7 Reasons Why Sellers Like to See Cash Offers (& Learn How To Compete When You Have a Loan)
Cash is King, they say. And for the buyers out there that have loans - let me explain why sellers may chose a cash buyer over a person puchasing with a loan - even if the offer on the home is the priced the same as an offer.
When you pay cash for a home....
1. You don't have to ask for permission from anyone. There is no lender involved, and therefore no appraiser involved.
For a home to get a loan, a bank must hire an appraiser to assess the value of the home. If the appraiser values the offer price higher than the value of the home, you will get a low appraisal. The bank will only give a loan based on the appraised value. When you have a low appraisal, both the buyer and seller have to re-negotiate price to bring it down to the appraised value of the home. Here's more detail on how low appraisals work.
With a cash offer, you aren't asking the bank to give you anything. The home is worth to you what it is worth to you - and you can pay want you want to pay for it.
2. Sellers like cash because they don't have to lower their price. It's already agreed. If the seller takes an offer with a loan, there is always a chance of a low appraisal, which will mean there is chance the seller will have to lower the price of the home.
HOW TO COMPETE WITH A LOAN: One option is to waive a portion of the financing contingency that talks about appraisals. Meaning - whatever the appraisal says the price is, the buyer is willing to pay the difference (which means more cash up front for the buyer - this difference cannot be financed). In this case, the seller may ask for proof that the buyer has more money in the bank to cover the spread. Another option is not to waive the appraisal portion altogether, but rather, have the buyer say they are willing to pay XYZ more dollars to cover a low appraisal, so at least that part of the negotiations is already addressed of in the event of a low appraisal.
3. You have some timing advantages.
You don't have the same restrictions and processes a loan has if you have a cash deal. Many loans take 30 days to close.
Cash can close in less than 2 weeks. If you are a seller that wants to move quickly - it's a very quick process for you.
HOW TO COMPETE WITH A LOAN: Some lenders have products that will get you to the point of underwriting before you put your offer in. Yes, it takes work on the part of the buyer, but you can compete with a quicker close if you do your work ahead of time - and have a really, really good loan officer. Usually you can close in 2 weeks with this type of loan.
4. There is a Lease-back advantage.
If the seller needs to stay in the home after closing, they don't have to worry about a lease-back timeline. Lenders providing loans on an owner occupied loan are only allowed to do a 60-day lease back.
HOW TO COMPETE WITH A LOAN: The good news is, most sellers don't need longer than a 60-day lease back. It's quite rare, unless the home has renters in a long term lease that exceed the 60-day mark. If that's the case you need a different type of loan. Consult with your lender about investment loan options, not an owner occupied loan.
5. It's about what happens to earnest money in the event of a failed deal.
When you have a cash closing, the seller doesn't have the same worries about losing earnest money.
When you purchase a home with a loan, you usually have a financing contingency in place. If for some reason, the lender cannot lend on the home, then per the contract, the earnest money is returned to the buyer. If you have a cash offer and the buyer walks away, the seller will keep the earnest money.
HOW TO COMPETE WITH A LOAN: A recent practice has been to allow the earnest money to be deposited by the seller after mutual acceptance. Of course, if the deal goes south, the seller should only keep the earnest money if the buyer is in default, not the seller. But it's important how this portion of the contract is written. Real estate agents are only supposed to fill in the blanks of contracts that have "boiler plate language" and are created by attorneys. Remember, your real estate agent is not an attorney. There are laws in place that discuss how earnest money is handled. Allowing money to be non-refundable after mutual acceptance is a risk. Earnest money cannot exceed 5% legally, for example. Some real estate agents exceed the 5% and call that additional money something like a non-refundable deposit. I worry that as an industry, there will be lawsuits around this practice.
6. It's easier on the Listing Agent.
When you have a loan, your loan will go through different phases: Loan Application, Loan Processing, Underwriting.
The Listing Agent's job is to protect the seller's interests. When you have a loan, the Listing Agent will worry about the loan being processed properly. The Listing Agent may enact different terms in the contract to verify the buyer's loan application, or they may go so far as to have the buyer waive their financing contingency.
If the buyer has a cash deal, the Listing Agent, on behalf of the seller, doesn't have to worry about this part of the process.
HOW TO COMPETE WITH A LOAN: You can reduce your contract's timelines in the financing contingency. And very importantly, have a competent loan officer that pre-approves the client and has a proven track record of closing on time. Look for someone that offers clear communciation to the listing agent at the time of offer review to discuss how wonderfully the transaction will go, how qualified the clients are, and how quickly they will make it happen. And during the communicate, communicate, communicate. Don't give the listing agent reason to enact clauses in the contract.
7. Sellers don't have to worry about buyers switching lenders.
When you are financing a home, sometimes there are issues with the lender. I had one scenario where the buyer was completely qualified, but the bank did not like the insurance policy of the HOA. The bank would not fund the loan, so the buyer had to get another lender to get the loan done.
Did you know that when you change lenders or change the terms of the loan, you have to get permission from the seller? The seller could say "no" - which would mean earnest money should be refunded to the buyer and the contract terminated.
HOW TO COMPETE WITH A LOAN: The advice from #6 still applies here. But, the biggest thing you can do to prevent this from happenning is being an educated buyer. Understand that in this very competitive market, you have to have all your ducks in a row before you put your offer in. Any time after mutual acceptance is not the time to search for a better rate or different lender. If you change your mind on lenders, you could be getting yourself out of the contract.
Talk through issues with your real estate agent BEFORE you go house hunting. Get pre-approved and be ready to go. This market is extremely challenging, even for the most experienced agents. Work with your agent to give the best offer you are able to give.
Kristin Bushnell is Designated Broker of Bushnell Real Estate Solutions and Co-owner of Bushnell Craft Brewing Company in Redmond, WA. Check out my profile here.
If you are ever interested in chatting about real estate, contact me at firstname.lastname@example.org or call me at 425-559-1355. I'll buy you a beer (or non-alcoholic beverage, if you prefer!), and we can chat about real estate until your heart's content.