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You’ve likely heard the phrase “cash is king” and that certainly applies to the real estate market. Almost a third of all home purchases were made via cash offer in early 2021, according to Redfin.
What Is A Cash Offer?
Before we delve into this topic, it’s helpful to understand what exactly a cash offer is and how it sets a buyer apart. A cash offer is one made with the funds on hand. The buyer won’t don’t need any financing because they don’t require a mortgage.
How Does The Home Buying Process Differ With A Cash Offer On A House?
For the seller, accepting a cash offer or a financed offer doesn’t have much material difference. They’ll be paid at the end of the sale regardless. However, cash offers set a buyer apart because the home buying process is typically expedited for cash buyers. For example, cash buyers don’t need to go through the financing process which allows them to skip the mortgage application, documentation, underwriting, and appraisal.
When it comes to cash sales, there are typically fewer contingencies, which are certain conditions that must be met by either the buyer or the seller in order to move forward with the sale. Cash buyers can skip the financing contingency, as they aren’t using a mortgage loan.
Cash buyers can often skip appraisals, as well. Those are typically required by lenders, so a buyer using all cash will be exempt from this step. The closing process is also more efficient without financing. That’s because the paperwork load is lighter and closing costs may be more reasonable because there aren’t any lender fees.
How to Beat a Cash Offer on a House
Now that you understand what a cash sale involves you can begin to develop a strategy to navigate the competitive landscape. No doubt this trend made purchasing a home out of reach for home buyers who needed to finance the purchase. But that doesn’t mean buyers in this situation are out of luck. There are still ways to compete and help you beat out the competition:
1. Get Approved for your Mortgage
Getting mortgage pre-approval before you try to make an offer is highly recommended. Many mortgage lenders extend fully underwritten preapprovals. This means they’ve pulled your credit and reviewed your finances. You can consider it a green light to pursue a mortgage loan, except you haven’t found a house just yet.
You can get pre-approved by completing a mortgage loan application. The lender will check your credit with the three major credit bureaus and ask for various forms of paperwork to review your income and assets.
With a pre-approval, you can potentially earn the seller's confidence. That’s because they know you’re a safe bet to buy their house.
2. Waive Contingencies
The more seamless you can make the transaction for the home seller, the better. Waiving contingencies is one of the best ways to get on the seller’s good side.
This might mean waiving your:
Financing contingency: In effect, you wouldn’t be able to back out of the deal if your mortgage loan falls through.
Sale contingency: This one applies to current homeowners and states that you must sell your existing home before following through with the purchase. (It’s also one of the least attractive contingencies for sellers)
Appraisal contingency: This allows you to back out or renegotiate if your appraisal comes in low. However, a word of caution: Not every contingency should be waived. Know that most experts will advise you to introduce an inspection contingency — no matter the temperature of the market.
Waiving an inspection could result in not detecting significant underlying issues on the property and in most cases, it doesn’t really impact your chances.
It’s best to consult your agent about the pros and cons of waiving contingencies if you’re considering this.
3. Increase your Earnest Money Deposit
Think of earnest money as a good faith deposit. It reserves your right to buy the home, and if the deal falls through on your end, the seller gets to keep it.
If you really want your offer to stand out, increasing your earnest money deposit is prudent. It shows the seller that you’re serious about buying their house and that you’re willing to fork over your hard-earned dollars on it.
4. Offer Above Asking Price
It’s not usual for cash buyers to put up lower-than-asking-price offers because they have the upper hand. If you’re up against a cash buyer that’s got this trick up their sleeve, going above and beyond the listing price may be your saving grace.
One strategy is to include an escalation clause, which increases your offer automatically if someone outbids you (up to a pre-determined amount, of course).
5. Include an Appraisal Gap Guarantee
Nowadays it’s pretty common for appraisals to come in low. This can trigger anxiety on the part of the seller, as they don’t want you pulling out of the deal if the home’s appraised low.
To address these fears, you might consider adding an appraisal gap guarantee to your offer. This communicates to the seller that you’ll cover any shortfall between the bid and the appraised value.
This is typically only an option if you have some extra cash on hand above and beyond the down payment. Covering an appraisal gap would mean paying extra above and beyond the money you’re putting down with your lender.
6. Schedule an Inspection Quickly
A quick home inspection shows that you’re not wasting anyone’s time. Try to do this within the first days of having your offer accepted to show the seller you’re wanting to make the transaction seamless.
7. Offer to Pay Closing Costs
While saving the seller a few thousand dollars might seem insignificant compared to the hundreds of thousands of buyers are paying for the house, such a tactic can be a means to appeal to money-conscious sellers.
The Bottom Line
Cash buyers might be more common in today’s housing market, but that doesn't mean you can’t get the buyer to favor your offer over another. It’s all about being an informed buyer. Talk with your agent, get an underwritten preapproval from a mortgage lender, and know which cards to play.