What's Better: Buying a House with Cash vs Mortgage?
Kelly K. | Nov 23, 2021
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By Kelly K. on Aug 27, 2021
In the last few years, we've seen already hot real estate markets such as Denver, the California Bay Area, Seattle and others become even more competitive. Not only are homes selling just days after being listed and for way over asking price, but increasingly the winning bids are also "cash offers."
What exactly is a cash offer and what does this trend mean for buyers and sellers?
In this article, we explain the most important things to understand about why and how to buy a house with cash, why sellers prefer these deals, how all-cash offers work, and other frequently asked questions.
What you'll learn:
What is a cash offer?
How common are all-cash offers in real estate?
But wait, how do cash offers work?
What are the benefits of buying a house with cash?
Do you need a real estate agent to make a cash offer?
Are cash offers necessary in 2021?
Traditionally, a cash offer in real estate was one where the homebuyer didn't require a mortgage. Today, a cash offer can be made by a purchaser who has "proof of funds" for the full value of the offer, which means that the offer doesn't depend on them successfully arranging financing after the deal is accepted. That's a subtle, but powerful, distinction.
Many homebuyers hear the term “cash offer” and instantly picture someone incredibly wealthy carrying a briefcase stuffed with neatly bundled hundred-dollar bills. These days, the most common image of a cash buyer is a faceless corporate developer or an investor who intends to make a low bid, flip for a hefty profit, and get out … rinse and repeat. These are not families or individuals who intend to live in the house they buy and be part of the community.
And while there are individuals and institutions out there who have the liquidity to buy a house with cash (minus the 007-style briefcase) -- and many of these buyers are investors and developers -- making an all-cash offer on a house is a strategy that is increasingly accessible to everyday people. This is thanks to a new kind of lender who is turning the traditional (read: old-fashioned) mortgage lending industry on its head.
Making a cash offer on a home only requires that you have cash on hand; and an iLender like Accept.inc will provide proof of funds so you can bid with the power of cash.
Keep reading to learn how it works and why cash can be the factor that makes or breaks your deal.
Many people tend to assume that all-cash home purchases are rare. However, they represent a surprising proportion of property sales – accounting for 36% of home sales according to CNBC.
Others assume that the only people able to make a cash offer on a house are only either extremely wealthy investors or those companies that put out the "We buy houses" signs on the side of the road, whose sole intent is to buy a house for under market rate and flip it.
But increasingly, cash buyers are regular home buyers looking for a leg up in a tight sellers market.
Cash offers are simply offers that don't have an appraisal or a financing contingency, because the buyer already has 100% of the funds available, ready to use on the purchase of the house. That's it.
Everything else about the process is straightforward, with no strange surprises or strings attached.
So how do everyday buyers afford to make a cash offer on a house in an expensive market like Denver, San Francisco, or Washington DC if they aren't sitting on a giant inheritance? The alternative to traditional financing is to work with an iLender like Colorado-based Accept.inc.
We flip the script by doing the underwriting process up front – not after the offer is made and accepted. Accept.inc buyers are Cash ApprovedTM before they make an offer. This is not a pre-qualification or pre-approval -- Cash Approved means the money is already in the bank, guaranteed.
(Once the sale on the house closes, the buyer will then begin to pay back the loan, just as they would have with a traditional mortgage.)
Providing proof of funds upfront is a highly attractive prospect for sellers. The reason? If a potential buyer is unable to secure lender financing – or a mortgage matching the amount they pre-qualified for – the deal is likely to fall through and the seller would be forced to relist their home.
An all-cash offer is a win-win-win scenario for everyone involved -- buyers, sellers and real estate agents.
If you're a buyer, the traditional mortgage process is stressful! It's no picnic for homeowners on the other side of the transaction either. Waiting for the lender to approve the loan AFTER the offer has been submitted and accepted, only for the deal to fall apart because of a financing contingency feels completely backwards.
Here are the main reasons why cash offers are better:
Neither buyers nor sellers want to endure a lengthy, drawn-out closing process. Whether a seller is relocating to accommodate their growing family, an employment opportunity or simply taking the next step in their homeowner journey, they want the same thing: a smooth and speedy sale.
