1/3 of homebuyers in the US have paid for their entire home in cash. Here are the do’s and don’ts of competing with cash offers

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It’s tough trying to compete with an all-cash offer, but these tips can help.

Key points

  • Many buyers pay cash for their homes.
  • Sellers sometimes prefer cash offers because it can make the process easier.
  • Those who don’t have a lot of money to deposit can still make a competitive offer by getting pre-approved and including a valuation gap guarantee.

Buying a house with cash has become increasingly common. In fact, according to Redfin, nearly a third of US homebuyers who purchased properties in July 2022 paid cash for the transaction. This is close to the record reached in February this year.

If you don’t have hundreds of thousands of dollars to invest in a property, this stat might frustrate you. It can be difficult to compete with a cash buyer. Sellers often prefer to work with someone who doesn’t have to secure financing. Cash buyers can often close on a more flexible schedule since they don’t have to wait for mortgage approval. And there’s less chance of the deal falling through due to home loan qualification issues.

But just because so many people pay cash doesn’t mean you’ll automatically lose a property if you can’t. You can always make a competitive offer – you have to be smart about it.

These are the “backs” of competition with cash offers

Here are the best ways to successfully compete with an all-cash offer to buy a property:

  • Get pre-approved for a home loan: Being pre-approved gives the seller more confidence that you will be able to close the deal. It also allows you to get a mortgage faster, which can be a big plus for sellers. This involves submitting financial details to a mortgage lender and obtaining preliminary loan approval. You’ll receive a letter from the bank that you can submit with your offer so sellers know you’ve reached this key milestone.
  • Make a larger deposit: If you can put down more money as an earnest money deposit, it can also convince a seller to work with you even if you’re not making an all-cash offer. This shows that you are serious about pursuing the transaction and can reassure a seller about your financial situation.
  • Include a Valuation Difference Guarantee: When you get a mortgage, lenders usually require an appraisal of your home. This can be a problem if the appraisal shows the house is worth less than you pay, as you may not get a large enough mortgage to buy it. Salespeople are often nervous about this. You can include a clause promising to cover differences up to a certain amount (eg $10,000) if the appraised value is less than the offer you made.

Each of these steps is intended to reassure sellers that you will track the transaction so they have less to worry about the transaction failing.

And these are the “don’ts”

There are also some things you should not to compete with all-cash offers. Here is what they are:

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  • Giving up too many contingencies. You’ll probably want to make your offer (or conditional) conditional on a satisfactory home inspection and your ability to secure financing. Otherwise, you could end up buying a money pit or losing your deposit if you can’t close the house because you can’t get a loan.
  • Paying more than the house is worth. If you bid more than asked and promise to pay more than the house is worth, you could end up with a property that you can’t sell for as much as you paid for it. You’ll also have to put a lot more money on the table since lenders won’t lend you more than a certain percentage of the home’s value.

While you want to compete with cash offers, you have to do it smartly so you don’t lose money. Hopefully these tips can help you make a competitive offer without putting your finances at risk.

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