Author Topic: Buying a home in cash?  (Read 6156 times)

sunflower_yellow

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Buying a home in cash?
« on: September 27, 2013, 05:49:08 PM »
My husband and I are in an interesting situation as first-time home buyers.  We are considering a property for which we could conceivably pay cash without touching our emergency fund or existing retirement funds.

I'm a little uncomfortable going into too much detail online, so I'm going to make up some illustrative numbers to give you the gist of what we're looking at.  Let's say...
-asking price on home is $150k
-cash savings is $165k
-emergency fund included in ^that^ should be $20k, leaving about $145k for buying the place outright.
-retirement savings currently $85k
-we're somewhere around 30ish

We believe that the seller is motivated (but has set the price too high), and based on a few comparables we've seen, we think the place should be valued somewhere between $130k and $145k.

The house will need some work (we're figuring on about $30k tops), for which we could get a HELOC.

So!  In this situation, why get a mortgage?  Why pay in cash?  Would a lower cash offer be more acceptable to a seller than a higher, mortgaged offer?  Maybe get the mortgage and invest the cash?  I don't know if we're saving enough for retirement - we max out our Roth IRAs and I have a small retirement plan at work, but should we be saving more there?  What would you do?  I am new to all of this and trying to learn as much as I can.

Thanks in advance for your insight! 

(Edited to subscribe to replies.)
« Last Edit: September 29, 2013, 07:00:49 AM by sunflower_yellow »

AlexK

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Re: Buying a home in cash?
« Reply #1 on: September 27, 2013, 07:16:04 PM »
Yes, make a cash offer. You can always finance it later if you like. Buying with a mortgage is stressful because you never really know if it is going to go through until it actually does. Buying with cash is a breeze. I have done it both ways. Also if you give the seller a cash offer with proof of funds in your bank account, that will be a much stronger offer than someone else with a financed offer, because banks have a way of pulling out at the last minute, especially since 2008.

Also on a property which needs work, sometimes a bank will not finance it at all. If that is the case you can get a great deal on it by paying cash. Banks are funny, around here they won't lend if it doesn't have a kitchen range, something you can install in 5 minutes for $100 on craigslist.
« Last Edit: September 27, 2013, 07:19:45 PM by AlexK »

NumberJohnny5

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Re: Buying a home in cash?
« Reply #2 on: September 27, 2013, 08:23:26 PM »
I don't "think" there's any reason you couldn't start out paying cash, then switch to financing. As long as the buyer gets the cash, they're good (doesn't matter if it's wired from your account, or if it's a cashier's check from the lending bank). But making a cash offer does let them know you are serious, and will have no problem following through with the offer (unlike an offer that's "contingent on financing").

A couple tips. Don't just give them a bank statement. If you make a lowball offer for $120k, then get a letter from the bank stating that you have $120k available in your account. Check with the agent, ours had to be worded along the lines of "Josetann has $X available in his checking account to fund the purchase of (address of property we were making an offer on)." When you're getting close to your "real" offer, you could get them to write a letter stating you have $138,500 available in your checking account; makes it look like you may not be able to keep going up, and they either have to take it or leave it. Also, be willing to just walk away. If they know you really want the house, and know you have $165k, they may play hardball with you. But if they think you're pretty much tapped out and not super-serious about the house, they may be willing to deal.
« Last Edit: September 27, 2013, 08:58:31 PM by josetann »

arebelspy

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Re: Buying a home in cash?
« Reply #3 on: September 28, 2013, 09:06:28 AM »
Yes, make a cash offer. You can always finance it later if you like.

Quote from: josetann
As long as the buyer gets the cash, they're good

No.  If I'm a seller accepting a cash offer, I expect cash (via wire transfer, yes).

I do care if it's cash versus financed, because financing comes with conditions (appraisal, inspections, etc.) that cash often does not.  If you want to switch at some point in the short escrow period, and didn't have financing lined up to begin with, then ou're suddenly expecting to extend out the escrow, add extra due diligence, etc.  All when I had accepted your offer under the pretense of it being a cash offer.

That's called "not performing" on the contract, and better do it during your due diligence period so you have another reason to back out, or they can keep the EMD.

