9 ways to crush all-cash buyers
Here's one big reason someone offering to buy a home with cash is attractive to a seller: Much of the hassle that comes with selling a home — dealing with the buyer’s financing — is eliminated.
If you’re shopping for a house, there’s a good chance you’ll compete with all-cash buyers. In January, 44.4% of U.S. home buyers paid in cash, according to RealtyTrac, a California-based firm that tracks real estate trends.
These are financial institutions scooping up investment properties to rent out or foreigners, most likely Canadian. International buyers account for about 6% of home sales, but more than half pay cash, in part because they can’t get mortgages.
Still other all-cash buyers are people who have accumulated equity or savings. The proceeds from a home sale combined with savings can be enough to pay cash for that next property.
If you’re relying on a mortgage to buy a home, try these smart moves to get your purchase offer accepted over an all-cash buyer’s offer.
Many all-cash buyers are bargain hunters, whether because they’re investors or because they know being a cash buyer puts them in a strong position.
Beat them out by making your final offer up front. Also, don’t ask for closing costs, which means cash out of the seller’s pocket.
"There is no time to try to get a deal on the house you love in a strong seller’s market with cash buyers lurking around," says Doug Vogelsass, a real estate agent with Agents for Change in Austin, Texas. "When you see a house you want, put your best foot forward immediately."
Vogelsass also recommends telling sellers you will not ask them to fix minor problems discovered during the home inspection; you’ll only ask them to fix structural and safety issues.
Your best offer should still be a price that makes sense for the property. You don’t want to make a poor investment, and banks won’t lend based on an inflated price.
Presenting a mortgage preapproval letter from your lender when you make an offer is the traditional way to show you're a serious buyer. Preapproval is more rigorous than prequalification and gives the seller confidence your financing will come through.
But getting an underwriter's review of your loan application prior to making an offer is emerging as a more thorough first step.
"The loan application is submitted to an underwriter with the property address to be determined," says Richard Airey, a loan officer with PMAC Lending Services in Portland, Maine. "The underwriter reviews all income, asset and credit documents, and actually underwrites the loan. This allows the buyer to submit a loan commitment letter to the seller with their offer, pending appraisal," he says. "This is much more attractive to sellers as they have an actual commitment from the lender to loan the money."
When you can’t outbid a cash buyer, this step puts you on closer-to-equal footing with them.
Not everyone offers underwriter review, though, so you should ask your lender or broker first.
The most common reason a home sale doesn’t close is that the buyer’s financing falls through. And financing often falls through after the appraisal.
Appraisals are problematic in a rising housing market because appraisers rely on previous sales to set the value, a key determinant of how much you can borrow. When recent comps lag current home values, the home might appraise well below the contract price, and you may not be able to borrow enough to complete the sale.
Put more skin in the game, and you improve your odds.
"A purchase with 50% financing is significantly stronger than a purchase with 80% financing because it's far more likely to close," says real estate agent Ben Kruger of Teles Properties in Beverly Hills, Calif. "With more equity in a home, a lender … is going to be far less concerned with appraisal. There is simply less risk for the lender."
Most buyers make offers contingent on a home inspection so that if there’s anything major wrong, they can back out.
It doesn’t have to be that way.
Ben Kruger was a listing agent on a property that received eight offers the first week, some financed and some all cash. The all-cash offers had lengthy inspection windows.
"An agent representing a financed buyer reached out to me, explained that their buyer was very serious and asked if they could complete inspections before their submission of an offer," says Kruger, a Beverly Hills, Calif., real estate agent. "My seller agreed, and the buyer completed a general inspection, chimney inspection, foundation inspection, sewer line inspection and HVAC inspection."
The buyer then submitted an offer with no inspection contingency.
The seller accepted the financed the offer, even though it wasn’t the highest offer or an all-cash offer.
"From my seller's point of view, this buyer had shown a significant commitment to the property and a strong desire to close," Kruger says.
