Have you seen real estate listings marked ‘cash only’? It seems strange – who has the cash to buy a house outright? But they exist, and fortunately, there are ways to get the cash you need if you want those properties.
Let’s look at what ‘cash only’ purchases mean.
Sellers Are Only Accepting Cash
First, let’s look at the obvious – you can only buy the property with cash. Financing isn’t allowed, and the seller doesn’t want to wait for buyers to get loan approval. This doesn’t mean you can’t have financing behind the scenes, however.
A short-term loan, cash advance, or even a loan from your personal network is allowed. As long as you have the cold-hard cash available to pay the seller and there’s no financing involved regarding the property, you can buy the property.
The Home Isn’t In Good Condition
Now, let’s look at why sellers would request cash only. There’s typically one main reason – the home won’t pass the appraisal process. The seller knows the home needs major repairs and no lender in their right mind would provide financing for a property in such serious disrepair.
In many cases, the home may be not inhabitable. In other words, it needs a lot of work to get to a livable and sellable state. If you don’t have the cash and experience needed to buy it and fix it up, it’s probably not the right investment for you. The issues could be with the flooring, roofing, windows, mold, dry rot, siding damage, drywall damage, missing appliances, or other hazards that need to be addressed.
If there was financing that needed to be secured, it would create financial and logistical nightmares for the seller. He’d have to agree to make specific and costly changes so the lender will approve the loan. If the seller is in a position to sell cash only, it means he doesn’t have the means or interest in fixing the property, so asking isn’t an option. As a buyer, your hope is that the home is undervalued and you’ll score a great deal. Being able to make a cash offer also gives the buyer some leverage and usually leads to more flexibility in the final price.
Should You Consider A Cash-Only Purchase?
The bigger question is should you even consider a cash-only purchase? It doesn’t matter if you can get your hands on the cash, as many people can through the sale of assets or other loan means, but is it worth it?
Consider the following:
- Do you have enough money not only to buy the home but also to fix it up? Have you seen the interior? Did you pay for an inspection so you know exactly what’s wrong and what it will cost?
- Did you do your research on the area? Is the home worth more than it will cost you to buy it and repair it? We aren’t talking cosmetic changes here – we’re talking full-blown structural changes that will cost thousands of dollars.
- Do you have a contingency fund available? We all know nothing is what it seems. Once the contractors start the work, what happens if they find more problems or emergency issues? Do you have money set aside on top of the money you have saved to buy and fix the home? Figure a 10 – 15 percent contingency fund just in case.
- Do you have reputable contractors that can do the work, bringing the home back up to code and making it attractive? Remember, you want to sell the home for a profit, but you also need it to pass an appraisal for future buyers as most buyers use some type of financing. A good contractor will be key.
- Do you have the money to cover the carrying costs based on how long the repairs will take? Work with reputable contractors so you have a valid timeline and then calculate what it will cost to keep the home on your inventory, tying up your liquid cash.
Are Sellers Hiding Something With Cash-Only Purchases?
Do your due diligence when buying a home in all cash. There is less protection on your end since you won’t have the traditional appraisal and extra set of eyes looking over the property. You know it’s in bad condition, but do you know how bad? Hire the professionals that will provide an honest opinion on the home’s condition and what it needs to bring it back up to code and to a point where people could safely live in it.
Cash-only purchases aren’t always the best choice, especially for beginners. Finding a property that will accept financing allows you to spread out your spending, making the most of your investment and giving you a better chance of earning more profits in the end. But if you find the right cash-only property – go for it, and have a solid plan in place to help you.