Is Cash Always King When Buying Real Estate?
Cash is king, so they say… Until it’s not. Cash can be considered king when talking about real estate or it actually could harm your purchase. Were going to discuss the pros and cons of using cash or being an all-cash buyer when purchasing Portland homes and specifically luxury real estate. Most homebuyers do purchase in all-cash but is that really the best way to go?
A jumbo loan may be in your better interests but let’s discuss both the advantages and disadvantages of going with cash when buying a home.
What is a cash buyer?
While most of us probably know what this is, let’s at least identify it. A cash buyer is one that can purchase the entire property with cash rather than going through third party or borrowing money to purchase the home. It can also offer buyers a more certain closing as well as a quicker closing because we don’t have to deal with all of the lenders and financing documents.
According to data from the National Association of Realtors in 2019, 12% of all buyers purchase their homes with cash. It means that you technically have all the money needed to purchase the house and you won’t be relying on a loan to fund the purchase. Most buyers will purchase the home available in a liquid account, or an account that allows immediate withdrawals and transfers. This could mean a checking, savings, or money market account.
Advantages of an all-cash purchase.
Limited contingencies. One of the biggest benefits is that nobody has to worry about financing contingency when purchasing the property. This will not only save money but in a competitive market, and offer without financing contingencies can be highly desirable.
Less hassle and fees. When you’re paying with all-cash or taking out a big part of the purchase and sale process, the financing department. You won’t need to worry about lender underwriting, gathering tax documents or income statements, proof of employment, assets, credit scores or other financing details. If you have the cash, you buy the home.
Faster closing. With an all-cash offer, buyers and sellers have more control over the closing timeline. Deals can typically close faster because no one is waiting for financing to come through.
Potential savings. Many sellers may be attracted to an all-cash offer because of the limited kit contingencies and quicker timeline but you may also be able to make a lower offer since you’re paying in all-cash.
Disadvantages to an all-cash offer.
Loss of liquidity. This is probably one of the biggest things. Real estate is a non-liquid asset, meaning that you can’t just pull money back out of your house whenever you want. Having money in the bank means it’s liquid, you can have access to it at any time. If you tie up all of your cash in a home purchase, it may cut into your savings and cause more problems later on. While this isn’t the case for everyone, it is something to consider.
Loss of diversification. If you put all of your savings and cash into the home you may lose out on potential gains from investments elsewhere. Real estate can typically run between two and 3% increases each year but actual cash may gain higher rates of return elsewhere.
Tax issues. Mortgage loan interest can be deductible on your federal income tax even though standard deductions have now increased dramatically. This really only works for those that itemize their deductions so asking a tax accountant or your CPA about tax implications on paying all-cash for a home is advised.
While there are pros and cons to each, if you’re spending every time you purchase a home, buying in all-cash might not be ideal. If you’re tying up all your money in a cash offer, your financial liquidity and taxable income could be at risk. This is definitely something to carefully consider before making an offer. Talk to your financial advisor and/or real estate agent about the best option for the type of home and area in which you want to buy.
It’s important to note that contingencies can still be built into the purchase and sale contract even with an all-cash offer. The appraisal contingency, inspection contingency, and maybe a sales contingency may be included so all-cash offers may or may not be beneficial to the seller depending on the terms.
More Tips for Home Buyers
- How Long Does it Take to Close on a House? A 10-Step Process
- 7 Keys to Getting Your Offer Accepted in a Seller’s Market
- Should I buy New Construction or an Older Home?
- Can I Negotiate Closing Costs?
- 10 Questions to Ask When Buying a Home
- Are House Inspections Necessary?
- Mortgage Options for First Time Home Buyers
- 10 Things to Know about an HOA Community
- How to Find the Best Mortgage Officer
- 4 Costs You Could Face When Moving From a Starter to a Forever Home
- How is Your Mortgage Rate Determined?
- 5 Things You Should Never Do Once Approved for a Home Loan