Buying Real Estate With Cash
Buying Real Estate With Cash
There can be many advantages to buying real estate with cash. Whether you are buying a home to live in or buying real estate to invest in cash offers grab the seller’s attention. Buying with cash allows the buyer to save time and close quicker on the purchase if that is what they want to do. With fewer contingencies a cash offer can be more competitive than a higher priced financed offer. Learn more about how to use cash to buy investment real estate or buy a home in this article.
Where To Get The Cash
If you happen to have enough cash savings to cover your purchase, then perfect. Make an offer based on the cash in a readily accessible bank account. Sellers will want to see proof of funds which means providing a copy of a bank statement showing the required amount of cash based on the offer price. Even in brokerage accounts where the value of the stock is greater than the offer price can serve as proof of funds for making a cash offer. Most of the stocks on the NASDAQ and NYSE are readily tradeable and the owner can usually sell their shares quickly in order to raise cash.
Cash that will be coming from Home Equity Line of Credit Loans (HELOC) or some other personal lines of credit (LOC) generally can be easily accessed assuming those accounts are current. If a buyer needs to apply for the HELOC or the personal LOC then the seller may not be as convinced about the ability of the buyer to make the purchase. Buyers wanting to use cash from their equity or personal LOC should have applied and been approved for those before even making an offer. Banks offering LOCs and HELOCs usually provide a statement showing the availability of the amount a person can withdraw from those accounts and can be used as the proof of funds statement to satisfy the seller.
If a buyer owns multiple real estate investments their ability to get a personal LOC based on the equity built up in those properties is a possibility. Wrap loans can also allow a buyer to borrow based on the equity of their current real estate investments and the wrap loan becomes a lien on all the properties the buyer is willing to put up as collateral to secure the loan. Existing mortgages remain in place and are not usually affected by the wrap loan. Having enough equity in a property is a big consideration for lenders approving a wrap loan.
Buyers with large stock portfolios can also borrow based on the value of the portfolio in order to get cash. Buyers who have whole life insurance policies that have built up cash value can borrow cash against that value of the insurance policy to use towards buying real estate. There are a number of options buyers can use to bring cash to the table without necessarily having immediate cash on hand.
Beware of Too Much Leverage
Outside of having cash on hand the other methods of raising cash have higher risk due to the leverage involved. If the stock market goes down the portfolio lender can demand the buyer put more cash into their account or sell stock in order to meet margin requirements (also known as a Margin Call). Margin calls can be stressful as a downward trending market can lead to multiple margin calls. If the account holder does not have the cash to put into the account, the next option to prevent a margin call is to sell stock and in a down market that may mean taking a loss on the value of the stock.
Personal LOC also have risk where if the net worth of the person drops that could cause the LOC to be cancelled. With wrap loans if the value of the underlying property put up for collateral drops, then the loan could also be called if the terms of the loan allow for that. While property value does not have to drop based on market forces having just one property covered by a wrap loan literally go up in flames means that the loan may not have sufficient collateral to satisfy the lender. In which case if allowed by the terms of the loan the lender can demand the loan be repaid sooner rather than later.
Buyers should always strive to use actual cash on hand to make a purchase as opposed to cash obtained by taking on another loan. When using a loan to raise the cash for the offer, the buyer should work to pay off that loan as soon as possibly in order to prevent from suddenly being in a situation where there is no cash to cover any debt and the result is having to file for bankruptcy. Too much leverage can be a bad thing.
What Advantages Do Cash Offers Have?
One of the biggest advantage a cash offer has over a financed offer is the fact that there is no third party who can step in at any minute and say this deal cannot go forward. When buying investment real estate or a home with a mortgage the lender can pull the loan at anytime for reasons such as change in buyer’s credit, buyer taking on more debt than allowed based on loan requirements, appraisal comes in low, buyer cannot get insurance for the property and more. With a cash offer the buyer can opt for an appraisal or state they do not need one. The buyer/seller do not have to worry about any credit changes for the buyer. So long as the cash is there on closing day the buyer can purchase the property.
A cash buyer can close much faster than a financed buyer since there is no appraisal requirement and no lender underwriting requirements. Sellers prefer cash buyers over financed buyers even when the cash offer may be lower than the financed offer due to the fewer potential hiccups and ability to close quickly. The cash buyer can close as soon as the title company is ready to close the deal assuming the buyer is not wanting inspections and/or to have an appraisal done.
With the recent interest rate jump in the 30-year mortgage many buyers have stepped back from the market. A cash buyer now faces less competition from financed buyers while home/investment real estate prices and mortgage interest rates remain high. Cash buyers don’t have to worry about interest costs unless they are borrowing money to raise that cash. When buying with cash the buyer can get a mortgage later on in order to extract cash from the property and replenish their cash holdings or pay off debt used to raise that cash.
Cash buyers of investment real estate or buyers of a home to live in can close on the property much quicker than a financed buyer can. Sellers often will prefer a cash offer that offers fewer contingencies. Buyers should be careful though as overleveraging themselves by taking out loans to raise cash could cause problems down the line.
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About the author: The above article “Buying Real Estate With Cash” was provided by Commercial Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you. Contact me today!
I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.