Is Selling a Home For Cash a Mistake?
When a buyer offers to pay cash for your house, it might seem like a dream come true. After all, it eliminates the chances of the deal falling through if they can’t get a lender’s approval. But accepting a cash offer might also mean leaving a lot of money on the table. Whether selling a home for cash is a good idea or not depends on who is making the offer—and why.
Why Would a Buyer Offer Cash?
There are four different types of buyers who might want to make a cash purchase of a home. The purchase price and procedures for the sale depend on who the seller is dealing with.
There are people on the hunt for properties they can flip. The houses they buy are often for sale as-is and can be in very bad shape. A flippers goal is to make a profit by fixing up a cheap house quickly, and then selling it for a profit.
As soon as some house-flippers sell one of their renovated houses, they use the proceeds to buy another fixer-upper. This can mean they have the cash on hand for the offer. The nature of their business, however, means they are looking for deals. They might be willing to take a problem house off of a seller’s hands, but their offer will be at the low end of the spectrum—possibly as low as 70% of the house’s value.
Rental Real Estate Investors
Some investors who are looking for houses to rent out might offer cash. Like flippers, they may be willing to fix up a house that needs work. But rather than needing to attract a new buyer, their goal is to simply make the house desirable for a renter.
This can result in higher offers than a flipper might make, provided the house is in a good location and in reasonably good shape. Take a college town, for example. A house near campus with outdated appliances, carpet, and fixtures might take a lot of time and money to appeal to a buyer. A landlord, however, could find a tenant without doing any work, simply because of its location. The promise of a steady income that is a sure bet, could have an investor offering more than a flipper.
“Instant Buyers” or iBuyers as they’re known, are becoming increasingly common. These include large well known corporations who will buy houses for cash. It also includes smaller investment companies that advertise with billboards and temporary roadside signs, often with little more than a phone number to call.
These companies promise a fast and easy way to sell a house. The appeal is obvious for homeowners who dread the uncertainty and stress that can come with selling a house. They might also offer as much as 98% of a house’s value. But unlike flippers, they are looking for houses in the best possible shape. A house needing a lot of work will get a lower iBuyer offer. Plus, iBuyers charge a fee of about 9% of the sales price for the convenience of working with them, compared to the 6% that would normally go to agent commissions at closing.
iBuyers focus less on the profit they’ll make from the individual houses they buy and sell. Instead, they make their money by turning over the most homes in the shortest amount of time.
Selling a home for cash to an ordinary buyer who needs a place to live is not very common—unless the market is as hot as it is right now. Those who can manage it, are offering cash as a way to compete with the crowd of buyers who are more than willing to engage in a bidding war.
Rather than the discounted prices offered by flippers and investors, cash offers from individuals can mean selling at or above the asking price.
How a Cash Sale Works
When an individual pays cash for a house, the process is only slightly different than when the buyer gets a mortgage. Taking the lender out of the equation decreases the chances of the deal falling through. It also eliminates the time it would take for the financing to be approved. Buyers may still include contingencies in the contract (in fact a home inspection is always recommended), but they won’t be based on a lender’s rigid requirements.
Skipping the step of getting financing is replaced by proof from a bank that the buyer does indeed have the funds. Even though it is called a cash sale, the money changes hands at closing either by electronic transfer or with a cashier’s check.
Aside from that, the title will still need to be cleared of leans, and the buyer must get homeowners insurance as with any home purchase. Closing costs will be the same except for lender’s fees. In these sales, real estate agents can be involved just like in any other home sale, so their commissions are due from the seller at closing.
Advantages of Accepting Cash
Selling a house to an individual for cash, especially in a seller’s market is a good thing. It speeds up the process and there is no danger that a bank will prevent the deal from happening.
Selling to a flipper, rental real estate investor, or iBuyer has some advantages too:
- Sales can be completed within weeks of signing the contract
- Homes are often bought as-is, meaning minimal or no repairs are necessary
- The house does not need to be prepped or staged for photos, videos, or showings
- These buyers are usually flexible about the closing date, giving sellers time to find their next home
For buyers who are in a hurry to sell, or whose property is in poor condition, selling to one of these buyers will give them quick cash without the hassle. That alone is reason enough for some people to make the sale.
When Selling a Home for Cash is Not the Best Option
There are few if any drawbacks to selling to an individual for cash, especially when the market pushes the sales price up. Selling to one of the other types of buyers, however, has some disadvantages:
- Sales prices can be significantly below market value
- The cost of repairs might be deducted from the offer
- iBuyers charge hefty fees
- Scams are a possibility since unlike real estate agents, these buyers are not licensed
Sell for Cash, But Proceed With Caution
One of the most important jobs a real estate agent can do for you is determine a good asking price for your home. Selling to a flipper or investment company for cash may get you only a fraction of what your house is really worth. Finding an individual buyer who wants to pay cash is another story. Not having to worry about a lender’s approval can be a win-win.
When presented with a cash offer, consider the hidden costs and proceed with caution. And contact Berkshire Hathaway HomeServices Select Properties. We’ll be happy to help you make the sale that makes the most sense.
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