When Shermika Bennett entered a bidding war for her dream house last month, she didn’t expect to win, especially at $ 25,000 less than other bidders. But she won, and now Bennett and his family are the proud owners of a six-bedroom, three-fireplace home in the heart of Atlanta.
“I was surprised and amazed when I was told my offer was successful,” Bennett says. “I certainly didn’t think a lower bid would win. Everyone always goes with the highest bid.
The secret to Bennett’s good deal? His offer was not dependent on mortgage financing. With the help of an emerging new home buying solution, Bennett was able to make a cash offer. And the cash offers, well, they usually mean big savings.
According to a new study from researchers at the University of California at San Diego, stories like Bennett’s are not that uncommon. Over the past 40 years, cash buyers have paid about 12% less than those who use a mortgage. This is the difference between a prize of $ 200,000 and a prize of $ 176,000.
There are many reasons for the discount, but the main driver is the certainty that the money provides to sellers. On mortgaged offers, there is always a chance the deal will fail – either due to appraisal, an inspection issue, or the buyer’s failure to qualify for the loan itself. .
“Many sellers are willing to accept a lower offer in return for the certainty that the deal will be done,” said Kristina Morales, real estate agent in Cleveland. “With a cash offer, there is no funding contingency and, most often, no valuation contingency. Without these contingencies, sellers are more confident in the conclusion of the transaction. “
It seems, however, that sellers are more suspicious than warranted. According to the National Association of Realtors, only about 6% of all contracts fail – and funding issues are only a small part of those.
“Vendors leave a lot of money on the table,” says Michael Reher, one of the report’s authors and assistant professor of finance at UCSD. “They are more worried that the funding will fail than they should be.”
Why do sellers prefer cash?
Whether the data supports it or not, experts say sellers do fear mortgage problems, and this fear plays a big role in why buyers like Bennett win.
When funding fails, sellers are forced to go back to square one, often delaying their sale for weeks or even months. This can be especially difficult if they are trying to buy a new home at the same time.
It also hurts the market value of the home, which could delay the sale even longer.
“If that happens, they will have to relist their home on the market, which could drastically reduce the amount they can get for the home,” says Vanessa Famulener, vice president of HomeLight’s Cash Close program. “A house put back on the market is like damaged property.
But that’s not the only attraction of cash offers for sellers. According to Shaival Shah, CEO and co-founder of the Ribbon cash offer solution, cash offers are also faster. With cash offers, closings can take as little as 14 days. A typical mortgage closing takes between 30 and 60 days in most cases.
This speed, coupled with the added certainty these offers bring, can often give cash buyers the edge in bidding wars – a common occurrence in today’s short-supply market. According to real estate broker Redfin, around 56% of its listings were the subject of a bidding war in January.
“My teams like to say money is king,” says Keli James, real estate agent at eXp Realty in Las Vegas. “Cash offers will usually make your bid the strongest on the table and make it more likely that you walk away with the keys to your new home. “
Even more savings for buyers
As if 12% off and an edge in the bidding wars weren’t enough, cash offers also come with additional savings. These arise from all kinds of mortgage related costs, the most important of which is interest.
If you were to finance a $ 200,000 house today (using a 30-year fixed rate mortgage at Freddie Mac’s current average rate of 3.02%), you would end up spending $ 104,332 in interest over the course of over the next three decades. With a cash offer? You would have no interest charges.
Cash buyers also avoid certain closing costs – which typically add up to 2-5% of the loan amount – as well as mortgage insurance, which can range from $ 30 to $ 70 per month on a conventional loan.
“Cash offers don’t have to deal with the costs of working with a bank, including appraisal fees, processing fees, mortgage interest over time and more,” notes Tony Rodriguez- Tellaheche, co-founder of Prestige Realty Group in Miami. “Depending on the property, this could represent tens of thousands of dollars in savings.”
To be fair, a cash offer does not entirely remove all closing costs. According to Paul Buege, president of Atlanta Mortgage in Menomonee Falls, Wisc., Cash buyers will still need to cover things like title insurance and registration fees to transfer title to the home. These fees vary by location, but you can generally expect to pay between $ 1,000 and $ 2,000.
No money? no problem
The cash offers probably seem a little intimidating to most buyers, especially with the average home price close to $ 304,000. But thanks to a few creative solutions, you actually don’t need an empty bank account or tons of savings to get a lot of benefits.
Programs like Ribbon, HomeLight’s Cash Close, and the Opendoor-backed offers – which Bennett used to save $ 25,000 – are just a few of the options that allow you to make cash offers without paying the bill yourself.
With these programs, the company makes a cash offer on your behalf and you mortgage the property in a separate transaction without involving the seller. This allows you to take advantage of those cash price discounts, set yourself apart from other buyers, and potentially win a bidding war, all without dipping into that emergency fund or dipping into your savings. (Although, of course, you still end up paying the closing costs and interest payments associated with your eventual loan.)
As Famulener says, “It’s the best of both worlds, especially in a competitive market where money is king for sellers.”
According to Tom Willerer, product manager at Opendoor, buyers who use his company’s cash offer program see their offers winning 50% more often than those with traditional mortgage offers. Bennett is just one example among many.
“For buyers right now, the real benefit of making an all-cash offer is having a leg up on other interested parties when competing for the home,” said Willerer. “With low interest rates, limited inventory and high demand, buyers need to find ways to make their offer as attractive as possible to the seller. In this case, the cash component made it even stronger and our buyer won the house.
The downside of paying in cash
Despite its advantages, there are some drawbacks to buying with cash. More specifically, it immobilizes your money.
Real estate is what is called illiquid. It can help you build wealth, but it is not as easy to access it as it is with other investments, like stocks or money market accounts. If you find yourself in a financial bind down the line, it could cause a problem, especially if you’ve put all your savings in the house.
Paying everything in cash also takes money away from other potential investments – those that may equal higher returns in the long run.
“With interest rates currently so low, borrowers can get better interest rates by investing their money instead of spending it all on buying their home,” says Buege. “Yes, homeowners with a mortgage will have to pay interest on the money owed, but if they can get a higher rate of return by investing the funds, it might be in their best financial interest to take out a mortgage.”
Still, there is something to be said about life without a mortgage. Take Rick Patterson, for example. Patterson bought his home in Tulsa, Oklahoma, using all of his cash in December 2019, and now, he says, he has “virtually no debt of any kind and minimal bills to pay each month.”
As he says, “The real benefit is peace of mind and a stress free lifestyle. I will always have a home no matter what.