7 Benefits of Cash Buyers in Real Estate
Financing is the bedrock of any real estate transaction and commonly, most investors obtain these funds by applying for mortgages from lenders.
However, it is also possible to purchase real property without the assistance of these mortgage institutions or banks.
Cash offers are probably more popular than you think, and this fact is backed up by recent research that shows that about 30% of all home buyers in America paid cash within the first four months of 2021.
If you are looking to get a home soon, this article will help you understand what a cash offer is, who a cash buyer is, some of the benefits of purchasing a property with cash as well as give you insight into how the process works.
What Does it Mean to Buy a House with Cash?
The term ‘cash buyer’ is often mistaken for a lot of things; however, buying a house with cash simply means purchasing the property upfront without the assistance of a mortgage or house loan.
This entails that the cash buyer must be able to pay for the property in full without financing from lenders.
Another misconception most people have is thinking you have to show up with a briefcase full of cash to close the deal. The truth is that there is no room for raw cash in the real estate market as no one wants to be stuck counting large wads of cash.
For example, if you are looking to purchase a property worth $500,000 without a mortgage, all you have to do after identifying the property is to make an offer on it.
Once your offer is accepted and all criteria have been met, proof of funds is then presented as evidence of financial stability.
Both parties then proceed to draw up and sign the agreement contract, which would also state that the property is being purchased without a loan involved.
Once this is completed, you are expected to put down earnest money as a deposit for the home while the rest of the money will typically be held in an escrow account to be wired to a title company just before closing day.
Benefits of Purchasing a Real Estate Property with Cash
Selling or buying a property through a cash payment does come with some benefits over the conventional method of purchasing a property with a mortgage. Some of these benefits include:
Reduced Closing Costs
When paying cash for a property, investors can save thousands of dollars by waiving closing costs.
Not only do cash buyers get discounts on some closing fees, but they can also avoid excess charges associated with mortgages, like mortgage application fees, and loan origination fees, that make up a substantial part of the closing costs.
No Appraisal Fee
Before getting approved for financing from a mortgage institution, a major requirement is to carry out an appraisal of the property by an approved appraisal company, usually, one that is suggested by the lender.
Lenders do this to ascertain the real value of the property and ensure that they are not giving out a loan that is higher than the property value.
The average cost of appraisals ranges between $300-$400 but it can also cost as high as $1200 and traditionally, the buyer pays the fees for the home appraisal because it is required by a lender.
However, since a cash buyer is not working with lenders, he or she is not mandated to carry out a property appraisal, thus enabling them to avoid paying the appraisal fees.
No Loan Contingency
One of the significant advantages of purchasing a property with cash is the absence of loan contingencies in the transaction.
This is a security, especially for the seller as no clause entitles the buyer to a refund of any money spent during the transaction process.
Therefore, the buyer is most likely to see the transaction through because the transaction is independent of mortgage approval and the buyer would not want to lose any money by forfeiting the deal.
No Interest Payments
Another important benefit of cash transactions in real estate is the elimination of interest payments associated with loans. Due to the fact that the buyer is paying for the property out of their pocket, they are not required to make monthly mortgage payments afterward.
Consequently, the issue of paying high interest on borrowed funds is removed. This, in turn, could potentially help the buyer save a significant amount of money in the long run.
Close on the House Quicker
Real estate investors opt for cash transactions when buying or selling a property because of the lesser time it takes to close the deal.
Typically, the closing process when you purchase a home with a mortgage can take over a month to be finalized. This is due to activities like obtaining mortgage pre-approval, underwriting, and other time-consuming steps of the home-buying process.
However, the reverse is the case when you purchase with cash as it is possible to close on a deal in as little as a week or two.
This in turn makes the process very convenient and saves both the buyer and seller ample time and money.
Less Hands in the Pot
Selling a property directly to a cash buyer simplifies the transaction process, reduces the hassles faced by both buyer and seller as well as limits the number of individuals involved in the entire process.
Because the buyer does not work with third parties like lenders and appraisal companies, there is no complex chain to work through and an even lesser risk of complications.
The House is Fully Owned by the Buyer
This is perhaps the most important benefit of paying cash for a property as the buyer is not encumbered by a mortgage.
Hence, the buyer does not have to worry about fluctuating housing market trends, increasing interest rates, or losing the property to foreclosures so long as all payments, such as property taxes, are made on time.
How Do You Buy a House With Cash?
The process of purchasing a property with cash is relatively straightforward. After securing your funds and drawing up a practical budget, here are the next steps to take when buying a property with cash:
Identify the Property
The next step is to select a suitable property within your budget that caters to your specific needs. When choosing a property, ensure to carry out due diligence, taking a look at the location of the property, other surrounding properties, title search, previous transaction history, and any other document of importance.
Submit an Offer
As soon as you have chosen a suitable property and done thorough research, it is time to create and submit a compelling offer to the seller. This is a crucial aspect of the procedure and should be handled with expertise.
It is therefore advisable to work with a professional and experienced agent to improve your chance of getting selected. Once your bid is chosen, negotiate with the seller and agree on the price to be paid.
Show Proof of Fund
As soon as a price is agreed upon, proof of funds or a financial statement is obtained from your financial institution and presented to the seller, stating that you are in good financial standing and have enough money to put in a cash offer.
You are also expected to put down a holding deposit or earnest money which is typically 1-3% of the total price to secure the property and show commitment.
Sign Agreement Contract
A legal agreement that outlines the terms of the transaction is drawn up and signed by both parties. Regardless of whether you are purchasing a property with cash or a mortgage, it is important to employ the services of a solicitor to handle all legal affairs related to your property.
Once all the necessary inspections have been carried out and contracts have been signed, you will transfer the full outstanding payment for the property purchase to a title company just before the day of closing.
Close the Deal
After the final house inspection is performed, it is time to finalize the deal. Closing a cash deal is quite faster and only requires you to come with a means of identification i.e a government-issued ID card, a cashier’s check or wire transfer for the payment of purchase price, and all other necessary documents.
Once payment is completed, there is a legal transfer of ownership of the property to the buyer and this signifies a successful end of the transaction.
Final thoughts on Buying Real Estate with Cash
Purchasing a property with cash is one of the appealing avenues investors use to acquire properties as it not only makes your offer more appealing but it also speeds up the closing process and helps you save money in the long run.
However, just like any other transaction, it is important to carry out thorough research to understand what buying a property without mortgage entails. It might also help to discuss with a professional, such as a real estate agent or lawyer.
TL;DR: Paying all cash on a house or property lets you skip the financing contingencies that hold up a lot of real estate transactions. All you have to do is find which house you want and make an offer.