Cash is King!

Cash is King

For home buyers who need to finance their purchase using a mortgage, a cash buyer can be their worst enemy.

That’s because when a buyer makes a cash offer, the seller knows it’s a solid deal—and that financing hiccups won’t delay a closing. Sometimes, that’s enough for the seller to accept a lower bid for a cash deal instead of a higher bid from a financing buyer.

It just recently happened to a client of mine.   Against a cash buyer, the financing borrower just couldn’t compete against my cash buyer.

We were wringing our hands over this because the offer that came in on this property was not cash, and we were quite a bit lower than the offer.  The winning bid was ours for $370,000; the other buyer's offer was $395,000 and contingent on financing.

It’s a scenario that is becoming more common with the number of cash buyers on the rise, swooping in for deals on low-priced properties. Yet while cash is king, there are some things financing buyers can do to better their chances of having an offer accepted.

Perhaps the most important tip: “The smartest thing they can do is make sure they talk to a competent mortgage banker … to preapprove them ahead of time."

Also, remember that the more cash you’re willing to put down, the more secure your job and the better your credit, the better off you will be in getting the seller to accept your bid, he says.

In February, all-cash deals made up 33 percent of all home sales—a record high, according to the National Association of Realtors. In 2010, 59 percent of those who bought a home as an investment paid cash for the home, the group found.

People are plunking down cash on properties for a variety of reasons. One popular one: With low housing prices, some people are pulling their money out of the stock market and investing in rental properties, with a plan to own them long term.

That way, their money is being put to work in what seems to be a bottoming housing market. You can buy these things cheap enough and with a small amount of renovation … the rents pay the mortgage.

Some parents may be providing the cash to help their children buy homes, at a time when financing can be out of reach for young adults.

Instead of applying for a loan from a bank, the kids make their payments to the Bank of Mom and Dad. Meanwhile, the parents can charge 5 percent to 6 percent interest on the loan—earning them more than they’d get on a safe investment such as a certificate of deposit.

Cash offers often win out when the bank is the seller. Those are most likely foreclosures now back on the lender’s books.

When dealing with a bank, remember that lenders are typically more analytical than a homeowner seller. And for an institution, they’re more apt to go with the safest bet.

Time is money, and taxes are ticking away on (the house). They want to get the bad loan off their books quicker and the money on their ledgers. Someone with cash on hand theoretically could close immediately, while a buyer who needs a mortgage typically drafts a contract contingent on the financing going through.

A typical home seller with equity is less likely to be motivated by a cash buyer, says Donna Knudsen, a mortgage loan originator with Cobalt Financial Corp.

“When you have an equity seller, they don’t have to take a low-ball cash offer,” she says. Instead, they’ll most likely opt for the best and highest offer, since they may not be as motivated by time, she adds.

To compete with a cash buyer, you’ll need a bit of strategy.

First, get prequalified—or better yet, preapproved—for a mortgage. Along with a high down payment, preparing to put down a high deposit could also up your chances of beating out a buyer who is bidding with all cash, he says.

Another tip: To beat the deep pockets, you might have to act quickly.

What I found out is with these cash buyers, they act quickly. To compete, you have to act quickly. A lot of times, these are investors and they have a relationship with these listing agents. It’s a good idea for the buyer’s agent—or the buyer if he’s representing himself—to develop a rapport with the listing real-estate agent too.

Before writing the offer, your agent—or you, if you’re representing yourself — should do some sleuthing: If possible, figure out what the seller needs, including shorter or longer settlement time. In some cases, your flexibility will be a bonus for the seller..

It’s also important to ask if there are other offers and if any of them are cash. In my experience, a well-prepared contract that is typed out, plus a cover page summary of the contract details, is another way to show you’re serious.

Finally, have patience. If you’re interested in bidding on bargain homes including foreclosures, you might end up looking at 40 different properties and make seven or eight offers before you get one accepted. You have to be willing to do whatever it takes.

And remember, cash deals can fall apart too.

Is it $300,000 in green cash in someone’s bank account? Or are they tapping into their 401(k), are they going to be cashing in CDs, are they going to take cash out of another property?  If investments need to be liquidated for the purchase, that can also put the deal at risk.

Sometimes cash isn’t really cash, especially if the buyer is utilizing a hard money loan or liquidating assets to consummate the purchase.