If you want financing, make the offer that way, don't try to switch to it later.  That would piss me off as a seller, as I've likely taken your lower cash offer over a higher financed one.

In this situation, as a buyer, I often make two offers - a higher financed one*, and a lower cash one.

*By higher, I mean higher than the cash offer, not necessarily high, could still be significantly below their asking price.
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AlexK

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Re: Buying a home in cash?
« Reply #4 on: September 28, 2013, 11:14:55 AM »
Quote
No.  If I'm a seller accepting a cash offer, I expect cash (via wire transfer, yes).

What I meant was buy it with cash now, than after you own it you can refinance it with a bank if the need for the cash arises. I agree it will piss off a seller to switch the method of payment after the contract is signed.

arebelspy

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Re: Buying a home in cash?
« Reply #5 on: September 28, 2013, 08:37:25 PM »
Quote
No.  If I'm a seller accepting a cash offer, I expect cash (via wire transfer, yes).

What I meant was buy it with cash now, than after you own it you can refinance it with a bank if the need for the cash arises. I agree it will piss off a seller to switch the method of payment after the contract is signed.

Ah, I follow you.

Yes, this is true, but many more banks are willing to do initial financing than cash out refi.  The latter often comes at higher rates and lower LTVs, which is annoying.  If you want to finance, I'd do it up front if possible, personally.  But yes, if you have to pay cash (because it's not financeable, for example, or will get you a much better deal from a distressed homeowner), there are ways to refi it later.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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sunflower_yellow

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Re: Buying a home in cash?
« Reply #6 on: September 29, 2013, 06:55:14 AM »
Thank you so much for your replies! 

I really like the idea of having a letter from our credit union stating, "There's XXX amount in this account."  Then the seller understands that, no really, we're not going to increase our offer.  (Having said that, our credit union account holds our house fund AND our emergency fund, so I would probably want to move our emergency fund to another account with the same credit union.  That way the credit union can be truthful, the seller won't know that we have extra savings, and we won't have to throw our entire net worth at the transaction.  In fact, I would probably also put aside the amount of money we'd need to make the repairs we'd like to see.)

I also really like the idea of offering a lower cash price and a higher, "let's play with the bank" price.  From what I understand from the seller's agent and the history on this property, it's fallen into that black hole of "been on the market long enough that the fact that it's been on the market this long is a potential turn-off to buyers."  Two previous offers fell through, I believe at the home inspection stage.  We are taking a risk and getting the inspection before putting in an offer, so we know exactly what we're getting into and can make an offer without contingencies.  Hopefully this puts us in a good position to have the seller accept our offer.

Another question:  what's considered a "low-ball" offer?  I imagine this is pretty situation-specific, eh?  I don't want to insult the seller (insulted seller = purchase offer not accepted).  If we make two offers - one lower in cash, one higher and financed - does that make a much lower cash offer more palatable?

Thank you again for your input.  Really appreciate the suggestions!

lentilman

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Re: Buying a home in cash?
« Reply #7 on: September 29, 2013, 07:29:31 AM »
You also have advantages with a cash offer that might make your offer more attractive to the seller:

1) You can close quickly - perhaps a few days, a week, or perhaps 2.  This can be worth ALOT to a person with cash flow problems and can prevent them from having to carry another month of costs.  It's worthwhile getting your money ready to transfer before making the offer- remember it can takes awhile to move money around
2) No bank shennanigans with last second changes (this gains in value if the seller has had previous offers fall through!)
3) Fewer hoops to jump through.


Snowboard junkie

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Re: Buying a home in cash?
« Reply #8 on: September 29, 2013, 11:58:30 AM »
Cash is king.  There is a psychological advantage to buying with cash.  People take you more seriously, and the fewer conditions will make a difference to a motivated seller.  The letter stating how much cash you have on hand could be overdoing it though, I would save that for round 2 of negotiation if they come back with a counteroffer.  A significant deposit cheque to the real estate agent probably carries more weight re: the seriousness of your offer.  (Also carries with it real risk on your part, so make sure you're ready to buy the place)

Quicker (and sometimes cheaper) closing means you can get an better priced property.
(No Bank costs.  Lower title insurance costs (if you bother with it at all).  Lower appraisal costs, etc.)

