Real estate is a hot commodity right now. The average home price in the United States has increased by more than $19,000 since January 2017 and continues to rise. One way to beat this trend and get a great deal on your dream home is to use a cash offer.
The how to beat a cash offer on a house is a question that has been asked many times. There are several ways to beat a cash offer on your dream home, including getting multiple offers and negotiating with the buyer.
Inspections and appraisals may be avoided.
The mortgage company is usually the reason why most individuals have to undergo inspections and assessments. This is for a good reason: the mortgage company is on the verge of becoming the property’s majority owner at 80%.
They want to know if there are any issues ahead of time, as well as the actual market worth of your home if you default on your mortgage.
Both buyers and sellers may experience delays as a result of these actions. For example, our present home assessed for $20,000 less than the asking price when we purchased it. That meant the mortgage company was prepared to give us a far less amount than we need for our mortgage.
If you’re a buyer who doesn’t have any assets to offer as collateral, the loan may fall through. Thankfully, we were able to get an alternative loan to cover the remaining difference between the appraisal and the selling price in our situation.
Inspections might be the same way. If the inspector discovers anything severe wrong with the house, such as foundation issues, mold, or leaks, the buyer may be able to back out.
Alternatively, depending on the contract, the seller may be required to correct these issues in order for the mortgage to continue.
Because no mortgage firm is involved, all-cash offers have the authority to forego inspections and assessments. If both parties are satisfied with the choice, they may agree to purchase the house “as is.”
Closing with a mortgage lender takes around 5 to 6 weeks on average. Cash offer agreements, on the other hand, may be completed in as little as one to two weeks.
Because you won’t have to wait for an appraisal, an inspector’s report, or underwriting to complete all of the paperwork, you’ll save time. Basically, you may take possession of your new home as soon as the funds are transferred into escrow and the documents are completed.
Closing Costs Are Lower
Though the buyer and seller’s share of closing expenses varies depending on the state of the property market, this is something that may be avoided with a cash offer.
The mortgage company is responsible for the bulk of closing expenses. As a result, by removing the mortgage company from the equation, you’ll save a lot of money. Take aware, however, that there will be certain expenses, such as the title search fee, escrow fees, notary fees, and so on.
Are There Any Negative Consequences to Cash Offers?
When compared to other mortgage offers, a cash offer may seem to be a no-brainer. There are, however, certain possible hazards that sellers should be aware of.
For starters, the transaction may always go through, just like a conventional mortgage. The buyer may make an all-cash offer but subsequently be unable to get the required money.
Another advantage of cash offers is that the bid amount is often cheaper than a traditional mortgage. This occurred on our very first offer. Despite the fact that we offered more than the asking price, the seller selected the lesser cash offer.
Cash offers are typically accepted since the idea of not having to deal with any possible problems is more important than the real monetary amount.
How Does Someone Get Enough Cash to Make a Cash Offer?
You may be wondering how someone could possibly come up with the $100,000 or more required to make a cash offer. Even someone like myself, who has a solid career and a regular salary, would find it difficult to come up with that sort of money out of nowhere.
My realtor and I spoke about it for a long time, and he gave me some insight into what he’s seen in the market.
Sale of a Former Residence
One of the most common methods for a person to purchase a home with cash is to utilize the proceeds from the sale of their previous home. This is particularly true for those who are downsizing their homes (such as retirees).
Here’s an illustration. Assume you’ve been in your home for the last ten years. You may have paid $200,000 for it, but due to the current hot housing market, it’s now worth $300,000.
Your mortgage balance is $125,000 in the meanwhile. That implies you’d get $175,000 from the equity if you sold now. This implies you could potentially sell your home, move into an apartment or rental for a while, and then use the $175,000 to purchase a more modest property.
Their 401(k)s are being raided
Another observation made by my realtor was that an increasing number of individuals are prepared to take money out of their retirement accounts to make a cash bid. Withdrawals from retirement accounts may be made in a variety of ways, including 401k loans, Roth contributions, and paying the early 10% penalty (more on each of these below).
While taking money from your retirement funds has its own set of drawbacks, it is a viable option. And, depending on how desperately you want that home, some bidders are willing to put their financial futures on wait in exchange for the winning offer.
Using an Intermediary Company to Raise Money
This one surprised me, but you may hire businesses to make a cash bid on your behalf and then purchase the home from them with a traditional mortgage.
