Cash is king. It’s a phrase that’s become ingrained in the common psyche of business owners everywhere, and for good reason. Cold hard cash never defaults on payments, nor does it trickle in at such a slow pace that you have to dig deep into your personal pocket to maintain everyday operations. Cash can be put to use immediately, making it the default payment option for sellers everywhere (except places where barter is still a thing).
“The shortest distance between two points is a straight line”
Advantages and Disadvantages for the Seller:
The benefits of a cash purchase are abundantly clear for the average homeowner looking to sell their property:
- No time wasted doing financial due diligence. There won’t be a bank involved so nobody needs to look at the buyer’s credit history and personal income to determine if he can afford monthly payments on his shiny new loan.
- Plus, say goodbye to long, drawn out appraisal processes that may or may not work in your favor, leading to a long and tedious overall sale.
- In addition, pesky little fees are mostly no longer applicable – no more closing costs, mortgage origination fees, appraisal fees, or other fees with intentionally complex terminology.
- Furthermore, you won’t deal with nearly as many people backing out on the offer simply because there are less moving parts to the transaction that could potentially go wrong, especially pertaining to financing contingencies where a deal is dependent on factors like the buyer’s job security and personal assets.
- Just about the only negative for the seller is that cash buyers are aware of how attractive the option is and thus, can command a slight discount over other buyers who do not have access to such an option. As a seller, you can reasonably expect to sell your home at a slight discount if the buyer will be paying in all cash
Don't let my smile fool you. I'll get real nasty if you can't close.
With all of these advantages, it’s no surprise that a cash offer will win out if there’s a bidding war over a hot property and all other offers are with conventional mortgage financing. Sellers simply don’t have the time or patience to deal with months of back and forth between the buyer and the bank, they want to sell RIGHT NOW.
Advantages and Disadvantages for the Buyer:
For a buyer, things are not as clear as for the sellers. There are many more factors to consider, with advantages and disadvantages for each option:
- Because your offer is more competitive, you will be able to command a discount over conventional buyers. In this case, the seller’s disadvantage is your strength. Because you can close quicker and without any contingencies to meet, the seller is more likely to consider your offer over a conventional mortgage offer.
- In addition, you will be able to close in days as there is no lender to act as a third party in the transaction. The advantages of this ability to close quickly become more apparent when dealing with sellers who are in some sort of personal distress (typically a foreclosure or a divorce) who only have a couple weeks to sell the property.
- You will truly own your property free and clear, meaning that even if the market takes a turn for the worse, you will still be able to sell, even at a loss, because there is no loan to pay off. Of course, this is made with the assumption that you utilized your own funds in making this cash transaction and not a high interest loan from a loanshark.
- You will not be as leveraged as someone who used financing and only had to use enough cash to fund a down payment on the purchase price. Leverage is when you take on debt in order to increase the potential return on an investment, for example, borrowing $1 million to purchase a commercial apartment building instead of using $250,000 to buy a single family or a duplex. Leverage is a double edged sword, meaning that it is neither good nor bad. It is good if the returns on investment override the costs of borrowing money so much that it beats just slowly investing your own cash with no debt. It is bad if there is a severe market downturn and you owe too much money to sell at a loss, creating a surefire path to bankruptcy. In making a cash purchase, you are choosing to play it safe, meaning that you are insulated by a potential downturn but you also do not take advantage of an upturn as much as an investor who uses the same amount of money to purchase a bigger property by taking on debt.
- If however, you utilize a hard money loan to obtain the necessary cash to close, then none of the “safety” advantages even apply to you, since you likely borrowing the money at a higher rate than a conventional mortgage loan. In fact, your only advantage is that you get to close on deals you normally wouldn’t because of the “cash is king” factor with sellers in a hot market.
How cool would I look if I brought this to closing?
Sample Cash Purchase
Below, we will take a look at a sample cash purchase which will hopefully illustrate how the transaction can be a win-win for all parties involved:
John is a programmer who just landed a dream job at Google. He currently lives in Jersey City and owns his own small, 3 bedroom single family residence, living with his wife and two kids (along with a few pets). Life is good, the garage sale was a success, and the family is excited about the beaches of California and the idea of saying goodbye to winters forever. However, things hit a wall when he tries to sell the property through a broker. Because of the challenges of raising 2 kids in a small environment, there are noticeable defects with the property when you walk in – no major structural issues or anything like that, just weird smells from pets, and minor repairs needed here and there that have tacked on over the years. Because of this, the listing agent recommends that John spend some money to fix up the place before it’s listed, even though he needs to move to California right away and doesn’t have the time or know how to watch a bunch of YouTube videos and try to figure out how to replace a broken tile.
This looked so much easier in the video...
This is where Caroline, a local investor steps into the picture and makes a competitive, all cash offer on John’s house without requiring him to make any repairs or aesthetic improvements. John and his family eagerly accept, free from having to deal with endless property showings, constant back and forth with buyers, approval processes, and other pitfalls of selling the house conventionally through an agent, and are free to enjoy their new life in California.
Meanwhile, Caroline does a complete redesign and renovation of the interior and instead of occupying it herself, converts it into a duplex and charges above market rents to new hip tenants looking to enjoy the career and entertainment opportunities of Manhattan and the affordability of Jersey City. It’s a win-win situation for all parties involved.
To learn more about cash transactions as well as other ways to structure the ideal real estate transaction to help you achieve your personal goals, fill in the “contact us” section here or give us a call at 551-236-3325.
Written by Brandon Lor