According to Ellie Mae, after an offer is accepted, it takes approximately 47 days for the sale to close. It takes this long to close in part due to the lengthy underwriting process involved in getting a loan through a traditional mortgage lender. An all-cash offer, on the other hand, offers a fast turnaround time, taking an average of 14 days to close.
Cash offers are less likely to fall through. "Issues related to obtaining financing” continuously tops NAR’s Realtors® Confidence Index report as the leading cause of delays or terminations of a potential home sale. So, naturally, sellers want to engage with buyers who provide certainty and the least amount of risk possible.
Buyers who go the traditional mortgage route attach a pre-approval letter to their offer as “assurance” that the deal will close. But don't be fooled. While traditional pre-approvals can be obtained quickly, they don’t provide much in the way of certainty because the lender can still draw out the approval process when they take a deeper look into the borrower's finances or deny the loan outright. There's no such risk with a cash offer.
And Accept.inc offers won't fall through because of an appraisal contingency either. That's because there is no appraisal required after the offer is made. The Accept.inc process includes a value-check before the offer is made, so both sellers and buyers can rest easy knowing the sale is already approved for the amount of the offer.
Just to be crystal clear: an Accept.inc-backed cash offer has no appraisal contingency and no financing contingency. Period.
Because of the reasons listed above, sellers find all-cash bids more attractive. In fact, in a bidding war, a cash offer might beat a higher offer with traditional financing. If you're the buyer, that means you benefit from a hidden cash discount.
In 2021, the average home price in the United States has reached a new all-time high of over $400,0000, according to Statistia. According to the Denver Post, in the summer of 2021 the median home price in Denver reached a record $600,00, up 25% over 2020. Even if the market begins to cool, buying a home in a market like Denver is going to continue to be a big-ticket purchase for the foreseeable future.
Even a small percentage point discount on such a large purchase -- when it comes at no additional cost to you -- is free money, or instant equity, back in your pocket.
“Even if you have the strongest financed offer out there, there is just something about cash that almost always entices the seller”
-Madison Kissel, Compass
While you don’t technically need a real estate agent when buying a house, we don’t recommend doing it without one.
Regardless of whether you're buying with cash or using a traditional home loan, a professional real estate agent brings important knowledge to the table. Agents have the market intelligence and local insights needed to help buyers understand everything from various neighborhoods and school districts to what it takes to write a winning offer.
An agent’s expertise is priceless – especially when it comes to crafting a competitive offer or handling negotiations with a seller. With a purchase worth potentially hundreds of thousands of dollars (or more!), the risk of trying to go it alone won't be worth it.
The great news is that you're in charge. Accept.inc is a lender, not a brokerage, which means we work with you and whichever real estate agent you choose -- this gives you and your agent the flexibility you need to make the best decisions for you.
According to CNN, “In this wild housing market, with 21% fewer homes on the market than last year and demand pushing prices to record highs, the competition for a home is fierce. One thing that can put a potential buyer on the top of the heap is an all-cash offer.”
When given the opportunity to choose between an offer with financing contingencies that could drag on for potentially two months and an all-cash offer, which can close in about 2 weeks, the seller and their agent will be hard pressed to choose the slower and riskier option.
Cash is powerful -- whether that's to gain an edge against competing buyers or to create a more favorable position for negotiating on price or terms. Making a cash offer can increase your chances of making a winning offer by 4X or help you negotiate a lower sale price. If you want to increase the odds of winning your next offer, at a price that works for you, we think making a cash offer on your next house is the right strategy.
"We won the home even though there were multiple offers that were much higher! The seller liked ours the best because of the cash, knowing that we could close faster. My buyers were thrilled after waiting on so many other homes, they had told me they thought they were never going to be able to get a house!
-Clark Hutt, HomeSmart
Our philosophy at Accept.inc is simple: if you can qualify for a mortgage, then you deserve the same opportunity to make a strong offer through the power of cash. To be clear, there are no extra costs involved and you pay off your Accept.inc loan over time, just like a regular home lome. Our mission is to enable a cash offer on every home.
Kelly K. | Nov 23, 2021
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