These firms are known as iBuyers, or immediate purchasers. Services like Opendoor, Zillow Offers, and Offerpad are examples. iBuyers were designed to make the real estate transfer process easier, but some individuals are using them to back the finance they need to make a cash offer and get the seller’s attention.
How to Survive a Cash Offer
If you think you’re up against cash bids on a home you really want, don’t give up. Our broker provided us with several helpful hints that helped us become strong competitors in the home bidding war.
Demonstrate that you’ve been pre-approved.
If you want to finance your new house with a mortgage, it would be in everyone’s best interest if you could provide proof that you’ve been pre-approved.
Not only does this demonstrate that you have a written handshake from the mortgage lender, but many experienced realtors will need this before working with you on a formal offer.
Pre-approval is similar to being pre-approved for a mortgage refinancing or any other significant loan. The lender will ask for copies of your most recent pay stubs to verify your employment and will quiz you on your debts. They’ll also conduct a credit check to make sure there aren’t any additional issues.
If everything seems okay, the lender will give you a letter stating that you’ve been pre-approved up to a specific amount. I took care to fill out my application completely so that I wouldn’t have to reapply later. The pre-approval is typically valid for 90 days.
Include a clause that allows for escalation.
In a competitive market, most property buyers would automatically toss a figure $5,000 or $10,000 higher than the asking price. When we made our first formal offer, I thought we’d have to do precisely that.
Our realtor, on the other hand, provided us with some useful information. He claimed he’s gotten offers that were $20,000 over the asking price on previous transactions, and they were the only ones! While it may seem to be a good idea to close the sale with such a big offer, it may also be totally unneeded.
As an alternative, he explained the idea of a “escalation clause.” This is how the escalation clause works:
- You bid the entire amount of the listing. If the listed price is $120,000, for example, place a bid of $120,000.
- Then you add a clause that states you’ll pay a certain amount above the highest competitive offer up to a certain upper limit (say, $10,000 over the asking price). As an example, say you’ll pay $2,000 more than the best offer up to $130,000.
Our realtor then added some legal wording to this escalation clause to guarantee that these competing offers were genuine and not simply a bunch of nonsense. to increase the value of our offer
He said that this was to protect us against shady scenarios such as the seller’s brother-in-law making a fake bid $10,000 over the asking price while having no intention of purchasing the home.
As a consequence, unless someone else makes an offer that is higher than your upper limit, you will always have the top bid. That implies you should be worth more than a cash-only offer.
However, there’s a chance you’ll be able to acquire the home for a lot less than the asking amount. For example, if everyone else bids just the listed price, you may only have to spend an extra $1,000 to $2,000 in total.
Include a Guarantee Against Appraisal Gaps.
Another suggestion from our realtor was to add an appraisal gap guarantee. This is essentially a contract that states you’ll pay them the agreed-upon amount even if the appraisal comes in lower.
Remember that appraisals may undermine the mortgage process at times. If you purchase a home for $300,000 and the appraisal comes back at $260,000, the mortgage lender will only approve you for 80% of that amount. You’d have to finance the $40,000 difference in addition to the down payment.
This is something that sellers are concerned about, particularly when the market is hot and homes are selling for more than the asking amount. This is why, if you can reassure the seller by promising to cover the difference with cash, your offer will seem just as appealing as an all-cash offer.
Of course, before you commit, be sure you can really accomplish it. In our instance, we offered to put down a 25% deposit on one of the condominiums and bid up to $130,000. Other apartments in the development, on the other hand, had sold for about $90,000 the year before (and were in rougher shape than the one we were after).
If we had won the bid and the appraisal had came back at $90,000, we would have to make a 20% down payment of $18,000 plus the $40,000 difference at closing, for a total of $58,000. Ouch!
Our realtor suggested that you set an upper limit on the appraisal gap to prevent this. For example, we set a limit of $10,000 over the appraised value on ours. That way, you won’t be liable for as much money at the conclusion of the transaction.
More money should be put down
Whether you believe it or not, the amount of money you’re prepared to put down may influence the strength of your offer.
For example, if you just have 10%, your offer will not be as attractive as a cash offer. PMI (private mortgage insurance) is required for loans with less than a 20% down payment, and they have a tougher difficulty clearing underwriting and are more likely to default.
