Advantages of all-cash home transactions

Question:

My real estate broker tells me that about a quarter of her sales are for cash. If people have enough money to pay cash for a home, then surely, they can get a mortgage, so why don’t they finance and use the rest of the money for other purposes?

Answer:

All-cash transactions are surprisingly common. Figures from the National Association of Realtors (NAR) show that 26% of all existing home sales in October were all-cash transactions. The situation with new homes is a little different. The National Association of Home Builders reports that in the first three quarters of 2022 all-cash deals represented 9.5% of all sales, more than FHA-financed new home purchases for the first time since 2007.

If you have the dollars to buy a property for cash, it might well be an attractive option for several reasons.

One of the biggest headaches for home buyers is the mortgage application process, the need to meet certain standards to qualify for financing. If you’re an all-cash buyer you can skip the whole application process, something that saves time, irritation, and sometimes lender rejections.

That’s right, it’s possible to have lots of cash as well as a mortgage application that does not pass muster. This can happen when an applicant wants financing but has woeful credit; they’re not using their cash to pay bills on time or in full, something that deeply troubles lenders.

Cash also gives buyers a marketplace advantage. Make a cash offer and sellers no longer have to worry about lender approvals. Cash buyers have a plain ability to close and that can mean discounted offers look attractive, especially in local markets where sales have slowed.

Right now, while prices have generally held up as of this writing, sales have slowed as a result of inflation, higher mortgage rates, and the possibility of recession.

In October, for example, existing sales were down 28.4% from a year earlier according to NAR, a huge drop. Prices across the country, however, were actually up 6.6% from a year earlier, though results in local markets may differ.

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By Peter G. Miller

The interest rates that have increased so quickly during the past year are a boon to all-cash buyers. Higher rates reduce property competition and bidding wars because there are fewer potential buyers. That means still-more market leverage for all-cash purchasers.

Why would well-healed buyers purchase with cash when they could borrow money to finance a property and use their cash to buy stocks and bonds? One answer may be a general comfort with real estate as an investment option. An October study from Coldwell Banker Real Estate found that “80% of U.S.-based high-net-worth consumers agree that real estate is a safe investment, and over one-third agree that it is the safest investment one can make when compared to stocks, bonds, cryptocurrency and pensions.”

Some of those with big savings buy with cash because it simply makes them feel comfortable, especially when times get tough. After all, there are no worries about lenders foreclosing when you don’t have a mortgage.

Email your real estate questions to Mr. Miller at peter@ctwfeatures.com.