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Home shoppers face fierce competition in today's real estate market, where would-be buyers outnumber sellers. Cash buyers have an advantage because they don't have to wait for a mortgage lender's approval. In April 2021, one-quarter of home sales were to cash buyers.
What is a cash offer on a house?
When a buyer makes a cash offer on real estate, it means they don't need to use a mortgage, as most homebuyers do. They have enough in the bank to buy the property, or they'll have the money after selling their current home or assets such as stocks.
In a hot real estate market, money talks, but not everyone can make a cash offer on a house. If you need to use a mortgage to buy a home, here are strategies for competing against cash buyers.
To compete with cash offers, find out what sellers want
As you prepare an offer, you tend to focus on what the seller has (a house) and what you want (their house). But you'll gain a competitive edge by viewing the transaction from the seller's eyes: What does the seller want?
If you believe the answer is, "money, duh!," you need to exercise empathy and imagination. Sellers want a high price, sure, but they have other goals, too. You may be able to beat cash offers by identifying what else the sellers want, then giving it to them.
"People are selling the house for a reason: job loss, job gain, births, deaths, divorces, marriages," says Chuck Vander Stelt, a real estate agent in Valparaiso, Indiana, and founder of quadwalls.com. "Some life event is causing them to sell the home. Buyers need to make offers that solve the sellers' problems."
The best way to peek inside the mind of your seller is by instructing your buyer’s agent to call up the listing agent and ask, "What are terms that would be especially beneficial to your sellers?" Vander Stelt says. Try to discern what motivates the sellers. What can you do to help them?
Here are common items on home sellers' wish lists:
A hassle-free transaction with easy-to-work-with buyers.
The highest price.
For the buyer’s transaction to close quickly and on time.
To deal with as few contingencies as possible.
To remain in the home after closing for a few days up to two months.
To avoid paying for or supervising repair work.
Think of these desires as problems you can solve. If competing cash buyers aren't able or willing to solve the seller's problems, you may have an advantage.
The least hassle possible
"Make your offer very easy to accept," Vander Stelt says. Use a well-known mortgage lender, make the offer clear and concise, and conceal your frustration at losing out on previous offers you made.
For example, don't demand a response to your offer within two hours. "That doesn't indicate that you're easy to work with," Vander Stelt says. "You're trying to put stress into the equation just to get your way. Who wants to work with that?"
This advice is hard to accept if a previous seller used you as a pawn, leveraging your offer to squeeze more from a competing buyer. Unleashing your righteous anger onto the next seller might feel satisfying, but it's not an effective negotiating posture.
Keep it simple: When you know there will be multiple offers and some of them may be from all-cash buyers, take your feelings out of it and ask yourself, "How can I make my offer the easy one to accept?"
» MORE: How to make an offer on a house
The highest price
Many cash buyers are investors who need to pay a low price to make a profit. Mortgaged buyers can sometimes outbid them.
"Cash buyers typically have a hard line in the sand ... a threshold that they won't be willing to cross, price-point wise," says Michelle Doherty, a real estate agent in northern Virginia with RLAH Real Estate. You can beat these cash investors by paying a little more.
Keep it simple: Some buyers insert escalation clauses into their offers. With an escalation clause, you make an offer at a certain price, but your offer automatically goes up if another buyer bids more, up to a limit. For example, you might offer $210,000 but have an escalation clause that says you'll beat rival offers by $2,000, up to a ceiling of $225,000.
Escalation clauses are cumbersome for sellers, especially if two or more buyers have them. "Just make your best-price offer," Vander Stelt says. In the example above, "just offer the $225,000 and quit messing around."
A sure, fast closing
You may know how demoralizing it feels to lose out to a competing bid for a house. Sellers suffer similarly when they accept an offer, but the buyer withdraws because of problems getting a mortgage. This is a reason that sellers find cash offers attractive: There's no lender to say no.
Not only are cash offers more likely to close, cash buyers usually close faster because they don't have to go through mortgage underwriting, which takes weeks.
When the seller wants a sure, fast transaction without lender glitches, you have to make your offer resemble an all-cash deal. This is where waiving contingencies comes into the picture.
A contingency is wording in an offer that lets you back out of the deal if some condition is not met. Most home purchase contracts include a few contingencies. When you waive a contingency, you're denying yourself an excuse to cancel your offer.
Mortgage buyers who want to compete against cash buyers may waive certain contingencies having to do with home loans.
A financing contingency lets you wriggle out of the deal if you can't qualify for the mortgage.
An appraisal contingency lets you withdraw your offer if an appraiser says the home is worth less than you offered to pay. In real-estate lingo, this is a "low appraisal" or an “appraisal gap.”
