all cash vs. financing

In the world of real estate investing strategy, cash is king. When selling a property, a seller will always prefer that a buyer of a property make an offer to purchase the property with their own cash, rather than with a financing contingency.

What is an All Cash Offer?

An all cash offer means what it says. It means that the buyer, without a lender, has sufficient funds of his or her own to buy the property. As a result, there are none of the contingencies and delays associated when purchasing with a mortgage loan.

Negotiating a cash offer on a home and what it means

Many borrowers and their real estate agents think that the difference between putting cash or mortgage financing on the agreement of sale for a property is not a big deal, and frequently put cash. They think that it will increase the chance that a seller will accept their offer of purchase, and that they can change it later in the transaction.

That does not always work out.

The buyer needs to remember that an Agreement of Sale to purchase a property is a binding contract. Once executed by both buyer and seller, this contract cannot be changed by either party without the other’s consent.

Many sellers will accept a cash offer that is lower than listing price as they believe the odds of the transaction closing quickly are higher. When the seller finds out that the buyer needs financing, they are not always willing to change the terms of the contract.

In many cases, the buyer has gotten an advantageous price from the seller because it is cash. It’s important to remember sellers frequently receive multiple offers. If the cash buyer changes into a buyer with a mortgage contingency, they may refuse to make the change, keep the buyer’s deposit because of the buyer’s breach of the contract and move on to another buyer at a higher price.

Other buyer’s believe that no one will notice that a material change has occurred. It is unlikely that this will happen. In this age of institutional sellers, offshore loan servicers and asset managers, the rules are rigid and inflexible.
The end result is frequently that the buyer has put down a deposit, paid for appraisals and inspections and losses everything when the seller refuses to change the method of payment and the buyer cannot close.

Real Estate Investment Financing Options

A buyer that cannot pay cash has several real estate financing options:

Conventional loan
Government loan
Hard money loan
Private money loan

Conventional Loan

They can borrow from a conventional lender, such as a bank. A bank loan will likely be one of the least expensive types of financing, but a bank loan will generally require a large down payment by the buyer and be subject to significant underwriting and delays.

Government Loan

Similarly, government insured loans, such as through the FHA may be relatively inexpensive, but have significant limitations and rules. An investor taking out a government backed rehab loan must be willing to live within the strict rules of the given program.

Hard Money Loan

The next option is a hard money loan. The hard money loan is from a lender who does not review the borrower’s ability to repay the loan and make payments along the way. They evaluate the loan based on the collateral. Accordingly, the hard money lender will generally lend less than other sorts of lenders (usually 50-60% of the value of the property) so that they are confident that they will be repaid in full if they need to foreclose on the property to recover the loan amount, interest and expenses.

Private Loan

The last option is a private loan. A private money lender will generally underwrite looking at the three “C”s of lending – credit, capacity to repay and collateral. The private money lender is first looking to see that the borrower can afford the loan and has a likelihood of repaying it. They will then examine the collateral.

Unlike a hard money lender, a private money lender does not want to foreclose on the collateral property. It wants to be paid interest and then be paid off pursuant to the terms of the loan documents.

Private money rehab loans are certainly more expensive than conventional and government backed loans. The expense is offset, however, by the speed at which private money lenders work and the flexibility they have in tailoring their loans to the borrower’s needs.

In sum, a buyer who is not in a position to pay cash for a property has many financing options within their real estate investing strategy. This buyer, however should be aware that they should be very careful when putting in a cash offer for a property and thinking it is not material and can be revised at a future point in time.