1/3 of U.S. Homebuyers Paid All Cash for Their Homes. Here Are the Dos and Don'ts to Competing With Cash Offers

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KEY POINTS

  • Many buyers pay cash for their homes.
  • Sellers sometimes prefer cash offers since it can make the process easier.
  • Those without a huge amount of cash to put down can still make a competitive offer by getting pre-approved and including an appraisal gap guarantee.

Trying to compete with an all-cash offer is hard, but these tips can help.

Buying a home in cash has become increasingly common. In fact, according to Redfin, almost a third of U.S. home buyers who purchased properties in July 2022 paid cash for the transaction. This is close to the record high, which was hit in February of this year.

If you don't have hundreds of thousands of dollars to put down on a property, this statistic might frustrate you. It can be hard to compete with a cash buyer. Sellers often prefer to work with someone who doesn't have to secure financing. Cash buyers can often close on a more flexible schedule since they don't have to wait for mortgage loan approval. And there's less of a chance of the deal falling through due to problems qualifying for a home loan.

But just because so many people are paying with cash doesn't mean you'll automatically lose out on a property if you can't. You can still make a competitive offer -- you have to be smart about it.

These are the "dos" of competing with cash offers

These are the best ways to successfully compete with an all-cash offer to purchase a property:

  • Get pre-approved for a home loan: Getting pre-approved, gives the seller more confidence you'll actually be able to close on the deal. It also enables you to move forward with securing a mortgage more quickly, which can be a big benefit for sellers. It involves submitting financial details to a mortgage lender and getting a preliminary loan approval. You'll get a letter from the bank that you can submit with your offer so sellers know you've taken this key step.
  • Make a larger deposit: If you can put down more money as an earnest money deposit, this can also convince a seller to work with you even if you aren't making an all-cash offer. It shows you are serious about following through with the deal and can reassure a seller about your financial situation.
  • Include an appraisal gap guarantee: When you get a mortgage, lenders usually require a home appraisal. This can pose a problem if the appraisal shows the home is worth less than you're paying for it since you might not get a large enough mortgage to buy it. Sellers often get nervous about this happening. You can include a clause promising to cover gaps up to a certain amount (such as $10,000) if the appraised value is lower than the offer you made.

Each of these steps is aimed at reassuring sellers that you will follow through on the transaction so they have fewer worries about the deal falling through.

And these are the "don'ts"

There are also some things you shouldn't do in order to compete with all-cash offers. Here's what they are:

  • Waiving too many contingencies. You'll likely want to make your offer contingent (or conditional) upon a satisfactory home inspection and on your ability to secure financing. Otherwise, you could end up buying a money pit or losing your deposit if you can't go through with closing on the home because you're unable to get a loan.
  • Paying more than the home is worth. If you make an offer above asking and promise to pay more than the home is worth, you could end up with a property you can't sell for as much as you paid for it. You'd also have to put a lot more money on the table since lenders won't lend you more than a certain percentage of the home's value.

While you want to compete with cash offers, you want to do it smartly so you don't end up losing money. Hopefully, these tips can help you make a competitive offer without putting your finances at risk.

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