By JAY POWELL
In today’s market, when there are options of loans, long-term mortgages and others that might take a true math wizard to understand, many homebuyers are making all-cash purchases upfront.
In a digital world where most everything is done electronically, you would think carrying around a pile of cash is a risky move.
In today’s market, when there are options of loans, long-term mortgages and others that might take a true math wizard to understand, many homebuyers are making all-cash purchases upfront. So many, in fact, that it accounts for nearly half of all closing sales nationally.
In Williamson County, that number is around 20-30 percent depending on the price.
“About a third of our buyers, give or take, are buying with cash,” Lisa Cahalan, broker for Westhaven in Franklin, said. “I think that a lot of those people are coming from more expensive markets.”
Some might have sold a much larger house and don’t need the extra space or maintenance to deal with. Their kids may have moved out or the homebuyer could be a retiree who has spent years saving and looks to settle down in something a little more simple and affordable.
“We see a lot of buyers who are downsizing a lot of square footage. We see downsizes coming from pretty much every market within Williamson County,” Cahalan said. “They’re coming from 5,000-6,000 square foot mega-homes in Brentwood, Green Hills and Forest Hills. They’re coming here and spending less on a new home and buying with cash.”
On the surface, it seems the simplest method. There aren’t any hidden pitfalls and arguments when you’re staring at cold hard cash. It’s not only beneficial to the buyer, but the seller as well. It makes the buying process a lot smoother, and in some cases buyers are closing under the asking price.
“What we are seeing predominantly in the cash-purchase business are people that, number one, want a discount in the purchase price,” Phillip Cantrell, founder and CEO of Benchmark Realty LLC, said. “And number two, we’re having a lot of these hedge funds moving in here and making offers on properties, all cash, close in 20 days and usually 15-20 percent under the list price, sight unseen.”
When you’re putting a home up for sale, the goal is to have a smooth, quick transaction so you can leave the stress of selling a home behind you. Most sellers don’t want to wait for potential buyers to get approved for mortgages or run the risk of being denied later on while those with cash are ready and waiting to pay in full.
Benefits of paying all-cash
Of all the benefits that come from buying a house with cash, the biggest is the peace of mind for both the buyer and seller.
Cash buyers gain full equity on their home upon purchase, not to mention the money saved on closing costs, bank appraisals, mortgage applications and title insurance fees.
“You have to understand that, to a seller, all purchases are cash,” Cantrell said. “So, from that standpoint the only benefit to the seller would be really the ease of purchase, but it’s a tradeoff of revenue received versus the ease. By ease, I’m talking about you don’t have a loan process to go through, an appraisal process, although 99 percent of them still include appraisals.”
Cahalan said although that is true some of the time, Westhaven’s window of approval is only five-to-seven days. Whereas, in the general market, it’s around 30 days for a loan, 15 for cash.
“We don’t wait as long as general agents, typically, if they use the Tennessee Association of Realtors contract. Our window for that buyer getting financing is very narrow,” Cahalan said.
Mortgage loans will also be one less thing a buyer has to worry about when paying cash, which in the long run will cost less. By eliminating the risk of loan denial, paying in cash is a quick way to streamline a sale, keeping the seller from having to wait or the risk of a lender of opting out due to bad credit.
Self-employers and independent contractors often have difficulty proving two years of employment, relying solely on tax returns. This takes longer and is something many sellers steer clear of when considering offers.
“If you’re self-employed or a 10-99 worker, you have to have two years of tax returns, and that’s pretty much what they base it on,” Cantrell said. “So, if you’ve got two years of good tax returns, there’s no problem. If you’ve got one of those years that’s bad, you’ve got a problem.”
Bad news for first-timers
With all-cash purchases continuing to grow and taking up a lot of the lower to middle-end price points, it’s causing problems for first-time buyers struggling to make a down payment or losing on a deal because they have to wait to qualify for a loan.
“We do not see a lot of first-time buyers,” Cahalan said. “I think that some of what has happened too is with the decline of the real estate market in the past few years, a lot of buyers sat on the sidelines, waiting to see what was going to happen in real estate. And in the meantime, they continued to amass wealth, and so now things have definitely improved and they’re jumping back into the market with their cash.”
First-time buyers consist of much of the market. When inventory is low, however, those with cash are still king, depending on the price point.
“Conventional wisdom is that ‘your first offer is your best offer,'” Cantrell said. “I’m not sure that holds up true anymore because we have a really weird market down here. It’s weird from the standpoint that certain price ranges are hot as a firecracker. Other price ranges there is tons of inventory, so to say universally that one rule applies across all product is absolutely not true.”
But that doesn’t mean there aren’t ways to compete with an all-cash buyer.
The best way is to first be a well-qualified buyer. Those gainfully employed, able to make a good down payment and have good credit will have the best chance of getting pre-approved. But, then it all comes down to if you’ve picked the right agent to meet your needs and will find the right price range.
“I think that if an agent is doing what they should do, they’ve got their buyer well-qualified and coached on number one, the type of property they should be looking at, and two, they’ve got their mortgage already lined up,” Cantrell said. “If the buyer’s agent does that well, as they should, then it kind of takes the wind out of the sails of saying, ‘Hey, I’m a cash buyer, I should go to the front of the line.'”
Finding a good lender also helps as well as doing research on a particular buyer’s wants. Not everybody is in such a hurry to sell and are willing to wait in order to get the best offer for their home. Paying in cash does often lead to faster closings and lower costs, but for someone looking to get the highest price for their home, it’s sometimes worth the wait.
All-Cash tips, finding the right lender
Self-discipline and keeping a tight record of extra earnings, such as work bonuses and inheritances, are smart if you are planning to buy a home with cash, but don’t know where to start.
Cantrell said the biggest tip he has is to make sure it really is an all-cash purchase, be wise on spending and, above all, have a good attitude.
“There’s a brashness that comes about when folks have a pocket full of cash that will absolutely sink the ship. If you’re asking the seller to come off his price 20 percent, you’d better have a darn good reason. Don’t wait it out, in other words,” Cantrell said. “And don’t be arrogant about it; the sellers bow up on that pretty quick.”
Above all, having a good accountability team will be the best way to stay on track. Avoid the temptation to spend money when it isn’t needed, tell friends and family about your house buying goals and keep a tight record of expenses.
Opening a separate savings account or long-term CD will keep your money secure and in a spot where you won’t be tempted to spend it next time you swipe your card at the store.
In the end, it comes down to whether or not the buyer is in the right hands. Many lenders will do much of the footwork before even looking at houses.
“We take the buyer prospect before we even look for houses, and we send them all the way through the underwriting process so that by the time you get a contract, as long as nothing’s changed, that buyer is already locked and loaded, literally,” Cantrell said. “If you work with a lender where all of that stuff is done on the front end, when they send the buyer through underwriting, then it short circuits a lot of that and really takes the wind out of the sails of a cash offer.”