When buying a home, you may have heard the term “paying cash.” While this can mean paying for a home outright without a mortgage, it can also mean you already have the green light from your mortgage provider.
Either way, there’s no waiting period after an offer is accepted. As a result, cash purchases have soared since the 2008 housing crisis, with an average of 20% of transactions now paid in cash.
Let’s take a look at how to negotiate buying a house with cash and whether you should pay cash at all.
What is a Cash Offer on a Home?
Paying cash means the funds used to pay for the home are already available and there’s no need to secure a home loan. Negotiating a cash offer on a home gives many buyers an inherent advantage, especially in competitive markets and where the proportion of cash buyers is low.
Cash offers enable sales to be wrapped up quickly, which is beneficial for both the buyer and the seller. As mentioned above, non-cash offers need to engage a mortgage lender after agreeing to a sale, which can take several weeks to finalize the transaction.
Should You Buy a Home in Cash?
There are many reasons why making a cash offer on a home is beneficial for both the buyer and seller. However, it’s also important to be aware of the drawbacks of making a cash offer on a house.
Negotiating Power – Negotiating a cash offer on a home is more effective because it gives the seller certainty of your ability to fund the purchase without any hiccups.
No Mortgage – By paying cash, you don’t have to secure a loan and pay interest over its duration. This is a huge long term advantage.
No-Risk – Thousands of sales fall apart after going into contract due to the buyer’s inability to secure financing. With cash, there’s little risk.
Liquidity – Allocating a large chunk of your savings to a cash purchase may largely reduce your cash reserves and liquidity.
Lower Returns – Using up your cash for a home purchase could prevent you from investing in other opportunities with potentially greater returns.
Mortgage Interest – When you take out a fixed mortgage, you’ll end up paying thousands of dollars in interest over time.
How to Make a Cash Offer on a House
If you are set on negotiating a home purchase in cash, you may be wondering how it works. Unfortunately, there are plenty of pitfalls you need to be aware of.
Follow this step-by-step guide to successfully negotiate a cash offer on a home.
Step One – Decide on Your Offer
Making a cash offer on a house is a balancing act. You don’t want to offer too little and lose the home to another buyer, yet you don’t want to pay over what the home is worth.
How much can you negotiate on a house?
Deciding what offer to place depends on the market and the desirability of the home. This is where the value of a qualified real estate expert like our Reali agents comes in handy. They know the market and can advise you on how to negotiate buying a house with cash.
Step Two – Show Proof of Funds
Submitting proof of funds is a crucial step when purchasing a home for cash. While not legally required, it’s highly recommended because it proves you’re a serious buyer. In essence, you offer the seller certainty of financial ability to purchase the property.
Cash buyers are advised to show a bank statement, whereas mortgage buyers can present a pre-approval letter.
Here’s a top tip: When showing a bank statement, put the money in a separate account. For example, if you show a seller a bank balance of $1 million on a home worth $250,000, they will know you have space to increase your offer.
Step Three – Determine a Closing Date
Depending on your location, closing dates can vary between 10 to 15 days. Shorter closing dates are far more attractive to sellers and may help you outcompete other buyers who may require 30-45 days to secure a loan.
Step Four – Understand Contingencies
Contingencies are written into an offer and detail the circumstances in which you can legally back out of a deal without suffering any penalties. There are three major types you should be aware of:
The inspection contingency enables prospective buyers to conduct any inspections or other forms of due diligence for a certain period after going into contract. The average time is around 10 days, but markets can differ.
Before this period elapses, buyers may rescind an offer without any penalties. In many cases, if there’s something wrong with the house, the buyer may rescind, reduce their offer or ask the seller to make any necessary repairs.
A financing contingency is a common contingency found in real estate contracts. Such a contingency states that the final purchase is dependent on securing financing by a certain date. If the buyer fails to show proof of conditional loan approval, they can legally withdraw from the contract. This type of contingency is not part of a cash transaction.
Appraisal contingencies prevent buyers from overpaying for a home. For example, this contingency stipulates that if the appraisal price comes in lower than the purchase price, the buyer can back out of the deal.
Step Five – Send Your Earnest Deposit
Upon going into contract, a buyer will send an earnest deposit between 1%-2% of the purchase price to a title or escrow company. This earnest deposit will go toward the home’s purchase price and demonstrates to the seller that you’re serious. If you back out without a contractual “out,” the seller can legally keep your deposit.
Earnest deposits vary wildly. Hotter markets will typically come with bigger earnest deposits. Consult with a real estate professional at Reali to determine the average earnest deposit for a home in your target area.
Step Six – Negotiate the Final Price
As you negotiate the final sales price with the seller, be sure to discuss any repairs and buyer concessions. However, if your heart is set on the home, try not to get too picky with your negotiations as it could sometimes kill the deal. Finally, be willing to walk away when dealing with an inflexible seller. It’s better to lose out on a home purchase than to overpay.
Tips for Negotiating a Home Purchase
When negotiating a home purchase, it’s important to do so wisely. It’s important for buyers to do their homework to prevent overpaying for a property. Here are some of our top tips for making a cash offer on a house.
Do Your Research
Research your local market before you start making any offers. It’s important to be armed with as much knowledge as possible. By taking the time to understand the ebb and flow of the real estate market, you can negotiate from a position of strength.
Start With a Lower Offer
When you’re starting out, placing a low offer isn’t always a bad idea. In fact, some sellers expect a negotiation and overprice their homes from the start. Plus, you’ll get some experience in the process.
Ask the Seller to Pay Closing Costs
If you find yourself at odds with a seller over the final price, consider requesting for them to pay closing costs. This can alleviate tension and, psychologically, make the seller feel like they’ve won because they got their asking price.
Choose a Shorter Closing Date
The advantage of making a cash offer on a home is speed. Leverage that speed by offering a shorter closing date in exchange for a lower price.
If another cash buyer needs 60 days to complete the purchase and you can fund cash in 15 days or less, the seller will often opt for the shorter time frame. This will speed up the sale and allow them to move on with their lives.
Be Willing to Walk Away
Showing your willingness to move on can motivate sellers to drop their prices, particularly if they’re having a hard time selling. If you’re buying your first home, avoid overpaying by not getting caught up in the excitement of purchasing a property. Stay diligent and stick to your budget even if a place appears to look like your dream home.
Reali Can Help
Now that you know how to negotiate a home purchase, it’s important to engage a professional to help you get the best price. Using a knowledgeable local agent can help you save thousands on the sale price and associated closing costs. Contact Reali to learn more about the home buying process, paying in cash, and the current state of your local market.