Today’s real estate market is highly competitive for buyers. With limited inventory, low mortgage rates, and significant numbers of people moving, it’s hard to make an offer on a home that’s both affordable and compelling for the seller. If you’re competing with all-cash offers, you have an extra layer of competitive difficulty to get past, as many sellers will take cash offers over conventional loan offers – even if the conventional offer is numerically higher.
Is there a way to compete directly with an all-cash offer? Or are you better off moving onto a different property?
Why Cash Is King
Why is cash “king” in the real estate world in the first place? Why are so many sellers eager to jump at an all-cash offer, even with a higher offer on the table elsewhere?
There are a few big advantages they typically consider:
- No financing concerns. Imagine you’re a seller who accepted an offer. After a few weeks, the financing falls through – meaning the buyer is unable to complete the transaction and you waited all that time for nothing. It’s an unfortunate reality that, while not common, is painful for sellers – and most sellers will try to avoid it at all costs. Getting an all-cash offer will circumvent the need for financing no matter what.
- Faster transactions. Even if the financing goes through smoothly, it takes time for the transaction to finalize. There are several extra steps buyers and sellers need to go through, often taking weeks from offer to close. An all-cash offer will be completed much faster.
- Fewer paperwork headaches. Some people like transactions to be as smooth and effortless as possible. If there’s an option that requires them to sign less paperwork and jump through fewer hurdles, they’ll take it.
Of course, there are also some major advantages incentivizing buyers to make an all-cash offer:
- Simplicity and speed. Simplicity and speed aren’t just advantages for sellers; they’re also advantages for buyers. There’s no need to contact a mortgage company or prove your income. You just pay cash for a house.
- No fees. Banks often charge a multitude of fees for loan processing, amounting to thousands of dollars of closing costs. You can eliminate these costs entirely by funding the purchase with your own cash.
- No interest rate. Mortgage loans tend to offer a reasonably low interest rate, but that interest rate still compounds. With principal and interest payments, people with home loans end up spending far more money on their house than is specified by their flat initial offer.
- True ownership. Buying a house in cash means you’ll be the full and true owner. By contrast, if you fail to make payments to the bank that issued you a home loan, they could take back possession of the house.
Competing With Cash
So what happens if someone taps into these advantages with an all-cash offer?
What can you do?
One option is to compete with cash – using cash of your own. The big obstacle here is that most people don’t have access to the kind of capital necessary to buy a house. You’ll need to work hard, save money, and invest to get that money – which can take many years.
If you’re interested in buying a house soon, you may need to liquidate a retirement account or take a similarly drastic action to get that cash (which isn’t typically a good idea).
Also, cash buying comes with some disadvantages, such as:
- Illiquidity. Your money is tied up in the house, meaning you can’t use it to invest in other assets.
- No financial leverage. Loans are great financial tools in part because of leverage – but you won’t get that if you buy in cash.
- No tax advantages. Homeowners can deduct the interest on their home loans; this advantage is gone if you buy in cash.
- Additional expenses. You’ll still be responsible for other home expenses like HOA fees and property taxes; cash offers don’t get rid of payments entirely.
That said, if you can raise the cash, it’s worth considering.
Alternative Ways to Compete
If cash isn’t an offer, there are several strategies that can help you compete with the cash buyers in your area:
- Raise your credit score. Though it’s a minor factor, it’s a good idea to boost your credit score in anticipation of your purchase. A higher credit score will make it easier for your to qualify for loans and make you a more attractive buyer candidate if you’re paying for the house with a loan.
- Get preapproval for a conventional loan. Work with a lender to get a letter of preapproval for your loan, and prioritize a conventional loan over other types of loans. With a preapproval letter in hand, you’ll be considered a much more viable buying candidate.
- Prepare at least 20 percent down. Similarly, you should prepare enough cash to afford a 20 percent down payment. Not only will this make you a more qualified borrower and help you avoid private mortgage insurance (PMI), but it will also help you stand out in the list of purchase offers.
- Offer a higher price. One of the most straightforward ways to complete with a cash buyer is to offer a higher price. Tacking on a few thousand extra dollars may be all it takes to get a seller to take your offer seriously.
- Waive contingencies. It’s typically not a good idea to waive contingencies, especially without doing a home inspection. But doing so could seriously increase your chances of winning the bid, since you’ll be saving the seller a lot of potential headaches.
- Write a letter. Sometimes, writing a letter to the seller could make them take your offer more seriously. Tell them what this home means to you and that you’ll take good care of it – they might find it persuasive if they have an emotional attachment to the home.
Even if you don’t have the capital necessary to fund an all-cash offer, you can find a perfect property for your needs – and Green Residential can help you do it. We have some of the best and most experienced real estate experts in the Houston, Texas area – and we’ll do whatever it takes to help you find the home of your dreams. Contact us today for more information or to schedule a free consultation!