If you try to do 2 bids on a property that has been on the market a long time, some flags will go up and   you should expect a counteroffer on the cash bid to be exactly equal to the financed offer. 
(Sorry, but if you showed up with a letter from the bank saying you had precisely 120k, and simultaneously a financed offer for 130k came in, I would be willing to bet that you could manage to scrape up an additional 10k more in cash and call you on your bluff) 

Gamesmanship like this might work in a crowded market, but may demonstrate a little too much effort put into the property and they could use that against you.

Lastly: Your negotiating room is proportional to the estimated costs that arise from the home inspection. 

My gut feeling is that you could save about 3-5% with a cash offer, but this will vary with the market, and could be higher since it's often difficult to get mortgage financing with home inspection issues. 

NumberJohnny5

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Re: Buying a home in cash?
« Reply #9 on: October 04, 2013, 05:46:13 AM »
I really like the idea of having a letter from our credit union stating, "There's XXX amount in this account."  Then the seller understands that, no really, we're not going to increase our offer.  (Having said that, our credit union account holds our house fund AND our emergency fund, so I would probably want to move our emergency fund to another account with the same credit union.  That way the credit union can be truthful, the seller won't know that we have extra savings, and we won't have to throw our entire net worth at the transaction.  In fact, I would probably also put aside the amount of money we'd need to make the repairs we'd like to see.)

That might backfire...because what if you DO decide to up the offer? Anyways, at least with the bank we had at the time, it should be unnecessary. Our letter didn't say "Josetann's bank balance is X", it said "Josetann has enough funds in his checking account to fund a purchase in the amount of X".

So you can have $500,000 in your account, but only want to offer $200,000. The bank doesn't necessarily have to say you have $500k. Rather, they can draft a letter that states that yes, you do indeed have enough money in your account to fund a $200k purchase. If you need to up your offer, the bank just gives you a new letter that states you have enough in your account to fund a $225k purchase. If I were to make an offer like $237k, that would make it appear as though I might not actually have $240k, or $250k...so if they want to squeeze more out of me, it better not be much more (as I might have to be scrambling to secure enough extra cash to cover it). They don't have to know that I have quite a bit more in my account.

But do note, if you make multiple offers you'll be asking someone at your bank for a letter multiple times. How's customer service there? Will they write up a new letter each time with a smile, and offer free coffee and donuts? Or growl at you and say scram after the fifth time?

sunflower_yellow

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Re: Buying a home in cash?
« Reply #10 on: October 04, 2013, 06:47:39 AM »
Hi all,

Thought I'd give a quick update.  For reasons mostly unrelated to finances, we're not going to put in an offer on this property.  The advice in this thread is great, though. 

Josetann, I think your suggestion is actually how our credit union would word the letter (we met with a representative of the credit union last week, and this was very similar to what she was saying). 

I love both of the credit unions of which we are members; they have fantastic customer service, competitive rates, and I feel that they are working for *me,* not a nameless shareholder.  I <3 my credit unions!

Thanks again for all of the advice in this thread.  :-)

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Re: Buying a home in cash?
« Reply #11 on: October 08, 2013, 12:29:02 PM »
We are under contract with a cash offer and our CU would only word the letter to state what funds we had available so we moved funds around to have just a little over our offer. Don't want them to know how much we "really" have:) We may finance later, but if so it would be to make another rental purchase. This is a duplex so if we could keep it "paid for" I would be thrilled with the Cash flow. Note we are using HELOC money from our primary residence. We will be fast tracking the payoff of that HELOC, so we don't necessarily need another funding source for the next one, its a matter of time, and our patience, how long can we wait until we've paid that HELOC down? That is the question. Good luck on your property hunt!

bash

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Re: Buying a home in cash?
« Reply #12 on: November 06, 2013, 04:46:19 PM »
Do people expect proof of funds to accompany a cash offer?  Seems unnecessary especially with a good deposit.

arebelspy

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Re: Buying a home in cash?
« Reply #13 on: November 06, 2013, 05:28:40 PM »
Do people expect proof of funds to accompany a cash offer?  Seems unnecessary especially with a good deposit.

Generally yes, they do.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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