How to Compete Against All-Cash Homebuyers
Cash buyers for homes are intimidating. Believe me, I speak from experience. They exist, and they are looking to buy in your hometown. According to the National Association of Realtors, "With fewer properties on the market compared to one year ago, a higher fraction of non-first-time buyers are making all-cash offers." It may not sound like a lot, but they’re out there, and their offers are noticeable. So what does it take to overcome these Goliaths?
Before answering that, let’s start with a little background information on the pros and cons of all-cash offers so you can understand what you’re up against.
Benefits of accepting a cash offer on a house
All cash means a fast closing, and of course, no mortgage. And no mortgage means no problems...or does it? More on that below.
The ultimate benefit is a fast closing, assuming the buyer can produce their source of cash and wants to waive the appraisal, inspection, or both. If they don’t waive the appraisal or inspection, they’re still looking at timelines to have those services done, meaning it’s not much faster than a buyer with a mortgage. The only difference is there is no financing contingency.
Remember, your competition may have a lot of cash on hand, but that doesn’t mean it’s the end of the road for you. So let’s focus on what could go wrong and how you can compete.
What could go wrong with an all-cash offer
Yes, you read that right. Things can go wrong with an all-cash offer. Many cash buyers know they’re working with a good hand, so they often offer the asking price or even less.
Before you accept an all-cash offer, be sure you see a proof of funds and fully understand where the money is coming from. Maybe the buyer is expecting funds from his home sale, and unfortunately, that falls through, or he makes less than anticipated. Perhaps they’re using an investor who is providing them the cash in one lump sum. That could have the potential to fall through.
Another competitor that is up and coming is the iBuyer. Startups and companies that fall under the iBuyer category (think Zillow instant offers, Redfin, Opendoor, and OfferPad) aren’t necessarily a formidable competitor. Can they keep you from buying your dream home? Well, yes, but it’s highly unlikely you’d even know that home ever hit the market. Many sellers who choose iBuyers are doing so to avoid having to list and show their home. They want a quick sale and fast closing, so they often sell to the iBuyer before ever trying their home on the market.
6 ways you can get your offer noticed
Now that you have a little background information on your competition let’s get into the six proven ways you can get your offer noticed and accepted.
1. Hire the right realtor
A knowledgeable and market savvy realtor will guide you through a variety of options when it comes time to compete in a bidding war, whether an all-cash buyer is involved or not. That’s right; the game isn’t over once your offer is submitted. It’s only just beginning.
Even if you don’t face competition, there can be counteroffers from the seller. Be sure the realtor you hire is ready to go to battle for you. Sometimes it’s more than what’s in the offer; it’s selling you — the buyer. Does your realtor know you well enough to be able to do that?
Need a realtor in the Denver area? Check out American Home Agents.
2. Increase your earnest deposit
Your earnest money is a deposit made to the seller, held in escrow, to show good faith and your interest in purchasing the property. It is applied toward your down payment and closing costs once you reach the closing table, so it’s not money lost. Buyers typically need to offer 1%-3% of the purchase price.
Earnest money will need to be submitted within three days of the seller accepting your offer, so it’s a good idea to have liquid funds available when you make the offer. You don’t want to have to borrow from your 401k or sell stocks last minute to meet the commitment.
3. Schedule a quick inspection
The faster you can schedule an inspection, the sooner you know what needs to be addressed. If there are a few minor issues that need to be resolved, consider taking them on yourself (as long as they are not safety or health issues). By limiting how much you ask them to fix, you’re able to save them some time and potentially money. If the projects are costly, you can always request seller concessions.
4. Agree to the seller’s timeline
Find out what your seller’s goals are. They likely want a smooth transition since they, too, are needing to relocate. Keep your list of contingencies short and be sure your closing aligns with your seller’s timeline. Do they need a little extra time before they can move to their new home? Are they moving in four weeks or less? You need to be more than agreeable when it comes to meeting their needs if you want to beat out an all-cash home offer.
5. Offer a little extra to cover a low appraisal
If the home appraises for less than expected, you have an opportunity to shine by covering the appraisal gap. Cash buyers don’t have the same limitations as mortgage borrowers. So if a home appraises for less than the agreed-upon purchase price, it affects the loan-to-value ratio, and the contract will likely change. Sometimes the buyer will make up the difference in cash (covering the appraisal gap), though it’s also possible for a seller to lower the home price. The latter, of course, hurts the seller and is very unlikely to happen in a seller's market.
Say you’re under contract to purchase a $495,000 home. If your offer includes a $3,000 appraisal guarantee, you’re letting the sellers know that if the home appraises low, you’ll help cover $3,000 of that loss. It comes out of pocket, so you need to have funds on hand, but the loan amount is smaller, so you’re financing less mortgage. If the home appraises for the sales price or higher, you do not owe the promised appraisal guarantee.
Learn more about how to prepare for an appraisal with our appraisal checklist.
6. Make it personal with a letter
Do you love their newly renovated kitchen? Well, they worked hard on it, so tell them. Maybe it’s their beautifully landscaped cul-de-sac? Even if they don’t maintain it, it’s highly likely their kids use it to ride their bikes around. Be colorful when explaining your love for their home and neighborhood. Sellers who want to pass their home along to an investor are few and far between. If you’re up against an all-cash offer, that may be what’s happening. So, take a few minutes and share your story.
The bottom line
The proceeds you receive at the closing are in the same dollars no matter who writes the check. So, don’t give up or move on too quickly just because you are competing against an all-cash homebuyer.
Come in with the best offer you can afford, and be prepared to be flexible so you can leave an impression on the seller. By following the six proven tips above, you’re sure to be one step closer to owning your dream home.