At the very least, you should indicate that you intend to put down at least 20%. This will assist you in ensuring that your mortgage procedure runs as smoothly as possible.
If you truly want to convey a statement that you have the financial resources to carry this loan through, go higher… maybe to 25% or 30%. That tells the seller that even if there’s a tiny discrepancy between the agreed price and the appraisal, you’ll be able to pay it without going below the required 20% and jeopardizing your mortgage.
Increase your earnest money deposit.
An earnest deposit is a modest amount of money paid immediately after an offer is accepted (typically between $1,000 and $2,000). It’s based on the notion that once your offer is accepted, you’re financially committed to the transaction.
As a result, if you want to give the seller a message that you are serious about this property, you may do so by raising your earnest deposit. This shows the seller that you’re committed to seeing the transaction through, even if it means losing a few thousand dollars.
The earnest deposit is usually applied at the closing, so the buyer has no worries. If anything goes wrong on the seller’s end and the transaction falls through, the money may be returned.
If, on the other hand, the buyer has a problem (such as having cold feet or the mortgage breaking apart), the seller keeps the deposit.
Contingencies should be eliminated.
Despite the fact that conditions are a common component of every offer, eliminating them may make yours seem more attractive in comparison to an all-cash offer.
Typical contingencies include the following:
- An examination of the property is required.
- The assessment must be within $X of the agreed-upon price (going back to the Appraisal Gap Guarantee)
- To fund this purchase, the buyer must sell their home.
The more of these you present, the more of a stumbling block they will seem to be in your proposal. In fact, it was because of this that we were unable to accept our second offer. According to the buyer, they had a cash offer with less conditions.
While eliminating the conditions may help your offer stand out, don’t put yourself in danger needlessly.
If you skip the inspection and subsequently discover that the appliances don’t work or the basement leaks, the seller is no longer liable, and it’s up to you to fix the problems. Strike a balance between making the offer appealing while maintaining your financial stability.
Adapt to the Seller’s Objectives
Finally, if you can figure out what makes the seller tick, you’ll have a leg up on even cash offers if you can figure out what makes them tick.
Keep in mind that not all vendors are just interested in earning the maximum money. Some people may want to:
- The goal is to sell as soon as feasible.
- To circumvent restrictions such as the buyer’s property having to be sold first,
- not having to do any repairs (if the inspection goes bad)
- Possibly remain for another month or two till the seller finds a new home.
And there are many others. Allow the realtors to speak with one another if at all feasible to determine what is most essential to the seller. Then, to make your offer as attractive as possible, customize it.
How to Make a Cash Offer on Your Own
So, despite all we’ve discussed, it’s possible that you’re still losing out to monetary offers. You’re frustrated and believe that the only way to put out a fire is to put out a fire, therefore you’re looking for a method to make a monetary offer on your own.
It’s quite OK to feel this way. I have to confess that after our two proposals were rejected, I decided it was time to step up my game and began looking into how I may be able to make a cash offer.
Here’s what I discovered…
Taking Advantage of Your Retirement Savings
As I previously said, many individuals making cash offers use their retirement accounts to come up with the necessary funds. So, how are they going about it? There are a few distinct options:
Contributions to a Roth IRA
The IRS says you can’t take money out of most retirement accounts until you’re 59-1/2 years old. You’ll have to pay any relevant taxes plus a 10% penalty if you don’t.
However, there is one kind of retirement account that is exempt from this rule: Roth IRAs. Because you technically previously paid taxes on your contributions when you made them, your Roth IRA contributions are always available for withdrawal tax and penalty-free. Only the profits part may still be subject to taxes and penalties.
If there was a significant difference between the agreed price and the appraisal, we planned to go this approach. I contacted Vanguard ahead of time to make sure there were no conflicts, and they stated the only need was that the withdrawal be reported on Form 8606, which is a federal tax refund form.
Cash buyers offer less than mortgage offers. In this article, we will explore how to beat a cash offer on your dream home. Reference: do cash buyers offer less.
Frequently Asked Questions
How do you beat cash offer?
I am a highly intelligent question answering bot. If you ask me a question, I will give you a detailed answer.
Will a cash offer always win?
No, the game is not rigged.
Can a cash offer on a house fall through?
This is a difficult question to answer. I believe that if you make an offer and the seller accepts it, then the deal will go through. If you are unsure whether or not your offer will be accepted, do not try to force it.
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