CASH ISN’T ALWAYS KING

BY CAMERON CARR

Considerations for paying cash for a home

Central Ohio is experiencing one of the most competitive housing markets in the area’s history. The median and average home sale prices increased more than 10 percent in 2021 to $290,847 and $250,000 respectively, according to a Central Ohio Housing Report from Columbus Realtors.

What’s more, through this past May, a typical home only spent 17 days on the market. While higher value homes typically spend longer on the market, the change in days on market from 2021 to 2022 is even starker for those properties.

The state of the market has buyers hunting for ways to stand out from the competition. One approach has been offering all cash to pay for a home. The percent of all-cash buyers rose from 16 percent in 2020 to 21 percent in 2021, according to Columbus Realtors. In January and February of this year, that number was up to 24.3 percent, on par with numbers last seen in 2014. The shift toward cash makes sense, particularly as sellers field increasingly lucrative and prompt offers. “A cash buyer can wrap up a deal a lot sooner, which is attractive for a seller,” says Matt Steinke, vice president of First Ohio Home Finance Westerville. By taking a cash offer, a seller can avoid the delays and inconveniences of having a buyer going through a lender, Steinke says. While dealing in cash may be in the best interest of the seller, it’s not necessarily the best decision for a buyer. Rather than paying a large sum of cash into a property, a buyer can invest that money into stock markets and likely earn returns high enough to more than offset interest on a loan. “With interest rates as low as they are, it makes a lot more sense to keep money invested because, over time, the market makes 10 percent, versus you can borrow around 3 or 4 percent,” says Vincent Finney, Managing Director - Investments for Bibler Finney Panfil Private Wealth Management Group of Wells Fargo Advisors.

In that example, money invested into the market instead of into a home could earn an additional 6 percent annually. That amount compounds over time, making it an even more savvy decision.

If a buyer kept $500,000 in investments rather than paying that money in cash toward a home purchase, they might make an additional $30,000 a year: $500,000 x 0 .10 = $50,000 made in returns $500,000 x .04 = $20,000 owed in interest $50,000 - $20,000 = $30,000 in net profit

“Our clients can actually go in as a cash buyer because we give them a priority line of credit with us . ”

Ryan Bibler

While a fully paid-for home does avoid interest payments, it likely won’t be building wealth.

“Even after you have your home paid for, it doesn’t pay you an income,” Finney says.

Making an all-cash offer doesn’t necessarily mean a buyer is truly paying in cash. Often, particularly on the higher ends of the market, a buyer will leverage their assets to allow them to act as a cash buyer by refinancing a home or working with a company that will pay cash on their behalf.

Working with a company such as Bibler Finney Panfil Private Wealth Management Group, a buyer can receive a credit line against their after-tax assets.

“Our clients can actually go in as a cash buyer because we give them a priority line of credit with us,” says Ryan Bibler, Managing Director - Investments for Bibler Finney Panfil Private Wealth Management Group. “Once they’ve purchased the house, then we can do a more traditional mortgage option for them.”

That allows a buyer to avoid the capital gains taxes associated with selling a portfolio for cash and still lock into a long-term financing plan while acting as a cash buyer. Those arrangements often allow a buyer to move promptly as well, avoiding the delays associated with a typical lender.

Sweeten the Deal

All-cash offers aren’t the only way to stand out in today’s real estate market. Buyers have found ways to make more attractive offers to separate themselves from other bidders. The most obvious is to make a higher bid: In June of this year, more than two-thirds of homes sold above the list price, according to Rocket Homes.

The trend of bidding above the list price seems to be cooling off, but buyers have other ways to sweeten the deal.

One relatively common approach, Steinke says, is offering to cover the appraisal gap. In that instance, an appraisal finds the fair market value of a home to be less than the agreed-upon sale price. Because lending is based on that market value, the buyer and seller need to negotiate any difference.

By offering up front to pay any appraisal gap, a buyer can reassure the seller that any surprises later won’t turn sour. Still, Steinke warns that this essentially results in a buyer agreeing to pay more than a property is actually worth. A buyer could, however, agree to pay the gap up to a certain amount, protecting them from any large differences.

Another method is waiving inspection contingency. The inspection contingency gives a buyer the right to an inspection and to negotiate or back out of a deal if the results are less than satisfactory.

“In other words, the buyer’s just saying, ‘I’m buying the house as is,’” Steinke says.

While Steinke recommends all buyers get an inspection, he says that, in some cases, a buyer might feel comfortable waiving their right to back out of a deal after an inspection.

This can be less risky in situations where a buyer already plans to do significant renovations or improvements. Similarly, a buyer could agree to ignore all repairs under a certain value amount, essentially saying that the inspection is only to avoid major issues.

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