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How to Compete against Cash Offers

In hot sellers markets, it's imperative for homebuyers using mortgages to understand how to compete against cash offers.

All cash offers in real estate transactions have become ubiquitous., so we need to know how to complete against cash offers. They’re everywhere, at every price range, and no longer the single solitary domain of investors looking to score a quick deal. And they’re making it ever more difficult for buyers who need a mortgage to buy a home.

It makes sense for sellers. It’s maddening for buyers. Where is all this cash coming from? Stockpiles of cash can come from a number of sources. Sometimes it’s the proceeds from a prior real estate sale. Sometimes it’s investment returns that paid off handsomely.

More and more often, we’re finding buyers are using cash from family – whether a personal loan, inheritance, or gifted finance from parents or siblings. The truth is that it doesn’t really matter where it’s coming from, only that you, as a buyer, have to compete against the power of that cash. So how does one compete?

Before you can compete with a cash offer, it’s important to understand why cash deals are attractive to sellers. The key word is RISK. With financed sales, sellers have to have faith that (1) the buyers can qualify for a loan, (2) they can deliver documentation to underwriters documenting their ability to repay their loan, and (3) an independent appraisal of the property must equal the sales price of the home.

With cash deals, buyers simply have to provide proof that they have the funds available to close on the sale. Inspections, surveys, and appraisals become optional with cash sales. And finally, with a cash sale – there is no third party (lender) that can prevent the sale from taking place – making it far more likely that the transaction will close on time and with minimal fuss.

You CAN Compete against Cash Offers

There are things you can do that will make your offer far more attractive, in some cases even more attractive than a cash offer. In a strong buyers market, these techniques are rarely, if ever needed but in a strong sellers market (like the one we’re in now), most homes are receiving multiple offers with some over list price. To complete is this kind of market, you have to remove as much risk as possible.

Offer Larger Earnest Money Deposits

The more money you put up as earnest money, the more difficult it will be for you to walk away as a buyer. Seller’s appreciate this. In a time when $1,000 earnest money deposits have become the norm, putting up a 5% earnest money deposit will speak volumes as to the seriousness of your offer.

Eliminate the Option Period

Option periods are typically when inspections are performed. If you’re confident that you really want the home, take your inspector with you on your viewing appointment and have them perform a cursory inspection of the major components. If they can give you the go ahead, and you feel comfortable with it, eliminating an option period both shortens your timeline to close and removes another risk for the seller.

Offer Quick Closing

Quick closings typically will depend on your lender committing to an expedited timeline. Seller’s tend to look favorably upon quick closings where lenders have a history of quick, clean transactions.

Offer Over List Price

Making offers over list price is becoming a standard practice in stronger markets. It’s important to keep in mind though, that the home will still have to appraise in order for it to close. Any listing agent worth their salt will understand this. If you’re using an FHA loan to take advantage of the smaller down payment requirement (3.5%), this tactic wont work for you unless the listing agent has severely underpriced the home.

Buyers using conventional loans however, have the cushion to offer over list price to try to entice the seller to picking their offer.

No Financing Contingency

If, and only if, you have a second option to close on your home using cash rather than financing, removing the financing contingency can put your offer on equal footing with a cash offer. If a cash backup isn’t in the cards for you, remove this contingency ONLY if you’ve had a qualified lender examine your entire loan package and credit history.

Don’t even consider this option if you are self employed or commission based, have questionable FICO scores, and are buying at or above your means.

A Final Thought

The techniques presented above all shift risk from sellers to the buyers. Eliminating risk from the sellers is how to compete against cash offers. It is imperative that you consult with both your Realtor and your lender if you are considering using any of these options during your negotiations.

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