Sellers, some of you are receiving multiple offers on your property for sale. So what's a seller to do? How to choose the BEST offer?
Well, if the price (and total costs) net the same, select the offer with the most cash financing. For example:
- An all-cash offer is better than an offer with a 50% downpayment and 50% financing
- A 50% downpayment is better than a 20% downpayment conventional loan
- A 20% downpayment is better than a 3.5% downpayment FHA loan
"But why is an all-cash offer better than a financed offer," you may ask? "I'll net the same amount of money in the end, right?"
Yes the NET may be the same BUT there are other issues that Sellers must consider:
1. An all-cash offer can close QUICKLY (assuming the buyer has funds available immediately -- ask for proof of funds). Whereas, a financed purchase usually takes at least 30 days to close, and many times longer. And the faster you get your money, the sooner you can invest it in something else, or simply be relieved of the hassle of selling your house.
2. All-cash offers don't have financing CONTINGENCIES. Will the buyer's loan go through? Won't it? How can you be sure? After many years of real estate sales experience, I can say that a high percentage of purchases fall out of escrow due to financing issues. Such as:
- Buyer qualified earlier, but now does not (credit score changed; financial ratios changed; buyer bought a new purchase on credit)
- Lender changes their loan requirements (they shouldn't, but some lenders change in the middle of the loan)
- Buyer's rate lock expired and loan rates increased
- Lender goes out of business (yes, this has happend up to 1 DAY BEFORE close of escrow)
3. With an all-cash offer, the buyer is very confident that he can close escrow, so you the Seller can request a NON-REFUNDABLE earnest money deposit. However, a financed buyer usually insists on a refundable deposit, because they are at the mercy of their lender.
4. No appraisal is needed for an all-cash offer. This is a critical piece of the financing "puzzle". Lenders will require an appraisal to determine the house's value. Appraisals can kill a deal. How?
- An appraisal comes in LOWER than the amount agreed between buyer & seller. Now the buyer wants the seller to lower his price, but the seller refuses.
- An appraisal notes specific items on the home that are "red flags" for the lender's underwriting department, and they refuse to proceed until certain items are fixed, which the seller refuses to fix at his expense (FHA & VA lenders are notorious for this).
- The appraiser is from out of the area, is not familiar with that specific neighborhood, and therefore does a poor appraisal, which is questioned by the lender.
- Appraisals can take a long time to get completed, especially with the new HVCC laws, they are delaying escrow closing time-periods.
- The lender, for whatever reason, isn't satisfied with the appraisal, and orders a 2nd (or 3rd) appraisal to confirm the 1st one; and then uses the lowest appraisal value.
5. Fannie Mae loans will question certain things, such as "property flipping", and will not lend on a property that has been sold within the previous 90 days. But all-cash buyers don't have to worry about these restrictions.
6. All-cash offers eliminate a huge layer of documents, paperwork, red tape, government rules, and headaches for the Buyers, and save time.
Of course, TERMS and PRICE are not the only things Sellers considers when selling their house. Private sellers (not banks or corporate sellers) may care a lot about their wonderful family home, and may select a Buyer who is going to live in the house and take care of it, rather than an investor who will only rent it out.
But remember, Sellers: to get to CHOOSE the best offer, you must first have multiple offers! And "How to get Multiple Offers" is a topic for another blog!
Regina P. Brown
Broker, Realtor®, e-Pro
Author of eBook "Stop Foreclosure Fast: Solutions to Save your House"
Author of forthcoming book, "Virtual Office Guide for Business Professionals: Work & Profit from Home"
Join & post to my NEW ActiveRain group at http://activerain.com/groups/virtualoffice
Text copyright © 2009 R.P. Brown, All Rights Reserved
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54 Comments on SELLERS: Choose an ALL-CASH offer instead of FINANCED Purchase
Jeff, I agree that the cash deals are becoming more frequent. Which is great for the investor, but as you brought up, it makes it tough for first-time buyers with mega-financing (FHA etc.) to get their offer accepted.
Regina - Congrats on the feature and very well done post, short, sweet and full of information.
Of course a cash deal is better especially if you have proof of funds and a non refundable deposit!
Good job of laying it out! I have gotten CASH offers on my listings in the past where I got a call from the buyer agent asking for an extension because the lender needed more time! I was like...WTH???? I told them they wrote a cash offer...and they responded with "but it's cash to your seller!!!" Gimme a break!
Thanks, Jeremy & AR team for featuring this blog post! I appreciate all the great AR members who stopped by to comment. I enjoy hearing your additional points of view and learning from you.
Great job, Regina!
Very valuable info.....I have not had very many cash buyers (I keep hoping!!), but you mentioning the fact that the seller can request a non-refundable earnest money deposit was really helpful.
Anything we can do to bring our clients to a smoother & quicker close is what I am all about!
Edith Schreiber - Dallas, Texas
Regina: What a great post. As they say.. Money talks and B.S. walks...
In this day and age, I think it may make more sense to take slightly less net if the offer is all cash for all of the reasons you listed above.
Regina, Thanks for laying it out so clearly. Very understandable for the reader. Many sellers don't understand the difference and why a lower dollar amount in cash may really be more beneficial to them.
Great post. The markets are tightening and cash isn't as kingly as it was three months ago, but I'd still rather have a cash buyer than someone with on ly 20% down payment.
So true, I had a buyer who was going to pay cash for a condo.
They took the offer at less with financing, he was going to net 200.00 more.
I saw it on the market again.
I called, it fell through.
My client had bought already.
Missy, that is very typical for financed purchases lately... it seems like the fall-out rate is close to 50% due to (mostly) the tough bank regulations.
I just wrote an all cash over on a new construction condo and tomorrow I am writing an all cash offer on a foreclosure. Shows the range of where the cash speaks!
Cindy, you GO girl!!!
Oh, and another great thing about non-financed offers: it doesn't have to be completely built. For instance, right now there are some houses in which the contract never finished construction and therefore cannot get a COO (Certificate of Occupancy) so conventional/FHA/VA lenders won't lend on it. The only possible offers are all-cash.
Janice, every culture is a little different... but most countries abroad DO expect to negotiate heavily. In their culture, they highly overprice things so that they can negotiate down.
Regina - I believe that an all cash offer should always trump financing, because of the many things you discussed in your post. Great job.
I am saddened by the posts above. I understand the reasoning behind cash offers being better, but it leaves me feeling hopeless. I am trying to buy my first home, I have great credit and have been pre-approved by 2 different lenders. I put an offer on a home that I truly fell in love with, and they accepted a cash offer instead. I understand the appeal of the cash offer, but what hope do I have if cash always trumps? I am heartbroken at losing the house and wish my offer could have been taken more seriously. I am buying well under what I can afford, I am fantastic with my money, and have a good down payment.
Any advise on how to get sellers to look at my offers more seriously, or will cash always win? Are there key things to say or show that will make a seller more confident in a financed buyer?
Lea, CASH IS KING. That is a life truism. You and I cannot change that basic business operating principle.
However, there are 2 parts to every offer: PRICE and TERMS. Since you don't have all-cash (most buyers do not), I suggest that you make the offer price higher, and the terms more favorable to the seller. Find out what the seller wants, and think of how you can get that seller more of what they want. For example, longer escrow period, buying their furniture from them, offering to do a lease-back, etc. Ask your local Realtor for help in structuring your offer to make it more palatable and to compete with the cash buyers.
Good luck!