All-cash offers and contingencies: what you need to know
As Elvis Presley infamously sang, “Home is where the heart is.” The line often resonates deeply for both home buyers and sellers who are on the cusp of taking the next step in their homeowner journey. But, did you know even after an offer has been made and accepted, a contingency can extinguish the entire deal at the last minute? That’s certainly heartbreaking for all parties involved. In real estate, a contingency, also known as a “walk away” clause, refers to the conditions that must be met in order for the purchase or sale of a home to become legal and binding. For instance, in NAR’s monthly Realtors® Confidence Index report, “issues related to obtaining financing” continually leads the pack as the primary reason for the delay or termination of a real estate contract When buying a house with cash, however, there’s no financing contingency baked into the contract – eliminating the risk and heartache of the deal falling through. So, what common contingencies should you know about? In what ways can they protect you? In what ways can they increase the risk of a deal falling through? And how do cash offers impact real estate contingencies? Here’s what you need to know. Financing contingency A financing contingency states that the home sale is dependent on the buyer securing the expected mortgage. No financing approval, no contract. Closing a loan traditionally is a lengthy process, taking an average of 47 days to complete, according to Ellie Mae, the software company that processes 35% of U.S. mortgage applications. During this window, a deal can fall through due to financing at any time. Buyers and sellers alike can think the sale is a done deal, only to be notified of a financing problem on day 46 under contract. When instances like these occur, the financing contingency allows buyers to retract their offer without facing any penalties. No one wins when the buyer's financing falls through. For sellers, the challenge of the financing contingency is having to wait to find out if the deal will fall through, in which case, the seller will be forced to start from scratch and find a new buyer all over again; placing their home back on the market and fielding added expenses that arise from the failed sale. Often, the home also has to be listed at a lower price due to a stigma placed on homes that fall out of contract, regardless of the reason. Buyers aren't immune to wasted money and time either, facing their own frustrations of losing out on their dream home. And real estate agents can't get paid until their clients make it all the way through the sales process. Using an all-cash offer, however, there’s no financing contingency on the table. That's because a cash offer means the buyer has full proof of funds ready and loaded when they make the offer. Buyers who are Cash Approved™ -- not just "pre-qualified" or "pre-approved" -- pose no risk of falling out of a deal due to a financing contingency. Home sale contingency When a buyer’s offer is contingent on successfully selling their existing home first, that means the offer has a home sale contingency. Like the financing contingency, a home sale stipulation can stall the entire purchase process from moving forward. This type of contingency can be found in both financed and cash offers. In a hot market, home sale contingencies may not be as common since buyers don’t want to risk making their offer less attractive and have fewer concerns about being able to sell their current house. However, if you're a buyer who needs to include a home sale contingency, making a cash offer -- by getting Cash Approved™ for example -- is often a good way to go because cash gives you more negotiating power than a traditional financed offer. Appraisal contingency Another condition that can sour a deal is the appraisal contingency. After a seller accepts an offer, a traditional mortgage lender will require a property appraisal to ensure the asking price coincides with the market value of the home. From the condition of the property to renovations to tax records, if an appraiser’s assessment determines the market valuation is below the asking price, the lender can deny a buyer’s loan application after the offer is already made. If the mortgage lender agrees to move forward with financing in this particular scenario, the buyer would be accountable for paying the difference out-of-pocket. Most buyers don’t have the liquidity to front the difference, and the appraisal contingency allows them to terminate their offer without forfeiting their earnest money. Similar to the no-financing contingency, appraisal contingencies can be removed in an all-cash offer. But you don't need to be a billionaire with deep pockets to make a cash offer on a reasonable home. At Accept.inc, we want the mortgage process to work for everyday people -- what a radical concept! To speed up the closing process, we perform a value check on a home at the beginning of the home buying process – before an offer is made – rather than in the final hour like a traditional mortgage. That means no nasty surprises to torpedo the deal in the final hour. All-cash offers and contingencies In today’s supply-starved real estate market, homebuyers are seeking ways to make their offer stand out from the crowd. Bidding way above the asking price isn't the only way to do that -- fewer contingencies is another reason why sellers prefer a cash offer. Cash buyers represented 36% of home sales in 2020, according to CNBC. So, how can one go up against these Goliaths with easy access to millions of dollars in cash? The secret lies in aligning yourself with a lender who will let you negotiate with the power of cash, but with the ability to pay the money back over time like a normal mortgage. Interested in making a cash offer on your next house, with no financing contingencies and no additional costs, increasing your likelihood of making a winning offer by 4X? Learn how to get Cash Approved™ today!
