What is the best way to pay for a house? Why is it smarter for you to make an all-cash offer on your house?
In the book Buy, Rehab, Rent, Refinance, Repeat, real estate agent David M. Greene says that sellers are more inclined to accept all-cash offers on houses. Compared to your competition, you don’t have to worry about pulling out because of loans, appraisals, or possible inspections.
Continue reading to learn why making an all-cash offers on a house is the smarter way to buy and invest.
Making an All-Cash Offer
Once you’ve found a good deal, you may need to compete against other bidders to secure it—and Greene says that an all-cash offer on a house makes your bid more competitive. Cash offers are attractive to sellers because they reduce the contingencies, which allow buyers to pull out of a deal without losing money within a window of time (the contingency period). Fewer contingencies mean greater odds that the deal will close smoothly and quickly.
There are three primary contingencies in every property sale:
- The loan contingency allows a buyer to withdraw if their loan doesn’t get approved. A cash offer eliminates the need for a loan approval and, thus, this contingency.
- The appraisal contingency provides time to get an appraisal and allows the buyer to withdraw if the property’s value is below a certain amount. Banks often require an appraisal, but if you’re paying cash, you have the option to waive this contingency.
- The inspection contingency provides time for a home inspection and allows the buyer to withdraw or renegotiate if the property has significant issues. Regardless of whether you’re paying cash, you can waive this contingency if you already anticipate a major renovation because the house is severely distressed.
(Shortform note: Each contingency is assigned a specific contingency period, during which the home is under contract. For example, a loan contingency may last 30 to 60 days, while an inspection contingency may be just 10 days. If the buyer’s financing isn’t approved or they can’t schedule a home inspection within the given time window, they have to decide whether to request an extension—which postpones the closing date—or move forward with the sale anyway.)
Greene adds that all-cash offers on homes also open you to more investment opportunities because some extremely distressed properties don’t qualify for financing.
Although Greene stresses the importance of all-cash offers on properties, it doesn’t have to be your cash. Alternative sources of funding include:
- Owner financing—when you give a down payment and the property owner acts as the lender to finance the rest of the sale price.
- Private money—when you borrow from an individual.
- Hard money—when you borrow from a hard-money lender—generally a private individual who approves borrowers based on their collateral rather than their credit scores (these are often short-term loans with high interest rates and fees).
- A business partner
(Shortform note: All-cash offers on houses became more common as the pandemic turned the heat up on housing market competition: They accounted for 20% of home sales in 2019, and by 2021 that number jumped to 33%. Many of these offers came from buyers looking to downsize, who were flush with cash after selling larger homes in the hot market. Facing low housing supply and competing offers for tens or hundreds of thousands of dollars above asking price, buyers with cash offers were nearly four times as likely to win bidding wars in late 2020 and early 2021.)