Hot Market: cash offer vs financing? & then what to do w/ 100% equity?

[surfer349]

So I've got a question, perhaps you smart mustaches can help out.  This seems to be a complex discussion topic and reddit is just saying: "cash is king."

My Primary Question:
Anyone have thoughts on buying a house in ALL CASH vs financing it?  I'm worried that the market is moving fast here and an all cash offer would make things happen quicker.  Any feedback from experienced buyers/sellers here?  I know that a pre-qualified, financed offer is all the same in the end to the seller, but it moves slower and has many more steps.    This is a question about the theory of the offer.

My Secondary Question:
If I did make an all cash offer on a home, anyone have thoughts on what to do after securing it and moving in?  Keep 100% in equity?  Refinance a mortgage down to 20% equity?  Open a HELOC and pull out cash on revolving credit and put it into other investments?  This is a question about what to do with a 100% equity house.

My Tertiary Question:
Going forward past this, what kind of options do we have to use this house as collateral for a loan to purchase additional investment properties?  Would it be better to have a HIGH% equity or lower, down to 20% to borrow against, opening up more cash for future investment purchases?



So here's my situation:

• just moved Austin TX and its a crazy HOT seller's market.  Friends tell stories of putting offers on 5+ houses and getting outbid before finally getting something or that a house will be on the market for less than 1 day before going under contract
• We are experienced home owners, each having owned primary residences for several years before
• My wife and I have have access to ~$600-$700k cash that we can liquidate & move quickly
• We both have excellent credit (800+) and are already pre-qualified for a 30-year 3.904% $500k mortgage
• We have a month-to-month lease until November, so plenty of time to look for a home and time the market

[bpleshek]

Hi Surfer,

I just read your post today for the first time as I was doing a search of the forums prior to posting my own question.

Primary Question answer:

I have purchased two homes in all cash.  My primary residence and an auction just finished about 2 weeks ago(you can follow the thread here if you want http://forum.mrmoneymustache.com/real-estate-and-landlording/my-first-auction/ ).  We had been consolidating some out of state properties and were looking at a home that was about 280k but decided on a short sale for a $220k house we got for $164k.  We had about 200k in cash, so we could do one cash and the other we'd have to finance.  I can tell you that it's nice not having a mortgage.  It makes it so much easier to say "F-You" at work if necessary.  I'm a contract programmer(IT) so my jobs are 6 months here, 12 months there and sometimes(not often) there can be a few months without income.  So the peace of mind of not having a mortgage is quite nice.  I'm so much happier that I bought this property than the more expensive one(also was a short sale).  The second cash purchase is to be a rental.  Both were closed very quickly.  I won my auction on Aug 10 and closed on Aug 26.  So that's just over two weeks from start to end.  The time frame on my personal residence was about 15 days or so, so about the same.

Secondary Question answer:

Is this for your primary home?  My personal opinion is that your personal residence should stay paid off.  Others may disagree, but I don't want ANY unforeseen bad thing to put me on the street.  I don't care as much for a rental property.  Let's say I lose my job(again since i'm just about to pull the FI trigger it's less of an issue for me).  If I can't make my mortgage on my rental property, it sucks to be my tenant.  Not a great thing, but since it's all about me. :)  Now, if I can't make my mortgage on MY residence, then it sucks to be me. Not if you're completely FI and you have cash flow to spare, I suppose you could do something, but ask yourself this: It's 2006 and your great plan is to take out a $100k mortgage on your personal property to invest in the stock market.  Seems like too much to risk to me, even if it isn't 2006.  Do you want to pay 3% to roll the dice and get 7%?  Then pay taxes on the difference?  Seems a bit of a risk for 4%.  I might want to save up and invest with other money but that's just me.

Tertiary Question answer:

My answer for this is the same as for your second question.  However, if you're applying the MMM plan to save at least 50% of your income per month, let's say that comes to 2500/month.  That means in a year you are saving $30k.  Now that's money you can use to put down on another property as an investment.  In my opinion, if you're going to go the real estate investment route, I'd establish a base of solid equity before you start leveraging like crazy.  I'll give you an example.  Let's say that in your area(like mine) that you can purchase properties for $100k.  If you had $100k cash, you could buy 1 property and start collecting income on it and get the full ROI.  Or you could put $50k down on 2 properties and get half ROI on each.  Or $25k down on 4 properties and get a quarter ROI on each.  The question you have to answer is HOW MANY MORTGAGES CAN YOU PAY IF ALL OF THEM GO UNRENTED?  Same question if you or your spouse lose your job?  If the answer isn't all of them, then you keep moving back toward the all cash purchase.  Now, once you have a base of 2 or 3 fully rented properties and you are socking away let's say 2500/mo + the original 2500/mo, now you have cash flow in case you lose your job that you can afford to start leveraging more.

