Cash Offer on a House: What It Is and How to Make One
Buying a house with cash is the most straightforward way to purchase a home. When you make a cash offer on a home, your bid likely has a better chance of getting accepted because the process is faster and easier than a standard mortgage offer, and working with cash notably decreases the strain of the paperwork.
But there are a few problems with this method, as well: for starters, putting together a cash offer essentially requires coming up with — in some instances — hundreds of thousands of dollars. Needless to say, this is no easy task for most people. But if you have access to enough cash to pay for a home, you might want to consider it. To help you decide on the right move for you, here is some background on the entire process of making a cash offer on a house.
What Is A Cash Offer On A House?
When you make an all-cash offer on a home, it means you are offering to pay for the purchase with funds that are already in your bank account. As a result, you wouldn’t need to arrange financing because you wouldn’t require a mortgage. Paying in cash eliminates the need for monthly mortgage payments and minimizes interest costs.
Are Cash Offers Common In Real Estate?
Cash offers for new homes are becoming more common in real estate — more than one-quarter of the home purchases in the United States since October 2022 have been made with cash, according to the National Association of REALTORS®.
Buying A House With Cash Vs. Taking Out A Mortgage
Because cash buyers don’t need a mortgage, they won’t need to account for mortgage interest or mortgage-related closing costs when they purchase a new property. Here are some of the other differences between buying a house with cash and paying via mortgage:
- Contingencies: Contingencies are often waived — or are less strict — for home buyers paying cash because the absence of a mortgage lender reduces the risk of the financing falling through. In other words, cash offers provide greater certainty and a more straightforward closing process, which decreases the need for contingencies.
- Appraisal: With a cash offer, there’s typically no lender requiring a formal home appraisal, which expedites the closing process. However, some cash buyers may still choose to conduct an appraisal for their own peace of mind, or to assess the property's fair market value. But in the end, it’s not mandatory as it is with mortgage-backed purchases.
- Closing: Closing timelines tend to be shorter with cash offers, as they don’t involve lender underwriting and approval. Also, cash buyers can negotiate for reduced closing costs because they don’t need to pay for mortgage-related fees. The transactions may still incur some closing costs related to title insurance, escrow and property taxes, but they will likely be at lower amounts compared to mortgage-backed purchases.
Pros And Cons Of A Cash Offer On A House
Like most decisions that come with buying a home, there are pros and cons to making an all-cash offer.
Cash Offer Advantages
There’s clearly something to be said for the simplicity of paying cash for a new home. Other benefits include:
- Lower risk of the deal falling through: Because there is no mortgage, there is no risk of buyer financing falling through. That makes a more comfortable deal for everyone.
- Faster closing process: Cash offers often result in a quicker closing process because they don't rely on lender underwriting or approvals, and there are no potential delays in securing financing.
- No need for an appraisal: A cash offer typically means there’s usually no need for a formal appraisal, saving time and likely reducing costs. However, if you forgo an appraisal, you risk purchasing the home over its fair market value.
- Fewer contingencies: Cash buyers might avoid some contingencies, which could give them greater control over the terms of the purchase agreement.
Cash Offer Drawbacks
Despite the simplicity of a cash offer, though, it comes with some drawbacks:
- Lower offer: A cash offer may be less competitive than offers backed by mortgages because you may not have the cash on you to beat out one backed by financing.
- Reduced buyer vetting: Cash buyers may not undergo the same rigorous financial vetting process as mortgage applicants, which could lead to less certainty for the seller regarding the buyer's ability to finalize the transaction.
- Notable tax implications: Paying cash may limit a seller’s ability to take advantage of tax benefits associated with mortgage interest deductions, potentially resulting in a higher overall tax liability.
- A dramatic drop in available cash: Using a significant portion of your savings or investments to pay for a house in cash can limit your liquid assets, potentially leaving you with less available cash for other financial goals or emergencies.
How To Make A Cash Offer On A House
Buying a home with cash takes more than just getting all your funds together. Here are some of the other steps necessary to pay for a new home with cash.
1. Get A Proof Of Funds Letter
When you’re buying a house with cash, it’s beneficial to have a proof of funds letter from the bank, credit union or other institution that holds your money. Similar to a preapproval letter, this will verify the amount of cash you’re good for, and it will inform sellers that you’re a credible buyer.
2. Find A Real Estate Agent
Even though paying with cash is a less-complicated process, there are still many steps to take. So it makes sense to work with a real estate agent or REALTOR® who can help you navigate this complex path.
3. Negotiate Price
It’s crucial to negotiate a fair price with the home seller when you’re paying for a house with cash. These negotiations are a complicated process that involves more than just going on what the seller is asking — there are several considerations to keep in mind when considering how much to offer on a house. These include:
- How long the listing has been active
- The property’s overall condition
- How much you can afford (a home affordability calculator can be helpful)
- The home’s price compared to the local market
While an appraisal isn’t required with a cash purchase, it’s wise to get one to ensure you’re making a sound investment.
4. Submit Your Earnest Money
Earnest money is a deposit made to a home seller to show how serious you are about buying a home. This is also called a good faith deposit, because the money also serves as a deposit on the property. It’s not the same as a down payment, which is the amount of money you pay upfront when using a mortgage to finance your home.
Earnest money is put into an escrow account and held there until closing when it is then applied to your down payment.
5. Get A Home Inspection
Getting a home inspection when purchasing a house with cash is crucial because it helps uncover any hidden issues or potential problems, and ensures you make an informed investment decision. Even without a mortgage lender's requirement, a thorough inspection provides peace of mind and can save you from significant repair expenses in the future.
As previously noted, the closing process typically involves fewer complexities compared to a mortgage transaction when you buy a house with cash. After reaching an agreement on the purchase price, you can expect a relatively streamlined closing process, involving the transfer of funds, signing the necessary legal documents and obtaining the property's title.
Tips For Beating Another Cash Offer On A House
If you’re trying to buy a house using a standard mortgage, it can be dispiriting to go up against another buyer who is making a cash offer. But don’t give up hope — there are some steps you can take to beat out a cash offer.
- Submit a preapproval letter: Before you make your offer, getting preapproved for a loan can save time during the buying process and show buyers that you’re a capable buyer. These preapprovals mean that your credit and finances have been checked, essentially giving you the green light for your mortgage loan for when you find the perfect home. Preapprovals give sellers confidence that you’re a safe bet.
- Reduce loan and appraisal contingency time: In order to speed up this part of the home buying process, you can ask your lender to quickly send an appraiser to the property and determine how long the loan turnaround would take.
- Prepare to pay more: Cash buyers often expect a discount because they’re paying for the entire purchase upfront. So, as hard as it may be to hear, non-cash buyers can increase their chances by topping a cash offer.
- Increase your earnest deposit: Boosting your earnest deposit will indicate good faith and demonstrate how willing you are to go the extra mile in order to get your offer accepted.
You can find other suggestions on beating a cash offer here.
The Bottom Line
Purchasing a house with cash offers several advantages, such as avoiding interest payments, faster closing times and less hassle. Cash buyers also enjoy a largely debt-free homeownership experience, with no mortgage-related stress. However, this approach may tie up a significant amount of cash, which can limit other investment opportunities. Also, it is simply not feasible for everyone due to the need for substantial cash reserves.
Ultimately, the decision to buy a house in cash should be made carefully, weighing these pros and cons to align with one's financial goals and circumstances. A good place to start is to determine what you qualify for and start the preapproval process today.