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When buying a home, cash is king… but everything is cash at closing.

Cash is king when buying a home

but every deal is cash at the closing table.

Todays episode of Realty With Robb has to do with real estate negotiations, specifically cash offers.

This recently came up in the office when a colleague took a call from a would be investor who was under the impression that a cash offer would substantially lower the amount that a seller would accept on a property. I am just going to come out of the gate with a hearty laugh and state that this is not typically true.

Don’t misunderstand…I said not typically true for a reason. We will start out with talking about some instances which would prove to be the exception to the rule that “everything is cash at closing”.

The first exception would be a true investment grade property. You know the house. The one you walk in and know right off the bat that with a credit score of 850 and everything in order, you are still going to need special financing (rehab, signature loan, revolving business account or some such) in order to purchase the property with a banks help. If you are looking for this type of home AND qualify for this type of credit, you probably are not reading this and are already an experienced and well heeled real estate investor and are not reading this blog.

The next exception to this rule would be buying a FSBO (for sale by owner) home. While there is no real financial advantage to the seller of a FSBO home to lower their price for cash, many will simply because they don’t have the assets available to qualify financeable buyers and will jump on cash just to get a deal to close. I know this is a little judgy, and there are exceptions to this in the FSBO world but they are just that: exceptions.

The third exception to this rule is inherited property. People who inherit property that is the result of someone else’s labor come in two camps. One being they value their ancestors work and the property and squeeze every dime out of it they can. The other being the group that just wants to dump it off for a quick buck and not be bothered with it. I think you know which group you are looking for.

The fourth and final major exception to the rule “everything is cash at closing” is the people who need to sell and close NOW. Whether it is an emergency move, short notice transfer, or someone who is avoiding foreclosure; the big advantage of cash in any housing market is speed to close. If they have to sell and close quick a cash deal could theoretically close in 3-5 days (with 2 weeks being the norm) vs the 30-45 days that one would reasonably expect with a home purchased with a mortgage.

At the end of the day, even these types of sellers typically will not sell substantially below their listing price for the simple reason that the property is worth what it is worth and most people list to sell at a small profit unless they have owned the property for decades and have experienced the full maturity of the asset.

So why is a cash offer not as appealing in real estate as it is in other person to person sales? This is a bit of a complex question, but that answer lies in the fact that real estate tend to be a very high ticket item so it is bought with mortgage financing more often than not. Because of this the financial industry (and government) have gone to great pains to make this type of financing as structured and streamlined as possible. Part of that stream lining is the use of lenders and title companies who take the risk of the money transfers, insure them and then at closing cut a check to the sellers. Since the sellers receive a check or money wire at closing for a real estate purchase as well, the seller sees no advantage (besides the potential 42 day time difference to closing) in accepting a cash deal over a financed one.

Now before you slap me with “but its 42 days faster”, lets look at that.

The average home sold in central Indiana in 2016 was just over $146,000. Let’s assume the buyer wanted a modest cut of the price of say 10% to bring cash to the table. Is getting your money 42 days earlier worth giving up $14,600?

Now let’s assume that buyer is a serious investor who wants a 30% cut in price so he can flip the house like he saw on one of the god awful house flipping shows. Is getting your money 42 days earlier worth giving up $43,800?

The answer to both questions is not unless there was something that would impede a financed deal from going through and in that case the home is over priced.

I hope I have illustrated this well enough to keep right thinking would be investors focused on looking for actual value instead of looking for the quick scam.

If you want to work with a professional realtor who will help you navigate the rough seas of real estate investment, call Robb at 317-657-8059 or email Robb@yourrealtylink.com.

If you want to look for unicorns, I suggest the cartoon network.

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