Currently, I have 2 rental properties and a personal residence.  I have one mortgage on one rental of about 35k remaining.  I'm going to be opening a line of credit on the new house in the amount of 80k and paying off the other mortgage(it's a significantly lower rate).  Then I'm going to open another line of credit on the second rental but not use it yet.  The plan will be to take the 30k I have in cash right now and another 30-40k in a HELOC to purchase a 3rd rental in cash(another auction).  Once I get it rented, I'll open a HELOC on that property and rinse and repeat.  My plan is to always have one property free and clear and the others with small balances.  My goal is to save up 50% cash and then 50% HELOC to purchase in cash a new property.  By having at least 1 fully paid off property and by purchasing properties at approximately the same value(i use a few targeted neighborhoods I have good knowledge of) I can pay off 2 mortgages with the rent from the one that's paid off.  This means that I can always manage a loss of 2 vacancies at the same time.  That is my risk tolerance level.  And I can always take another 6 month gig if I need to.

I hope that helps.

Brian

[Another Reader]

Start by shopping your mortgage.  A 30 year fixed mortgage should be under 3.5 percent.  Try aimloan.com as an example.

Here in Silly Valley, cash is the only way you will get a house in a desirable location.  Of course, there is a LOT of cash out there...

[piethief]

In a hot market, a cash offer may put you ahead of a financed offer for the same amount, but won't get you any big discounts.  If people are getting offers within a couple days, they aren't going to give you a discount when if the first financed offer falls through they will have a few more behind it.

I bought our current primary residence for cash.  I kept it paid off.  We discussed and almost pulled the trigger on a HELOC on our home to use to buy the rental properties, but changed our mind and used financing for those instead.  It would have been cheaper in terms of fees and financing costs, saving us a few grand per house, but then there's more risk on our personal property.  Deciding against that, we figured taking some of our nest egg and leveraging it into 20% down payments on properties that someone else pays off for us was a better route.

By way of personal experience... It's super nice to not have a mortgage or car payments or other loans of any kind on personal property.  And with investment property, the tenant is paying the mortgage.  We had a paid off house a ways back, and "upsized" to one with a huge mortgage and that ended up being a money pit for other unforseen reasons, and was very stressful.  Going back to the payment-less personal lifestyle was a great choice the second time as it was the first time.

[Landlady]

Cash works well in a hot market, but it's all the same to the buyer in the end. The only reason sellers like cash is because there is less chance of the sale falling through. Put yourself in the seller's shoes and offer what reduces their risk of the transaction failing the most. Some ideas are pre-inspecting the house, putting a non-refundable earnest amount down, offering rent back if they need it to find a new home. Usually if you put a non-refundable earnest amount down it should equal about one month's mortgage payment to make up for the risk of accepting a financed offer.
But the single BEST thing you can do is offer more than the other guy to get the house. :)
Best of luck! I'm sure you'll get something with a bit of work.

[TheOldestYoungMan]

In the last two weeks I had 9 houses get sniped away by either higher offers or cash bids.  There are two different parts to a cash bid that can affect how a buyer compares bids.

1.  More likely for the transaction to be completed.

Here's what can go wrong in a financed offer:  Property doesn't appraise.  Interest rates change.  Appraisal gets delayed.  Inspection gets delayed.  Insurance can't be found.  Small discrepancy on credit report can't be validated.  Buyer loses job.  Buyer changes mind.  Storm damages property.

Here's what can go wrong in a cash offer:  Buyer changes mind.

For that reason, I've seen cash offers that were lower win.

2.  Speed of the transaction.

Lenders are notoriously fastidious home buyers.  They want it inspected, appraised, and they thoroughly vet the borrower.  I just sent twenty pages of shit to my lender yesterday, and today they asked for another twenty.  It's not a big deal, but it takes time for all the pieces to happen.  A day here, a day there.

A cash sale can happen at 2:00 if there's a signed contract at 1:00.  Cash sales can happen so fast as to be instant compared to financed.  Time is money, and if the seller is ready to be done (like a many months vacant rental property) then it's potentially a couple thousand dollars difference just in expenses between a cash and financed offer, even if the face value is the same.

If I had the cash on hand to make cash offers, I would.  You can then choose to "buy it from yourself" and mortgage it if you want to, with all the time in the world to get all the different things done.

Many sellers are only going to look at the dollar amount of the offer, but cash puts you in an incredibly strong position, and greatly simplifies the calculus for the seller.  It's also a motivator in general, I had a friend that had his house listed at 240k for about 8 months, he turned down a ton of offers at 220-230k, someone stopped him on his driveway and offered 210 cash, they haggled up to 217, and he took it.  From the driveway on Tuesday to sold on Thursday.

What I ended up doing to compete with the cash buyers was offering more for the option fee and earnest money.  I just doubled what the "traditional" amounts are, and made sure to indicate that I was a pristine credit investor to the extent I could tell I was buying from another investor (buying from a L.O.L. I am a young single just starting out...).

Cash is King though.