Tuesday, April 15, 2014


Sellers prefer cash offers for several reasons.  When you contrast how “easy” a cash purchase is compared to a financed offer, especially in a hot market, the bias towards cash is obvious.

CLOSING TIME FRAME – A cash buyer can, theoretically, close the next day.  Usually, the cash buyer will want 10 to 15 days to get the home inspected, review the title commitment and (if applicable) HOA docs, but after that… it’s straight to closing.

INSPECTIONS – Not all cash buyers will take a home “as is”, but many will.  Inspections are usually just to verify there are no major deficiencies, with no “nickel and diming” arguments over minor repairs.

APPRAISAL – Many cash buyers are confident and know what they are doing.  Therefore, they will often skip right over an appraisal, which is a huge issue in today’s rising-prices environment.  Because appraisals look backwards, at closed sales, and many homes are now going to the highest bidder, eliminating the risk of a low appraisal is another major incentive to take a cash offer.

What’s missing from this list of key components of a cash offer?  Uh huh, financing. 

When a seller chooses to work with a financed buyer, there’s a whole new set of risks that enter into the transaction.

First, the appraisal.  Any financed deal is going to require an appraisal, and the lender will only finance on the LOWER of the contract price or appraised value.  Let’s say you off $300,000 for a house with a 10% down payment.  That would be a $30,000 down payment

But in today’s super-heated, emotional world of bidding wars, the appraisal comes back at $285,000.  Now you have a problem, because instead of loaning 90% of $300,000 ($270,000), the lender is only going to lend 90% of $285,000 ($256,500).  That means if the seller won’t lower his price (he won’t), the buyer’s only recourse is to find another $13,500 to add to his down payment. 

Does the buyer have it?  Maybe, maybe not.  But if not, the deal is dead.

Now we have the biggest challenge of all, and that is getting a loan through underwriting.  Unlike 10 years ago, when lenders willingly gave money to anyone who could blink their eyes or touch their nose, it takes a real job (with a two-year employment history), real credit, and a real down payment to buy a house in 2014. 

Not everyone fits neatly into that box. 

With rates having gone up and buyers desperately trying to get into the market before rates rise further, some buyers are borderline in terms of qualifying.  (That’s why, as an agent, you absolutely MUST make sure your buyer is in competent hands with financing and that nothing is being left to chance here)

Let’s say a buyer with a 42% DTI ratio goes under contract today, but tomorrow, rates go up .25% and they haven’t yet locked in their loan.  Now their DTI is 46%, and suddenly their financing is dead. 

If you’re a seller, you would rather not deal with this.

But let’s go all the way now and talk about FHA and VA, because in addition to being the lowest possible down payment products on the market, FHA and VA have condition requirements for properties.  Fifteen of them, in fact. 

Things like cracked or broken panes of glass, missing handrails, exit doors that don’t open and close cleanly, trip hazards (think heaving sidewalks), roof issues, peeling paint… all of these are subject to review in an FHA or VA appraisal, and if issues exist, the deal dies unless the seller will fix them.

While most homes don’t have these types of issues, many do.  And especially in a hot market, sellers simply have no interest in creating transactional risk by opening the door to these kinds of reviews, many of which are subjective. 

This is not an all-inclusive list of why sellers prefer cash to financing, but it illustrates the point. 

Now I know what you're probably saying.  "Who's got $300,000 in cash sitting around to buy a house?"  Ready for a shocker?  Right now, nationally, 35% of all buyers are showing up to closing with cash.  

All things being equal, a cash buyer beats a financed buyer every time.  And if no solid cash buyer exists, a more qualified financed buyer beats an FHA or a VA buyer. 

It’s not fair, but it’s a fact.  Even if a lender says you’re qualified to buy a home, in 2014, the market may not agree.