When you’re looking for properties to buy, you may come across listings that say ‘cash only.’ This is a different scenario than regularly listed properties. The name says it all – you can only buy the property if you’re paying in all-cash – no financing will be accepted. Sellers don’t want to deal with lenders or contingencies, but there’s a reason.
Why would a seller request a cash-only transaction? What are the benefits of following this strategy? Here’s what you need to know.
Cash Only Properties Aren’t In Good Condition
The main reason sellers list a property as cash only is it’s not in any condition that a bank would approve financing. The home was either abandoned or foreclosed on and not taken care of for quite a while. The home may be completely distressed or just have features that the seller knows a bank wouldn’t approve of and they don’t want to put the money into it to fix it.
Some Sellers Want To Sell The Home Fast
Sometimes, sellers just want to sell the home quickly and they don’t want anything to hold it up. Sellers that found their dream home or need to move fast for other reasons don’t want to be tied down by a buyer with mortgage financing who could experience delays in the buying process.
How Do You Buy A House Cash Only?
The typical way to buy a house cash only is to obviously pay cash. Let’s say you sign a contract to buy the home for $100,000. That means you’d need $100,000 in certified funds (usually a wire) from the bank paid to the seller.
Not everyone has $100,000+ lying around though, so there is another way you can take advantage of a cash-only deal – a hard money loan.
Hard money loans aren’t cash exactly since you take out financing to get the funds, but they differ from a traditional mortgage. Hard money lenders focus on the property, not the borrower.
You might think that’s not a good thing if the property is distressed, how would you get a hard money loan? Here’s how it works.
A hard money lender looks at the property value now and its estimated after-repaired value. You probably will fix up the property and either sell it for a profit or rent it out, so the hard money lender focuses on the end product – what’s the home going to be worth after you fix it up?
Mortgage lenders look at the property’s value now – they don’t consider its after-repaired value. Since the home is distressed, most mortgage lenders wouldn’t provide funding.
What Are The Benefits Of Buying A Cash Only House?
Buying a cash-only house has its benefits, as well as its drawbacks. For now, let’s focus on the good – how you benefit from buying a cash-only listing.
- The sale usually goes through faster. Since you don’t have to wait for a traditional mortgage to go through, you can usually close on a cash sale in a week or two, allowing you to get your investment going faster than if you had to wait for a bank.
- There are fewer hurdles. When you deal with a bank, you have to answer for your own qualifications and those of the property. You’ll field a lot of questions, have to provide a lot of documentation, and may even experience delays if the underwriter sees any problems.
- It may cost less money. Not only will you pay less for the house because it’s cash only and likely distressed, but you’ll also pay less in fees and interest. Even if you borrow a hard money loan, it’s a shorter-term loan so you’ll pay it off faster. Most real estate investors pay their loans off in 6 – 12 months because they fix and flip the home.
- You don’t have to worry about contingencies. Sellers don’t like contingencies and when you’re a cash buyer, there are fewer reasons to have one. Contingencies give you a way out of the contract, but if you’re looking to invest in a property, chances are you want to get the ball rolling as quickly as possible and don’t care about contingencies.
What Are The Downsides Of Buying A Cash Only House?
With the good must come the bad, right? Buying a house cash has its negatives that you should consider before investing.
- It’s a large opportunity cost. When you tie up your cash in the property it’s illiquid. You won’t get your money back until you sell the property which could take months or longer depending on its condition and the state of the market.
- You lose your flexibility in backing out of the contract. When you have mortgage financing, you can have a contingent purchase. When you pay cash, there’s no financing to make the sale contingent on, which means you’re stuck in the contract.
- The home may be in disarray. When you buy a cash-only property, it usually has a lot of problems, which could inflate the cost of the property, and decrease your profits.
Should You Buy A Cash Only Property?
Buying a cash-only property isn’t right for everyone. Weigh the pros and cons before you decide. If you think it’s a good purchase, consider using a hard money loan versus investing all your cash in the property itself.
You’ll need a contingency fund on hand, plus money for other investments and expenses in your life. Tying everything up with one investment is risky business, but when you offset it with a hard money loan that you pay off in a short period, you get the best of both worlds – a lower-priced house and liquidity with your funds.