How Does a Cash Offer on a House Work?

The PropertyClub Team
Jun 20th 2020
Even if you haven’t owned a house yet, chances are that you’ve read real estate news talking about people receiving a cash offer on a house. Getting cash offers is usually seen as a great thing, which is why sellers tend to prefer cash buyers. This term carries a lot of clout for a good reason. Here’s the scoop on why people prefer cash offers on a house, how they’re done, and why it’s a smart move.

What Is An All-Cash Offer?

An all-cash offer is precisely what it sounds like. It’s an offer that is made entirely of cash and requires no financing. They’re also just called cash offers, for short.

How Do Cash Offers Differ From Regular Offers?

There are a couple of significant differences that make cash offers stand out from the rest. These include:

  • Fewer contingencies- Since no lender is involved, there are no contingencies based on financing falling out or having to use an approved title home. This leads to a more streamlined offer. 
  • Faster approval- Not having to worry about finance approval also means you can expect the approval and transaction process to move smoothly. 
  • Easier closing- This turns into a simple cash transaction, rather than a three-way meeting with a loan officer. 

Benefits of Accepting A Cash Offer on A House

Having that much cash on hand has a huge array of perks for both the buyer and seller. In real estate, there are two main benefits of accepting a cash offer on a house, which tend to make them more attractive. Since cash bids have no loan or financing tied to them, there are no worries about financing falling out. This makes these bids more likely to go through the full buying process.

Along with being more likely to result in a purchase, cash house buyers also have the added perk of having the sale processed faster. So, time also can be a significant reason why people prefer to get cash instead of a loan.

Are Cash Offers Always A Good Deal?

Not always, though, they do have their perks. Because they are more convenient, most cash buyers tend to issue out offers that are lower than financed offers. If you’re given a cash offer from a potential buyer, it’s best to think about the price point before you agree.

It’s worth pointing out that there is an entire industry of investors and iBuyers who make a killing by offering cash for homes. The caveat is that they often buy the homes for a deep discount, which can put you at risk for having a financial loss. Still, it’s an option if you need the home off the market quickly.

Can You Buy A House For Cash?

If you have the cash, there’s no reason you can’t use it to buy a house. This is true, regardless if you’re a company or just an individual who’s looking to get a new home. Knowing how the cash buying process works is important, though!

How To Buy A House For Cash

There’s some good news and some bad news when it comes to getting a home paid in cash. The good news is that you don’t have a lender who can make your transaction fall through. The bad news is that it still can be a hassle. Here’s what you need to do to make it happen:

  • Send out an offer on the house that you want. After you’ve found and inspected a house, you will need to send out an offer on the house. To move forward with the deal, your seller will need to agree to the offer.
  • Give the seller money in earnest. This ensures that you’re serious and will meet up at the closing day.
  • Once the seller’s legal team approves everything, you can choose the title company and set up a transaction date. There, they hand you the keys, you sign the paperwork, and you hand over a check. Tada! You have a new house.

How To Sell A House For Cash

Selling a house for cash is easier. All you have to do is accept the all-cash offer, set up the title company appointment, and have the transaction. Once that’s done, you will be able to get your cash and give away the keys.

Where Do You Find a Cash Buyer?

Around 15 to 20 percent of all real estate transactions involve an all-cash offer. In the real estate world, there tend to be four main groups of cash buyers, but they’re not always easy to find. The average cash buyer has likely bought multiple homes in the past and is often looking for a good deal. The most common types of cash buyer are:

  • Investors- Both individual investors and real estate companies are known for offering up cash for properties they want. When you’re dealing with a business, they’re known as EPCs—Equity Purchasing Companies.
    Since investors and EPCs tend to deal with distressed properties, they try to keep offers on the low end of things. On a similar tangent are iBuyer companies, who use internet financing to find investment properties to fix and flip. 
  • Retirees- Many retirees tend to buy homes using their retirement funds as a way to avoid mortgage loan costs.
  • Previous Homeowners- Previous homeowners are often equipped with enough cash to buy a new place. They paid off their loans, and they’re just using the profit from their last home to finance their next place.
  • Very Wealthy Individuals- Of course, the most obvious category of cash buyers is exceptionally wealthy people who just want to get a new summer home or don’t want to deal with the hassle of financing a home. 

Another way to find a cash buyer is to simply sell to one of the many companies that buy houses for cash.

What Kind Of Homes Are More Likely To Be “Cash Only?”

Much like how there are homes that tend to be more likely to be financed, there are also homes that are more likely to be bought up using cash bids. Home types that are commonly sought by cash buyers include:

  • Foreclosures and Short Sales- If you’ve had your eye on a foreclosed property, chances are that you’ve noticed that they require cash-only buyers. This is because many banks don’t want to deal with loans involving foreclosed homes, primarily due to the fact that people aren’t allowed to inspect them.
    In many cases, banks are also averse to short sales for a similar reason. That being said, it is still possible to have a bank offer you financing for a short sale or foreclosure in the right circumstances.
  • Distressed Properties- If your home is a fixer-upper, you might find investors who want to buy it in exchange for an all-cash bid. It’s the easiest way to make the sales process happen. 
  • Investment Properties- Much like distressed properties and foreclosures, upscale properties that people view as investment properties are more prone to getting a cash offer than others. Whether or not you want to accept it is up to you.

Why Do Some Homes Require A Cash Offer To Be Sold?

This can happen for a wide range of reasons. It could be a seller’s preference, but in many cases, it’s because the property in question would have a hard time getting approval from lenders. By asking for a cash offer on the table, the seller can circumvent the chances of having an otherwise great sale fall through. 

Another reason why cash-only offers can be a requirement deals with the preferences of who moves in. If you’re getting a co-op for a cash offer, chances are that it is a mandatory requirement that was set forth by the co-op’s council. This is the committee’s way of ensuring that people who buy the co-op will be able to pay the maintenance fees required of them.

Are All-Cash Offers Risky To Make?

This all depends on what you’re trying to do and how you try to do it.  In most cases, making a cash offer is the best way to get a good deal on a house you want and push through the paperwork. However, there is a risk here. 

With financed offers, there’s a requirement to get your home appraised, and banks will be able to use their tech to ensure that you’re getting a reasonable price on the place. With all-cash offers, that requirement is off the table. This means that you have the option to skip an appraiser and that you don’t have a bank that will look out for your valuation’s needs.

At first, this probably sounds great. However, those protections are there to ensure that you’re going to pay a fair value for the home you’re in and not have to worry about additional costs. This means that there may be a slightly higher risk of ending up on the wrong side of the deal. To ensure you stay safe, it’s best to hire an appraiser to help you out. 

How long does it take to close on a house when paying cash?

Since there’s no lender involved, you can expect to close on a house in as little as two weeks when you pay cash. This compares to a minimum of 30 days, and an average of approximately 45 days to close when getting financing, so if you’re a cash buyer, you’ll be able to step into your new home quicker. 

Do All-Cash Offers Still Need Closing Costs?

A common misconception is that cash buyers don’t need to pay closing costs. Sadly, this is not the case. Closing costs cover all the paperwork and filing that needs to be done for a home to be officially sold. As a result, cash buyers still need to cover closing costs.