As the saying goes: “Cash is king.”
Liquid assets like cash represent flexibility and efficiency, and there are few areas of our financial lives in which the phrase rings truer than in real estate transactions. Given changes in the interest rate environment over the last few years, it’s no surprise that we’ve seen a surge in all-cash home purchases and notably fewer purchases with a mortgage.
According to the National Association of Realtors, all-cash buyers this year hit their highest levels since June 2014. When money was cheap to borrow, many people took out mortgages even if they had enough cash on hand, but now that borrowing has become more expensive, buyers are more often opting to pay all cash when possible. That said, there are pros and cons when it comes to buying a home with cash versus taking out a mortgage.
[Related:How AI Is Streamlining the Real Estate Listing Process]
The Pros for a Buyer
If a buyer has the solvency to purchase a home with cash, sellers may find their offer more attractive, especially in a competitive bidding situation. If two otherwise identical offers come in, but one is cash and one is financed, the seller will likely accept the cash offer over the financed one.
In some cases, especially if price is not the highest priority for the seller, a lower cash offer might be accepted over a financed one to avoid the risk that comes with financing and to streamline the path to the closing table.
“Cash offers are generally prioritized because they eliminate the seller’s risk of the financing falling through,” says Doug Bross, a realtor with Coldwell Banker in Westport, Connecticut. “And if a buyer is financing, this process can add up to 30 days, in some cases, to get their mortgage commitment. A cash buyer adds flexibility to the closing timeline, as there is no need to wait for lender approval, appraisals or other mortgage-related delays. For these reasons, a seller might be willing to accept a lower offer for the certainty that comes with a cash offer.”
The Cons for a Buyer
If a buyer opts to pay cash for a home, they are tying up that capital in a real estate asset, giving up liquidity. With so many options to invest money in all sorts of opportunities, some buyers might feel that real estate is not the best investment, especially in their home market. They might prefer a smaller down payment on their home, using a lender to secure the rest of the purchase price, and invest that cash in something else, like a business venture, money market funds, etc.
“Higher interest rates make all-cash purchases more appealing as financing becomes costlier, but the opportunity cost of using cash has also risen,” says Bross. “Cash buyers avoid locking in high mortgage payments, but might miss out on now higher-yielding investment opportunities.”
“That cash could be invested in a different product,” said Jeremy Lingvall, a real estate agent with the Alexander Group at Hilton Hilton in Beverly Hills, California. “There’s an opportunity cost for that cash if it could have been invested in a different asset class with a higher return.”
Cash buyers should also check their overconfidence: “Some cash buyers [purposely] offer too low, losing deals to slightly higher financed offers,” Bross says.
It should be noted that mortgage interest is a common itemized deduction used to reduce a homeowner’s taxable income. A cash buyer gives up this deduction by not taking out a mortgage.
The Pros for a Seller
For a seller, an all-cash offer might mean that you can get to the closing table faster. If a seller needs to get their investment out of the property and perhaps into their new home, an all-cash offer might be really appealing, as opposed to a financed deal with timeline milestones related to the lender.
“A cash deal not only removes risk related to the loan, but cash deals can close in days instead of weeks or months,” Bross says. Furthermore, “buyers offering cash can waive appraisal or financing contingencies, simplifying the process.”
“Accepting an offer is all about confidence,” says Lingvall. “The removal of a loan contingency and the uncertainty around securing financing in this market can go a long way towards engendering seller confidence in a prospective buyer’s ability to close. Higher interest rates have made securing a loan more difficult than before, so sellers might be even more inclined to accept an all-cash offer to eliminate that uncertainty.”
The Cons for a Seller
Because so many buyers know that their cash offer comes with reduced risks for the seller and perhaps a straighter and faster path to the closing table, sellers may find that cash offers come in more aggressively, with these buyers expecting their leverage to mean they can pay less for the home.
[Related:Buying an Older Home Is a Mixed Bag]
The Interest Rate Environment
Although these pros and cons are generally consistent no matter the interest rates, strategies have evolved as rates have climbed over the last few years.
Many believe they’ll purchase their home in cash, expecting to finance later, when and if rates come down again. Real estate agents across the country have lovingly called this strategy “Marry the House, Date the Rate.” Forward-thinking homeowners should be aware of the friction costs that come with financing, though, and plan for this.
Buyers who can’t afford an all-cash purchase but want to stay most competitive might remove a financing contingency from their offer, which lowers risk to the seller. With a non-contingent offer, the buyer must come to the closing table, whether they can secure their financing or not. This would appeal more to a seller than a financing-contingent offer, but is still not as streamlined as a cash offer.
When interest rates are lower and money is cheaper to borrow, the popularity of financing-contingent versus non-contingent deals generally seesaws depending on the strength of the market. In a more competitive market, buyers will drop various contingencies, like financing, to make their offer more appealing to sellers.
Is It a New World?
“It’s a misconception if buyers believe that just having cash will win them the deal, or that there aren’t as many buyers out there looking at the property, especially in the luxury market,” Bross says. And even in a hot market with low inventory, “sellers still need to price smartly, especially if they’re hoping for cash offers that will speed up a deal.”
Cash buyers should be aware that there’s competition out there, and the data shows this, with so many more all-cash deals recorded than in recent memory. Since the pandemic, various real estate markets across the country have seen their values skyrocket, especially in more affordable cities with great lifestyles or in states with desirable tax policies.
With the proliferation of remote work, scenic second-home markets have also grown in popularity and value. Inventory is almost famously tighter seemingly everywhere, so old strategies might not work anymore, and what works in one market might not work in another. As always, hiring a smart and experienced real estate agent with local knowledge is the best strategy.
More from U.S. News
Should You Lower the Price of Your Home?
Vintage Decor Is Making A Comeback
Buying a Home? What to Know About the Sewer
Ask a Realtor: With Cash Buyers at an All-Time High, What Are Pros and Cons of Paying Cash? originally appeared on usnews.com
