A lot of investors buy foreclosures with cash -- and for good reason. Cash means a faster, easier sale, and it usually means a better deal, too. Sometimes, it might even open the door to more property options, as many banks avoid mortgage-backed buyers altogether. Are you considering buying a foreclosure with cash? Not sure how to go about it? This guide can walk you through it.
Pros of buying a foreclosure in cash
There are tons of benefits to buying a foreclosure with all cash -- for both you, the buyer, and the bank holding the property.
For one, it means there's no financing involved. Mortgage financing is a lengthy and tedious process, and it requires tons of documentation, lots of time, and endless hassle. While that's no fun for you or other investors, it's a downright turnoff for the banks holding these properties.
You have to remember: Banks are losing money every day these homes sit vacant. They want a fast, easy, pain-free sale. And financing -- particularly government-backed options like a VA or FHA loan? Those won't achieve that at all. As a result, an all-cash offer could give you more negotiating power, especially if you're up against only financed buyers.
There are other benefits, too, of course. Buying in all cash means no mortgage payments -- and that's a big win if you're just looking to flip the property or rent it out. Additionally, there's no interest involved, so even if you pay listing price, you're technically paying less for the home over time.
Cons of buying a foreclosure in cash
On the downside, paying all cash could mean a serious ding to your bank account. As a real estate investor, having a solid financial cushion is critical -- for maintaining both your properties and your business -- so if an all-cash bid requires too much of those reserves, it could be a risky move.
On top of this, there's also less due diligence involved. With a mortgage loan, your lender would probably require an appraisal and maybe even an inspection -- moves that protect your interests and ensure you're making a smart investment of your dollars. Buying in all cash doesn't offer these kinds of perks, and it may mean getting stuck with a dud of a property. If you do go this route, research the property thoroughly and see if an inspection can be permitted. (You typically can't inspect a home if it's still occupied.)
Another drawback is the lack of tax benefits. With a mortgage loan, there are a number of tax deductions you might qualify for on the purchase. Cash offers don't allow for these sorts of perks, though this might not be a major deal if you're not planning to hold the property long.
The pros and cons of buying a foreclosure in cash
|Faster, easier sale.||Could eat into your cash reserves.|
|Makes you a more attractive borrower.||Less due diligence.|
|May come with more negotiating power.||Loss of tax benefits.|
|No mortgage payment.|
|No interest required.|
Buying a foreclosure in cash: A step-by-step guide
The exact process for buying a foreclosure with cash really depends on the venue -- whether you're buying through an auction or purchasing directly from a bank. For clarity's sake, let's look at the process in each scenario:
How to buy a foreclosure with cash at an auction sale
Buying at a foreclosure auction is unique in that you're up against other buyers live and in real time. Additionally, you'll have to deal with the rules of the auction house, which tend to vary wildly depending on where you're buying.
Here's what the process looks like:
- Research the property beforehand and be ready with an appropriate offer price.
- Ask about any required deposits. Many auctions require you to put down a small percentage of your bid upfront.
- Have the cash ready (or have a cashier's check in hand) when you attend the public auction. You may need to hand it over immediately following the auction.
- Submit your bid when the property you're interested in goes up for auction.
- Retrieve your sale certificate before leaving the auction. Once the seller approves your bid, you'll be assigned a closing date, which is when you'll officially take ownership of the property and get the title.
Buying a foreclosure directly from a bank or lender
If you're buying from a bank or lender directly, the process will look a little more like a traditional real estate sale.
Here's how it works:
- Use comps to determine an appropriate offer price.
- Submit a formal offer on the home, noting in the contract that this is a cash deal and no mortgage contingency is required.
- Provide bank statements to the lender or bank, showing you have the cash to make good on the offer.
- Wait to hear back from the lender. If they accept your offer, it will be assigned to a title company.
- Work with the title agent to ensure the closing goes smoothly and quickly. Be responsive if any additional documentation is required along the way.
In both cases, it's never a bad idea to bring in a real estate agent, especially one experienced in foreclosed property purchases. Having a real estate attorney on hand is smart, too, particularly when writing your sales contract.
Options for buying without cash
If an all-cash offer just isn't possible for you financially, there are other ways to buy a foreclosure property, including a conventional, FHA, renovation, or VA loan. Just keep in mind that some banks won't allow for financed offers (or certain types of loans), so double-check a property's listing details before planning on one of these options.
You could also look to a home equity loan or HELOC, if you own other properties. These let you borrow against the existing home's equity, typically up to 85%. You can then use this money to purchase the foreclosed home.
Finally, hard money loans are also an option. These typically come with higher fees and rates, as well as higher down payment requirements. A big benefit here is their speed. These loans are often funded in just a few days' time (a big improvement over traditional mortgage loans).
The bottom line
There's no doubt about it: Investors can find some serious deals when buying foreclosures -- even more so when paying in all cash.
But cash offers aren't your only option for these bargain-basement properties. If you're looking for an alternative way to buy a foreclosure, consider hard money loans, 203k loans, HELOCs, and home renovation loans.
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