You've probably heard people say: "Cash is king!" You've also probably heard a friend tell about how they missed out on a great home due to a cash buyer, or unfortunately lost out yourself.
But what makes a cash offer so great, and what are the best ways to compete against it if you're borrowing money?
Time And Risk
Cash offers appeal to sellers because they close quicker and come without the risk of financing failure.
A typical closing period for a transaction with a loan is 30 days. Before the lender gets to work, the buyer has to get through the inspection period. This is typically 10 business days, (14 calendar days with weekends factored in). Once the inspection period is complete, the lender typically takes the next 2 weeks between their underwriting process and getting appraisal results. Once the lender has everything wrapped up, law requires the buyers have the documents to review for 3 days before they can sign and close.
Because a buyer with cash is not working with a lender, they only need time for inspections and negotiate any repairs or credits necessary. Cash buyers often do not ask for sellers to complete repairs because they usually have the cash to do the repairs. This means buyers with cash can usually close in 10 business days (14 calendar days).
Here's how to compete with time:
Shorten your inspection period down to 5 days
10 business days is a very comfortable period to have a home inspection and have the necessary professionals do further inspections and bid issues uncovered. In 5 days you can have a general home inspection done, and get a fairly good picture of costs of any issues found. It will be tight, but it's possible. By shortening your inspection period, you can shave a whole week off of the timeline and only be a week longer than a typical cash offer. While it's still a longer close, it's close enough that you can still be competitive.
A transaction can fall apart outside of the buyers or sellers control if there is a financing failure. The appraisal can come in undervalue or an issue can come up in underwriting causing a loan to not go through.
Here's how to compete with risk:
- Waive your appraisal contingency if you have extra cash
In the chance that an appraisal issue arrises, you're still able to buy the home if you're able to make up the difference between the appraisal and sales price in cash. Appraisals coming in undervalue are not at all common, and this is one way to quell any seller fears of their home not appraising at value.
- Offer terms "sold as-is" or "seller to do no repairs"
Sellers are concerned about what will come up on an inspection and what they'll have to fix or credit they buyer. Even if a competing offer is cash or slightly higher than yours, you can become more competitive with a terms like "sold as-is" or "seller to do no repairs". "Sold as-is" means you will not be asking the seller to do any repairs or ask for any credits after the inspection. You still have the right to do an inspection and decide if you want to move forward or back out at that point, but you are signaling to the seller that you won't be asking for anything after the inspection. "Seller to do no repairs" signals the buyer will only ask for credits from the seller instead of requiring them to make repairs. Sellers like this because they don't want to deal with the repairs and additional issues can arise once a contractor opens up a problem.
- Waive your inspection contingency
One of the most competitive moves you can make is to waive your inspection contingency altogether. While you're not able to back out of the transaction based on issues found during the inspection period, you still have your seller disclosure contingency that protects you for 5 business days from receipt if you see anything that you don't like. If you already cut your inspection period to 5 business days, you're already protected in this period from the seller disclosure period.
P.S. - Write A Great Offer Letter
People want to work with people they like. If the cash offer is an investor who's about to tear the home down, you probably have a better story to tell. So tell it really well.
The biggest risk of a transaction falling apart is from the buyers getting cold feet or falling out of love with the home. Show the seller how solid of a choice you are with a great offer letter to accompany your offer. Head here to see our tips on writing an offer letter to the seller.