Why Cash is King in the Current Market

by Cecilia Kleiner 05/10/2023

 

Today, more and more homes are being purchased with cash. In fact, according to the National Association of REALTORS, almost 30% of existing-home sales in January and February 2023 were all-cash transactions vs. those financed with a mortgage, and for the past six months, cash buyers have comprised more than a quarter of the total market.

There are many reasons why cash offers are on the rise including:

  • Today’s higher mortgage interest rates
  • Intense competition for a limited supply of homes
  • Current stock market volatility, which has made hard assets like real estate more attractive
  • The household wealth that was created via the longest bull market in U.S. history (2009-2020), the subsequent pandemic stock market rally, and the pandemic-fueled housing boom

 

Sellers often prefer cash buyers because they offer greater certainty and, if a seller desires, a more immediate closing. Cash transactions also eliminate the need for an appraisal – another advantage in a market where low inventory and rapid price appreciation has created a lack of “comps” (comparable home sales that lenders use to confirm the value of the subject property).

All these factors can make it challenging for the vast majority of homebuyers who still need to finance a purchase with a mortgage. However, there are several ways these buyers can make themselves just as appealing as their more “flush” competition. Here are four tried and true strategies:

1. Powerful Loan Approvals

Recognizing the position many homebuyers are in, some mortgage lenders are offering new loan-application and underwriting processes designed to generate fast, effectual approvals that essentially level the playing field for buyers competing against cash.

  • For example, @properties’ affiliated mortgage company, Proper Rate, offers a new product called the PowerBid Approval, which puts a fully underwritten mortgage pre-approval in a buyer’s hands before they even make an offer on a home.
  • Another Proper Rate product, Same Day Mortgage, delivers a fully underwritten approval within 24 hours of receiving a signed contract and buyer paperwork.

While mortgage approvals used to take weeks, creating uncertainty for both the buyer and seller, today tech-enabled lenders like Proper Rate can complete the process in hours, giving both parties much greater assurance.

2. Flexible Contract Terms

If a buyer must obtain a mortgage, another strategy that can put them in a stronger position is offering the seller various accommodations on other terms of the contract.

  • For example, the buyer can offer a flexible closing date or a lease-back if the seller wants more time in their current home.
  • If there’s a chance the home might appraise below the offer price, the buyer can include an appraisal gap clause, which guarantees that the buyer will cover the difference between the contact price and the appraised price, up to a certain amount. In markets where multiple offers are resulting in sales prices well above asking, this is a good strategy.

Finally, some buyers may be willing to waive a home inspection and purchase a property “as-is.” Always consult with us before waiving an inspection or any other contingency.

3. More Earnest Money

Another way a buyer can appeal to a seller is by making a larger earnest-money deposit. Earnest money is a good faith deposit held in escrow until the closing to ensure the buyer complies with the terms of the contract. If the buyer defaults, they can lose this deposit.

Traditionally, earnest money ranges from 5-10% of a home’s purchase price, for example $25,000 to $50,000 on a $500,000 home. But, if a buyer plans to make a larger down payment, say 20-30% of the purchase price, then committing all of those funds ($100,000 to $150,000) to earnest money will give a seller much greater confidence.

Since this money would likely be sitting in a low-interest-earning savings account anyway, the buyer really doesn’t lose anything by putting up more earnest money – as long as they’re sure they’re going to close.

4. Up the Offer

Finally, there’s the tried-and-true technique of offering more money. It’s not foolproof, but buyers with solid financing and seller-friendly terms can put themselves in a strong position to prevail over a cash offer by sweetening the pot.

Low housing inventory, sustained demand, and the strong financial position of many of today’s buyers make it likely that cash purchases will remain a significant part of the real estate market for the foreseeable future. Understanding cash offers and the strategies for competing against them will help homebuyers who are financing their purchases achieve greater success.

About the Author
Author

Cecilia Kleiner

Your Trusted Resource for Real Estate

@properties shares my commitment to offering the most comprehensive and professional marketing, sophisticated technology, and expert market knowledge, supporting the highest standards of service and representation you expect and deserve. With local leadership and national and international reach, I bring results to clients wherever their buying and selling goals take them. I'd love to assist you. Whether you're in the research phase at the beginning of your real estate search or you know exactly what you're looking for, you'll benefit from having a real estate professional by your side. I'd be honored to put my real estate experience to work for you.  

I appreciate and welcome your inquiry, real estate need, or referral!