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A look at the benefits and potential drawbacks for both sellers and buyers when it comes to cash offers.
Kristine Gill is a former newspaper reporter who spent five years as a spokesperson for a law enforcement agency. She writes about homes and real estate for Better Homes & Gardens.
Published on April 28, 2024
In today’s housing market, cash offers are king because they eliminate the often troublesome contingency of financing. However, accepting or making a cash offer has its drawbacks. “It’s always best to go with the highest offer from the most qualified buyer with terms that will likely guarantee a successful closing,” says agent Jeremy Kamm of Coldwell Banker Warburg. “Sometimes it makes sense to take the financing deal from a qualified buyer who has offered more money and simply wait the extra time for the transaction to clear.”
This article looks at both the benefits and drawbacks of a cash offer and what you can expect if one is at play in your real estate dealings.
For the average home buyer, dropping a few hundred thousand dollars in cash for a home isn’t feasible, so many people go to banks for a loan. Being approved for a mortgage adds a hurdle for both buyers and sellers, which is why many view cash offers as preferable when possible.
“Many sellers find cash offers appealing because they remove financing contingencies and create more certainty during the home sale,” says Bryson Taggart, Opendoor agent partner and realtor. “With a typical mortgage loan, the buyer must work with a lender to approve the loan, and ensure that the house appraises for the value of the loan.”
When buyers offer to purchase a home in cash, they must prove they have the funds available to make good on the deal. “Proof of funds can be as simple as providing a robust checking or savings account with a balance that can comfortably satisfy the purchase price, closing costs, and post-closing reserves,” Kamm says.
Offering cash removes a lender from the picture and often leads to a faster closing process on the home.
“For buyers, the closing process with a cash offer can be much simpler, because they don’t need to work with a lender and go through all the required steps and paperwork,” Taggart says. “They still need a title and escrow company to handle the transaction, but they have more freedom in choosing these parties without a lender involved.”
In many cases, offering cash also removes the need for an appraisal on the home—something banks do to ensure a potential lender isn’t overpaying for a piece of property.
“The National Association of Realtors estimates that all-cash buyers now comprise over one-third of home sales.”
Buyers often make cash offers to compete with other buyers in a competitive market. Sellers like them because they make for smoother closings.
“Offering cash can be a position of strength for a buyer,” says broker Tate Kelly of Coldwell Banker Warburg. “It can also be a position of strength in a bidding war when going up against offers that include financing. This is especially true if it is a highly desirable property that may go over market value, as a bank will only provide the funds for a property at the appraised value rather than providing the money for the agreed-upon offer.”
If you’re like most Americans, you either need or prefer to have financing when buying home. You can get this through a conventional home loan or other options.
“If a cash transaction isn’t feasible or preferred, buyers and sellers can explore multiple options that are obvious, such as conventional, Federal Housing Administration (FHA), or VA mortgages/loans, but recently with rates higher than in previous years, I have seen an uptick in properties for sale with seller financing available or a lease-to-own option,” Kelly says. “Also, a buyer can explore leveraging other assets or financial instruments to fund the purchase, such as a home equity line of credit or investment portfolio.”
FHA loans are ideal for home buyers who can’t afford to put 20% down because they require only a minimum 3.5% down payment. Veterans qualify for VA loans, which require no money down.
Buyers typically start a house hunt by being preapproved for a loan from a bank. This gives them a ballpark range of what they can expect to be approved for with a home loan. However, it’s only an estimate. After an offer on a home is accepted, the bank begins a full approval process, taking a closer look at the buyer’s financial situation to make sure they can pay off the loan.
Financing is often the top contingency on a home purchase, followed by a home inspection.
As with all types of financing, cash offers come with risks and benefits. The main benefit is that they speed up the closing process by eliminating the common roadblocks that come with traditional financing.
“If the home doesn’t appraise for the same value as the buyer’s offer, or if the buyer has difficulty meeting the lender's requirements, the financing can fall through,” Taggart says of a traditional loan. This risk is eliminated with a cash offer. Many cash buyers also remove inspection and appraisal contingencies from their offer, which can expedite the time it takes to close on the sale even further.
Buyers who pay with cash can save on mortgage insurance and interest on a loan, which can add up to tens of thousands of dollars in savings over the years.
Buyers can also save upfront by skipping fees associated with traditional financing. “For example, most lenders charge application and origination fees. Fees are also associated with getting an appraisal and an inspection to complete the loan process,” Taggart says. “These fees can add up to over $2,000. Total closing costs, including fees, can be 3–5% of the loan amount, not including interest on the loan.”
Banks play a very small role in cash offers. “A cash offer is exactly what it sounds like, except that you are usually not presenting the seller with a bag full of cash,” Kelly says. “The only part the bank plays is sending the buyer’s funds to the seller’s account at closing.”
One drawback is that making a cash offer means parting with a large sum of money all at once instead of over many years of living in the home.
“For buyers, the sheer amount of money required to make an all-cash offer can leave you with little wiggle room for upgrades or home improvements. It can also limit your liquidity and tie up your wealth in one asset,” says Taggart, “and buyers will not be able to take advantage of mortgage-related tax deductions.”
Accepting a cash offer also speeds up the closing process for sellers. “The biggest drawback for sellers is that cash offers might be lower than other offers—but in talking with many sellers, the certainty of the sale not falling through at the last minute can outweigh this downside,” Taggart says.
As a buyer, your financial situation dictates whether making a cash offer is an option. If it is, consider your reasoning for going this route.
“Buyers should consider the cost of tying up a significant amount of capital in a single asset, the potential loss of liquidity, and the possibility of missing out on potential tax benefits one would receive with mortgage interest deductions,” Kelly says.
Are you looking to make a competitive offer on a coveted piece of property? Do you want to avoid added fees, such as mortgage insurance and interest over the length of the loan?
“Before making any offer on a home, all-cash or not, buyers should carefully evaluate the property’s condition and market value,” Kelly says. “Buyers should also make sure their agents and attorneys conduct thorough due diligence, inspections, and property value analysis prior to signing a contract.”
If you’re a seller, you should look at all the offers before automatically choosing a cash offer. “Sellers should keep in mind that a cash buyer might be less inclined to haggle on the price. There’s often an inherent agreement that the buyer is buying the house ‘as-is,’ which may reduce the seller’s negotiating power,” Taggart warns.
In addition, a cash buyer must show proof of funds, or the deal can crumble. “For sellers, the biggest risk is the buyer not having enough funds to purchase the property,” Kelly says. “For this reason, sellers should always be as certain as possible that the proposed buyer is financially qualified to make the purchase.”