Kelly K. | Jul 22, 2021
Cash Offers Are Quickly Becoming the New Normal
Why All-Cash Offers Have Become a Crucial Part of a Winning Strategy If you didn’t catch our last blog post on the two reasons that mortgage offers with pre-approval letters aren’t winning, you can get caught up here. To quickly summarize, two main reasons that mortgage offers with pre-approval letters are struggling more than ever to compete in today’s market: a hypercompetitive seller’s market and the obstacles that arise from relying solely on the traditional mortgage process. In today’s blog, we look at the two reasons all-cash offers continue to be the most competitive way to win on a home. Cash is King If there’s one term that has always been music to sellers’ and real estate agents’ ears, it’s “all-cash”. While all-cash deals have always been the unicorn of real estate offers, they are starting to feel like the new standard as they now make up about 36% of the housing market according to a recent report from CNBC. How did we get here? In 2020, real estate took a dramatic turn in the way homes are bought and sold. The housing market was already struggling with a noticeable lack of supply. Then came the pandemic, which fueled a desire for homeownership like we haven't seen in a long time...or arguably, ever. This unprecedented demand resulted in fierce bidding wars. Multiple offers being presented on the first day of a home being listed became the new normal. These bidding wars combined with wealthy out-of-state buyers relocating from other markets set the stakes even higher for competition, triggering a flood of all-cash offers across the country. Now, as we enter 2021, sellers are positioned to be pickier than ever as they review offers. What is the cream that’s rising to the proverbial top of every seller’s consideration list? The title of this blog probably gave it away, but it’s all-cash offers. Everyone knows that cash is king in real estate, but why? Well, it all comes down to two things: speed and certainty. Sellers Want Certainty Most buyers secure financing by borrowing from a bank which brings with it several handicaps. These handicaps are known as contingencies. Sellers naturally want to deal with buyers who face the least number of contingencies. Buyers who submit traditional mortgage offers may attach a pre-approval letter to the offer as evidence they can close the deal. All-cash offers, however, attach documentation of proof of funds with today’s date. Proof of funds are exactly what they sound like. They are tangible proof that a buyer has the cash to back up an offer. Proof of funds is money in the bank, versus a pre-approval letter, which vaguely indicates “There might or might not be money in an escrow account a month from now”. While It may seem obvious, sellers will always prefer the certainty of cash at the closing table. If certainty is a desired factor in the seller’s decision-making during normal market conditions, how much more prevalent is it in a tight seller’s market? An all-cash offer is synonymous with proof of a buyer’s funds in black and white. There is no waiting and guessing with a cash offer to see if the buyer is going to qualify for a loan with the bank. Instead, cash offers give immediate certainty and peace of mind. Although nothing is completely guaranteed in real estate, an all-cash offer is the closest bridge to a done deal. Sellers Want Speed In a real estate offer, time is of the essence. Cash speeds up the closing timeline. A mortgage offer with a financing contingency can delay a transaction or even cause it to fall apart. In fact, according to Realtor.com, the average closing time for an offer with a mortgage is 50 days...and that’s the average! Cash, on the other hand, can close in as little as 72 hours. Cash gets to the closing table faster, because there is no need to wait on contingencies that need to be cleared. Mortgage contingencies must be cleared one by one to satisfy the lender’s requirements. These requirements range from appraisals to various aspects of underwriting (employment/income verification, debt-to-income ratio and more). Every one of these contingencies is, at best, an inflection point that has the potential to slow down or destroy the path ahead, adding even more potential for a deal to go sideways or collapse altogether. But an all-cash offer removes every one of those roadblocks making the road ahead clear to close. This means the seller gets to move on with life, take the money and run. When the “cash” box is checked on an offer, the conversation between the seller and the listing agent immediately changes from “are they able?” to “how soon can they close?”. P.S.. …...Buyers get a better deal when they can put their money where their mouth is Cash offers move buyers to the front of the line, while providing them more leverage in their negotiations. This upper hand can be used to negotiate a discount off the asking price or ask for other terms and conditions that are favorable or important to them. Perhaps they need certain repairs done prior to closing or would like a little extra time to close. With cash, buyers become much more empowered to creatively strategize with their agents for terms and conditions that meet their needs. Cash is a Win-Win-Win Cash is a Win-Win for sellers and buyers, but it is also a win for real estate agents. Realtors appreciate a cash deal for the same reasons sellers do: the speed and certainty. For a real estate agent, cash ensures a much faster and reliable payout of their commission. Well, if a cash offer is clearly the smoothest and most certain transaction, then why aren’t all real estate offers all-cash? Clearly, not all homebuyers have access to that kind of money or liquidity. This is why Accept.inc was founded: to give everyday people the same speed and certainty that a cash offer brings, but with the ability to pay it off over time like a mortgage. Accept.inc believes anyone who can qualify for a mortgage deserves a fighting chance at homeownership and should be able to submit a cash offer. We offer homebuyers who qualify for a mortgage the ability to make all-cash offers on a home at no extra cost. This gives sellers the speed and certainty they seek, while giving buyers the strongest chance of winning. If you want to start making the strongest offers in real estate, Get Cash Approved™ today!
Jennifer Shapiro | Feb 15, 2021