Waiving the financing contingency
When you waive the financing contingency, you're betting that you'll qualify for a mortgage in the amount you'll need. You're also signaling that you can close fast. Get a mortgage preapproval before you make the offer and make sure you're buying within your means. Tell the loan officer that you will need to close the loan quickly and ask what the lender will need from you to accomplish that.
Waiving the appraisal contingency
The appraiser works for the lender, not for you. You can't waive the appraisal. But you can waive the appraisal contingency.
"If you're choosing to waive your appraisal contingency, that is simply the right to back out of the contract due to a low appraisal," explains Sherry Chen, a San Diego-based Realtor with the Kappel Realty Group at Compass. "Some folks get confused: 'How can I waive an appraisal contingency if I'm financing my purchase?'" The answer is that an appraisal will be done, but you are declining to protect yourself from a low appraisal.
It's risky to waive an appraisal contingency because it puts you on the hook to pay the difference between the appraised value and the purchase price.
Let's say the seller accepts your $100,000 offer and you waive the appraisal contingency. But the appraiser says the house is worth only $90,000. Based on that valuation, the bank is willing to lend you $85,000. The deal will go through if you have $15,000 cash to bridge the difference between the $85,000 loan amount and the $100,000 purchase price. But if you don't have that much cash, the deal will fall apart and you may lose your deposit.
Waiving these contingencies makes your offer more competitive, but you risk losing your deposit if the deal falls through.
» MORE: How a home appraisal works
Protecting yourself from a low appraisal
Doherty says, "Most of my clients who are waiving both financing and appraisal contingencies are doing about 20% down." That gives them a financial cushion in the event of a low appraisal.
Another strategy employs what Vander Stelt calls appraisal gap coverage. This is a clause that says you'll buy the home if the appraisal reaches a specified threshold. For example, you might have enough cash to make up a $10,000 difference between the price and the appraised value, but not enough to pay for a $15,000 difference. In this case, you would waive the appraisal contingency if the appraisal is within $10,000 of the price.
Keep it simple: When waiving financing and appraisal contingencies, your offer should include supporting documentation: not only a preapproval letter from the lender, but also financial statements proving that you have enough money to cover the appraisal gap, Vander Stelt says. Including these documents makes your offer easier to accept.
To stay in the home after closing
Most sellers plan to buy another home, using the proceeds from the sale for a down payment. After selling their home, they sometimes ask to remain for a few days or weeks. "They're asking for it because the sellers need time for themselves to find their next property to move into, given how hot the market is and how competitive it is," Chen says.
Buyers meet this need by offering a rent-back: a clause in the purchase contract that lets the seller stay in the home for a specified period. Lending rules typically cap the rent-back period at 60 days.
Keep it simple: It's called a rent-back because in a typical market — one that doesn't favor sellers as much as today's does — the seller pays daily rent equivalent to about one-thirtieth of a mortgage payment. But in this market, few buyers charge rent. Doing so would put them at a competitive disadvantage.
To avoid repairs
Some sellers don't want to pay for repairs or supervise the work. Their reluctance isn't always out of arrogance, empty pockets or laziness. The seller might be in a hurry to relocate, or the sale might be part of a divorce settlement and the ex-spouses can't agree on fixes.
You can fulfill the seller's needs by offering to buy the house as-is — but only after getting a professional home inspection.
In this case, hire an inspector, but don't treat the home inspection report as a list of things for the seller to fix. Instead, "it's a sink-or-swim situation," Vander Stelt says, in which you use the inspection report to decide whether to go through with the purchase or walk away.
Keep it simple: A purchase offer specifies how many days the buyer has to get an inspection done. The shorter this period, the more favorably the seller will look upon it. A week or less is ideal. Before making an offer, ask your inspector how many days it will take to get the home inspected and receive the report. Tailor the offer accordingly.
Be wary of skipping the home inspection, as it means you'll be purchasing a home without insight into its true condition.
Strive for understanding
By discovering what the seller wants and crafting your offer accordingly, you can sharpen your competitiveness against cash buyers (and financed buyers, too).
Be cautious about writing a personal letter to the sellers, explaining why they should choose you to buy their home. If you emphasize your similarities to the sellers, you may tempt them to violate fair housing laws. So if you write a letter, don't make it about you. Instead, describe how you can alter your offer to suit the seller. For example, your offer might not include a rent-back, but the letter can say that you're open to the idea.
Keep it simple: Make sure everyone agrees on terminology. The sellers might ask for an "inspection waiver" when they really mean that they want you to buy as-is. Ask questions to make sure you and the seller understand each other.