Cash was king in hot housing markets across the U.S. last year.
According to Redfin News, 23.6 percent of home purchases in Denver from January to April 2021 were cash buys. In West Palm Beach, Fla, residential property sellers see a whopping 52.6 percent of home purchases close with greenbacks instead of loans.
The trend is unlikely to go away as investors see long-term security and profits in the residential housing market. As of April 2021, 25 percent of non-first-time buyers paid in cash — a 10 percent increase from the previous year, according to a survey by the National Association of Realtors (NAR).
The great homebuyer frenzy of 2020 pitted traditional homebuyers against investors of all sizes, including cash-rich smaller home-flipping businesses and institutional investors. As cash-based buys may continue to trend upward, it’s worthwhile for buyers, sellers and agents to consider the pros and cons of cash offers.
Benefits for sellers and buyers
Cash offers bring certainty. The buyer knows there’s cash available for the purchase, so there’s far less risk of a deal falling through due to financial contingencies. Not having a lender involved in a home purchase means an appraisal isn’t necessary, and the value of the home is determined by the two parties.
Without an appraisal or underwriting process, closing times contract to as little as two weeks — ideal scenarios for sellers who need to move quickly or have already bought a home on contingency.
However, it may be wise for investors to request an appraisal, especially if they are planning to make immediate renovations or additions to the property. They may opt for a partial loan in order to finance improvements, and it’s easiest and more efficient to get the home appraised before closing.
Regardless of whether there is a home appraisal, the contract should explicitly state that the sale isn’t contingent on the buyer needing financing.
Buyers with cash offers eliminate closing costs, interest payments, mortgage documentation and processing fees. Buyers are still responsible for homeowner’s association dues, commissions, taxes and escrow fees, but avoiding a mortgage is a significant advantage for cash buyers. A study from the University of California San Diego found that cash buyers pay about 11 percent less than those with a mortgage.
Drawbacks of cash offers
Investors with cash offers are motivated by profit. Investors are often on timetables to manage their own key performance indicators (KPIs) and business profit margins, so buyers with cash offers can become pushy. They may give sellers just an evening or so to consider their cash offer, touting the benefits of working with a buyer who doesn’t need a mortgage.
Pressuring sellers to make quick decisions is rarely to the seller’s benefit, as many cash offers refuse to compete with mortgage-backed potential buyers who may become emotionally tied to the home and work with their lender and agents to improve their own offer.
Advising homeseller clients to wait out the initial pressure from cash offers is important, especially for sellers in attractive housing markets where it’s common to receive multiple offers in a matter of days. Zillow survey data from September 2021 found that 37 percent of homes sold over asking price, a staggering increase from the 13 percent mark in 2018.
The study also notes some markets, such as Berkeley, California, sees 80 percent of homes selling over asking, which can further devalue fast cash offers.
The speed and certainty of a cash offer comes with fast-moving deadlines. With a cash contract in hand, there are multiple dates for inspections, due diligence and other deadlines. Sellers need to act fast to meet these deadlines to avoid potential breach of contract issues.
Additionally, the quick sale eliminates the seller’s contingency of finding a new home before selling the current house, leading to temporarily living in a rental or rushing to find a new home.
Also, cash offers may be accelerating the national home affordability crisis. Many first-time homebuyers can’t compete with fast-moving offers that promise convenience and certainty, pushing even more families out of the housing market.
Agents are needed more than ever to help navigate clients through the benefits and downsides of cash offers. An agent understands how to manage multiple offers and can provide invaluable guidance about when to accept a quality cash offer and when it’s better to wait and receive multiple offers with mortgage-backed buyers.
Jenny Usaj is the Employing Broker and Owner of Usaj Realty, a Denver, CO real estate brokerage. Jenny is a member of the Denver Metro Association of Realtors Market Trends Committee.