Now that real estate is heating up again and inventory is low, more buyers are bidding on houses and some believe offering cash just might give them the inside track. But what if these cash offers are lower than other offers. Is it worth it? It’s a good question and one that needs further exploring.
As with many questions such as this, there really isn’t a right or wrong answer, rather what makes the most sense for you. Key points to consider:
• Do you need to sell quickly because you are moving?
• Are you financially struggling and need the money sooner rather than later?
The answers to these questions should make your decision an obvious one. However, without any extenuating circumstances such as these, it is wise to evaluate the two options closely before pulling the trigger.
The Loan Process: the way it used to be
Let’s take a quick trip down memory lane to give you something to think about. Prior to the banking crisis and market crash in 2008, many banks’ standards for loan approvals were loose (i.e. no income verification loans). Also, house appraisals and inspections were not heavily scrutinized and would generally come in without a hitch. Getting a loan to purchase real estate was just a formality and getting pre-approved was as easy as just signing your name. These types of practices, along with low interest rates, played a big part in the housing boom and eventually the housing bust. Well, the days of easy money are gone!
The Loan Process: today
Purchasing real estate and obtaining a mortgage has changed a great deal since 2008. Obtaining a home loan now is much more difficult. With a bank involved in the process, a typical closing can take 30-60 days in most states because of appraisals, inspections and other contingencies. In addition, even if a buyer is pre-approved, sellers may be wary that the agreement could fall through if the buyer loses their job prior to closing or the bank stops the loan for some unforeseen reason. As with many loans, there is a risk that something could happen to squash the deal.
It is not uncommon for many buyers to believe they have an advantage by offering cash to a seller and eliminating the banks and a longer closing process altogether. Some of the advantages of a cash offer include:
• Closing quickly (can take less than two weeks in some states)
• There is no requirement for appraisals or inspections
For reasons such as these many cash buyers believe they are entitled to a price break. The question for the seller is how much of a price break and whether it is worth it.
Please be aware that if you do accept a cash offer, it is not necessarily a slam dunk. A cash offer could have contingences related to inspections and appraisals if the buyer demands it. Do not forget to ask for proof of funds and never accept a personal check at the closing from a buyer. Acceptance of a bank check or a check from the closing attorney’s trust account is a better alternative.
So what is a seller to do? As I mentioned previously, it depends on your personal situation. After weighing the pros and cons, I believe that whatever offer will give you the most money in your pocket should be the one you take, and more likely than not, that will be the one where there is a loan.
Is it worth closing quickly with less uncertainty for a discount on your asking price? I guess it depends on how much of a discount. At the end of the day, you take a calculated risk by not accepting a cash offer. However, as I told my client’s daughter and my relative, as long as you feel confident in the appraisal and inspection of your property, along with verifying that the buyer is pre-approved for the loan, why take less money?
Remember, the proceeds you receive at the closing are in the same dollars no matter who writes the check- a bank or cash buyer- so why not take the higher amount from the bank? As long as you do your due diligence and understand why you made the decision to accept one offer over the other, you really can’t go wrong.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Rick’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.