgage to pay for the house, they have to provide the proper paperwork to get the loan and have it approved in the escrow period. If this fails, the seller has lost time dealing with this buyer and has to put the house back on the market. The seller does get the earnest money that the buyer puts down in cash to start the offer contract but you can’t get that time back especially if the housing market changes.
For a cash offer, the buyer can directly transfer the money instead of going through a mortgage lender. There is less risk of any issues for finance portion of the housing purchase.
Real estate contracts do not become firm until a few things happen:
1. A time period for inspections, attorney review, etc passes. This is usually a few weeks.
2. The financing deadline. This is usually one month or more. If the buyer does not get financing, the buyer can just break the contract and walk away from the deal with no penalty. If a buyer wants to walk away, he can usually manipulate it so the financing falls through and he walks away.
In a cash deal, there is no financing contingency. The contract is a sure thing.
In addition to the previous comments about appraisals, etc., another consideration is that many mortgages won’t loan money on a house that is missing certain things.. floor coverings, an exterior A/c unit, even a missing faucet could derail the mortgage process.
The house we bought could not qualify for most mortgages. It was in great shape, but one of the A/C units had been stolen. House was bank-owned and the bank’s policy was they couldn’t do “renovations”, just maintenance on the house.
We came with cash 30% under their asking price (which was already about 25% under market) and they accepted.
We are now sitting on a house that is worth 3.5x what we paid for it, after only replacing the unit, doing some painting and remodeling a bathroom.
Bonus ELI5: Why use the word “cash” for this? In my world (and in my native non-English language), cash means physical money only. As in, the buyer handing over like a briefcase filled with money.
Cash buyers are guaranteed to close since they don’t need to get final approval from a mortgage lender. They can also close more quickly since they have the cash on hand rather than waiting for the 30-45 day underwriting period.
Once the original offer is made in cash the only thing that could go wrong that is not in the control of the buyer or the seller is the title search during escrow.
After the title clears all that is left is negotiating the inspection repairs that were recommended.
With an offer that has loan contingencies, or a contingency that the buyer’s existing property close on time to close the current deal, there is a lot more that can go wrong. You are hoping the buyer’s loan funds, and you are also hoping HIS buyer’s loan funds. You are also hoping your buyer has clear title . . .
Cash is so much easier.
I sold my house to a cash buyer last year, the signing took about five minutes, it was so quick and nice.
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