With the explosion of the housing market over the past couple years, you may be hearing about more interested buyers having to make cash offers to get the home of their dreams. There are a few different ways to make an offer to purchase when buying a home. While taking out a home mortgage loan is still more popular, nearly one third of buyers are now paying entirely with cash. When making a Cash offer, a potential buyer is looking to purchase the property outright. The funds used for the purchase are typically used from savings, a gift or equity from another property.
The adage, “Cash is King” certainly is the case when purchasing a home. However, like any decision, there are pros and cons to making a cash offer.
The main advantage to making a cash offer is that sellers typically prefer cash to an offer that will be paid through a mortgage. Additionally, the buyer will own the property outright after the closing – meaning they will not have any payment obligations other than property taxes. Although not recommended, properties bought entirely with cash do not have to be insured.
With so many positives, you may be wondering what downsides there are to making all-cash offers. When paying the full cost upfront, the funds are tied up in the property, therefore they are not liquid and cannot be used for any immediate purchases. Additionally, the risk to the funds used are tied 100% to the property purchased, meaning if the Real Estate market goes into decline, like it did in 2008 and 2009, the value of the funds are not diversified and the owner could potentially suffer large losses if they are forced to sell before the value of the property rises. Real Estate values will come back when the housing market does, but it could take months or even years.
Making an all-cash offer instead of financing through a mortgage company, means the borrower won’t be able take advantage of low rates. Savvy investors use leverage (borrowing funds) to their advantage when rates are low. By leveraging funds, an investor or borrower, “frees” up their dollars to be used for other necessary purchases or investments.
Having enough cash available to purchase a new home outright, does making the process of buying a home a more effortless. However, an argument can be made to not use cash when making large purchases like a home. By financing the purchase, other future opportunities become accesible to the home buyer that would not have otherwise been available. According to Real Estate Investor and Coach, Robert Kiyoskaki in his bestselling book, “Rich Dad Poor Dad” debt is alright if it is good debt. “Debt is good when what it is used to purchase goes up in value quicker than the cost of borrowing.”
Therefore, financing a home, may, in some cases, be a better option financially than paying with cash.