CASH IS KING

By
Real Estate Agent with Clocktower Realty Group

Can You Buy With Cash & THEN Get A Mortgage?

 
This is a great competitive edge that many investors use.  With inventory low, especially this time of year, having the cash advantage can mean you get the house you want. Sellers don't necessarily have to take the better offer if the buyer hasn't been approved for a loan yet, they may be looking for easy and fast.  And that's why cash is king.

 


Can You Get A House With Cash And Then Get A Mortgage

In competitive markets, cash is king. But coming up with the full purchase price of a home for sale in Baltimore, MD, or anywhere else isn’t easy to do. That’s why some buyers are turning to a unique solution to better compete when multiple offers are on the table: paying with cash now, then getting a mortgage later. Sound complicated? It is. Here’s how it works and what you should consider.

1. Why cash is still king in competitive real estate markets

Here’s the strategy: Buyers liquidate their assets, amass enough cash to purchase the home outright, and then put in an offer as an all-cash buyer. For sellers, all-cash offers are more attractive than ones from buyers who need to finance the purchase. Cash deals mean fewer contingencies — mainly, the sale of the home is contingent upon the buyer getting the mortgage, and there’s no guarantee that will happen. For instance, the sale could fall through if something goes wrong during the underwriting process. The sale is also contingent upon a home inspection and appraisal if the buyer finances the purchase, and again, a number of issues could come up that may make your lender (and you) pause. Plus, all-cash deals tend to close more quickly and with fewer overall complications than a sale that depends on financing.

2. A new buying strategy: cash first, mortgage later

Buyers are using the cash first, mortgage later strategy to circumvent these contingencies. They still finance their home with a mortgage, but they delay that process until after the sale is final. “With prior proper planning, a buyer could conceivably offer a 24-hour closing,” says Dennis Crowley, principal of Vitruvius Capital Consultants. Before opening his own firm, Crowley served as a private banker and helped buyers use this strategy to purchase homes.

There are downsides, however, to this tactic. “You’re using marketable securities as collateral,” Crowley warns. “This means that the buyer and lender have agreed that the collateral is worth a certain amount, and that amount can change without notice.”

3. What to consider before liquidating your assets

This buying strategy isn’t right for everyone. “Use the same wisdom you’d apply to any other purchase,” Crowley advises. “Make decisions with facts and not emotions and understand your options thoroughly.” Instead of liquidating your assets and putting a lot of pressure on yourself to purchase a home, consider a new timeline for your homeownership goal — perhaps set a goal to buy in five years instead. By then, you’ll have saved up more cash and may not need to liquidate existing investments. Second, the real estate market could change during that time — making these extreme measures unnecessary.

4. How to buy with cash first and get your mortgage later

Some buyers take money out of their retirement savings. Others liquidate other investment accounts and various assets like other property or use cash savings. Buyers also turn to (generous) relatives to help gather the amount needed to cover the purchase price. Once you have enough cash, you purchase the home (woohoo!). Then you get a mortgage, using that loan amount to refill the accounts you depleted and pay back anyone who helped you gather the cash you needed to buy.

Of course, you need to be careful when dipping into retirement savings, like 401(k) and IRA accounts — it’s not always a wise move. You’ll be penalized for withdrawing funds before retirement age, so include those fees in the total cost of your mortgage if you want to fully pay back those accounts. And an important note: Crowley points out that trying to use your existing assets this way is not for people who want to borrow money they don’t have. The cash first, mortgage later option is intended for people who want to employ capital that they already have in the most efficient way, he says.

5. More factors to consider

Remember to evaluate your situation (and your assets) to determine whether buying this way is even an option. “A buyer with roughly 150% of their proposed purchase price in marketable securities brings these options into play,” Crowley says. “Failing that, a buyer who has at least 200% of a required down payment might consider these.”

An understanding of marketable securities is a prerequisite for this buying strategy. Crowley recommends finding the right lender too. Most mass-market lenders won’t be able to support the level of complexity required to help with the process from start to finish. “Most major brokerage firms offer these options. Some smaller firms do as well,” Crowley says. “Even some independent financial planners have access to such channels.”

The bottom line? Liquidating your assets to purchase a home with cash and delaying financing by taking out a mortgage after you buy is an interesting strategy — but not one that’s right for everyone. It can help keep your offer competitive when you’re trying to purchase a home, but you shouldn’t just liquidate all your assets to become a cash buyer. Use money you already have as leverage, and don’t try this strategy simply because you don’t currently have enough cash to put money down on a home or to buy a home outright.

This article originally appeared on Forbes.com

Comments (3)

Larry Brewer - Benchmark Realty llc
Benchmark Realty LLc - Nashville, TN

Hi Rhonda - to some sellers, a cash deal looks like the winning hand, but I remind them that usually cash buyers don't have the same motivation that applies to someone who has their home under contract. They have to move when their home sells, so they can't have small issues hold up the process, and they are less likely to walk away just because they see another home that they like better. I have a lot of cash deals, but they do have different kinds of risk.  For some reason cash buyers think they should get a better price on the home than someone who's getting a mortgage. I have to remind them that the seller doesn't care where the money comes from, it spends the same way.

Oct 06, 2016 11:17 PM
Jeanne Feenick
NextHome Premier - Basking Ridge, NJ
The Agent you choose REALLY does make a difference

You make a good point Larry - I recently had two cash deals collapse and in one case the home did close with a financed deal.  In both cases the cash buyers' vested interest was low and they made heavy demands and walked away with ease.  A cash buyer is very attractive in a head to head contest for sure --- but I learned from these bumps to do a better job in qualifying motivation and commitment.

Oct 06, 2016 11:33 PM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Calabasas CA

If all else is equal, an offer from a cash buyer will trump one from a buyer who requires financing 100 percent of the time. 

The reasons are obvious:

No waiting for lender approval means a quicker close

No issue with the buyer not qualifying

Unless the cash buyer asks for an appraisal contingency, there is no issue with the property not appraising.

Dec 12, 2016 11:00 PM

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?