Since time is typically one of the seller's main concerns, buyers with financing should make their contingency periods as short as possible and offer the seller a per diem so that if the sale closes late, they get compensated each day.
Each party agrees that if you can't close on a certain date, the seller will automatically extend the contract for, say, up to 15 more days, says William Golightly of Poole Realty in Live Oak, Fla. "But it costs you as the buyer anywhere from $20 to $75 per day until it’s closed."
Putting this provision in your contract "will keep the lender a bit more on their toes for your sake," he says, "and it also shows the seller you are really willing to put your neck on the line for your financing."
This deal sweetener will appeal especially to sellers who are carrying two mortgages.
One major downside to getting an FHA loan: You'll be forced to pay mortgage insurance premiums for the life of the loan.
But FHA loans also are unattractive to savvy sellers, who recognize some FHA buyers barely qualify because of low credit scores and are more likely to hit snags in the loan process.
If you have FHA financing, you’re not only at a disadvantage to cash buyers but also to buyers with conventional financing.
Home buyer Stacie Sheftel of Clearwater, Fla., says she had several offers rejected in favor of cash buyers, even though her offers backed by an FHA loan were higher.
She eventually had an offer accepted after switching to conventional financing at a seller’s request. She provided documentation to prove she had funds to close, and because she wanted the seller to contribute 3% toward closing, she offered the asking price plus 3%.
While she had to bring more money to the table — 5% down instead of 3.5% — she finally got a home.
When you’re submitting a purchase offer, there are many points of negotiation. If you’re trying to compete with cash buyers, a smart strategy is to give the seller what they want on every other point since you can’t offer all cash.
Todd Huettner, a mortgage broker with Huettner Capital in Denver, Colo., recommends that competitive buyers with financing accommodate the seller in the following ways:
- Earnest money: At a minimum, offer what they are asking.
- Title company: Let them choose.
- Inclusions: Let them decide which fixtures, furnishings or personal property they want to take.
- Inspections: Limit how much you will ask sellers to fix if the inspection reveals problems.
- Closing date: Give them the date they want.
- Possession date: Ask them if they want a day or two to move out after closing.
Finally, assuming you’re submitting your best offer, ask the seller, "What else can I do to make this offer better for you, other than a higher price?"
If one of your contingencies is selling your home first, the deal is far from a sure thing. Who knows when or if your home will sell?
This contingency will make you uncompetitive in all but the slowest of housing markets, where buyers are desperate to accept any offer. In a strong market, especially one with a high percentage of cash buyers, it’s a deal killer.
While selling your existing home first is a hassle — it means packing, moving and unpacking twice, not to mention finding a month-to-month lease — it will give you advantages beyond being able to make a more competitive offer.
First, you’ll know exactly how much you have to spend. And each month that passes, you can save more toward your down payment.
You also won’t be rushed to get a new home under contract in that small window between when your old home goes under contract and the buyer moves in.
Yes, they’re cheesy and sometimes insincere, but a heartfelt letter to a seller who has an emotional attachment to the property can give you an advantage over other buyers.
Last year, Carrie Van Brunt-Wiley found herself in a bidding war in Bayport, N.Y., against a contractor offering all cash. She gained the upper hand by learning something about the seller.
"The seller was born and raised in the house, so there was a lot of sentiment involved," Van Brunt-Wiley says. Along with submitting her best offer, "I wrote and told her why we loved the home and how happy we would be to raise our children in the neighborhood," she says.
She later found out the contractor’s bid was actually higher, but the seller didn’t like the idea of handing over the keys to someone who would just renovate the home and flip it.
"We were all shocked, including the real estate agents — and very pleased with the outcome, to say the least," Van Brunt-Wiley says.
You'll soon discover that when you were a renter, you had the easy life. Owning a home is a lot of work. Here are 7 surprises for new owners.
Click here to get started.
Our guide will turn you into a savvy borrower so that owning your home will be a joy, not a burden, and will help you avoid common mortgage mistakes.
Click here to get started.