7 Ways to Compete with Cash Buyers
A quarter of home sales are currently going to cash buyers. By finding out what a seller *really* needs and crafting your offer accordingly, you can better compete with all potential buyers—cash and mortgaged alike.
Money talks in any real estate market but in a hot market, it seems to talk louder. Over the last two years, a quarter of all home sales have been to cash buyers. With would-be buyers greatly outnumbering sellers, can the other 75% compete? Spoiler alert: Yes.
Through the seller’s eyes
Buyers tend to focus on what the seller has (a house) and what the buyer wants (the house). But to gain a competitive edge, think about what the seller wants. Is it money? Yes, of course. But sellers often have other needs too, and you may be able to beat out those cash offers by identifying what they are.
People usually sell their homes for one of 10 reasons, and those reasons usually come with a set of goals or deadlines the seller needs to meet. This is where an experienced, skilled real estate agent comes into play. Your agent should contact the seller’s agent to tease out what terms would be especially beneficial to the seller.
Here are some common responses, one of which may surprise you. If competing cash buyers aren't able or willing to solve the seller's problems, you may have an advantage.
Easy transaction
Waived contingencies
No repairs
Most money
Quick closing
Rent-back
Agreeable buyer
Easy transaction
Make your offer easy to accept. Don’t demand a response to your offer within two hours, a tactic used to put stress into the equation and force the seller’s hand. In competitive markets, this approach could easily backfire. Have your money in line and make your offer clear and concise. Put aside your frustration at losing out on any previous homes, clear your mind, and ask yourself, “How can I make my offer the easiest?"
Waived contingencies
A contingency lets you back out of the deal if some condition is not met. Most contracts include a few, and understandably so—when you waive a contingency, you deny yourself the opportunity to cancel your offer. If you’re a mortgaged buyer who’s competing with a cash buyer, you’ll want to seriously consider waiving certain contingencies. This may even work to your advantage more than you realize: Cash buyers don’t necessarily waive contingencies. In fact, a cash buyer can easily have enough contingencies in a contract to drag out the closing process as long as any mortgaged buyer.
A financing contingency lets you wriggle out of the deal if you can't qualify for the mortgage.
An appraisal contingency lets you withdraw from the deal if the home is worth less than your offer.
FINANCING CONTINGENCY
When you waive the financing contingency, you're signaling your confidence in qualifying for a mortgage in the amount you need. You're also signaling you can close fast. Make sure you’re buying within your means and get a preapproval before you make your offer. Make sure your lender knows you’ll need to close quickly and find out in advance what’s needed to accomplish that.
APPRAISAL CONTINGENCY
You can't waive the appraisal, but you can waive the appraisal contingency. This is a risky move because it obligates you to come up with the difference between the appraised value and the purchase price. If you can’t, you risk losing your deposit. Here’s how that could play out:
Let's say the seller accepts your $500,000 offer and waived appraisal contingency. But the appraiser says the house is worth only $490,000, and the bank is willing to lend you $485,000. The deal will go through if you can get $15,000 in cash to bridge the difference between the $485,000 loan and the $500,000 price. But if you can’t, the deal will fall apart and you may lose your deposit.
PROTECTING YOURSELF FROM A LOW APPRAISAL
Most buyers who waive financing and appraisal contingencies are prepared to make a 20% down payment. In our $500,000 purchase price example, this would give them a $100,000 cushion in the event of a low appraisal.
The fewer contingencies the better, but you still have to be smart. Another approach is inserting a clause that says you'll buy the home as long as the appraisal reaches a certain threshold. You may have enough cash to make up a $25,000 difference, but not enough for $50,0000. In this case, you would waive the appraisal contingency as long as the appraisal is within $25,000 of the purchase price.
In addition to your mortgage preapproval letter, be sure to include financial documents proving you have enough money to cover the appraisal gap. Including these documents makes your offer easier to accept.
No repairs
Some sellers don't want to make repairs or supervise the work. Maybe they have health challenges or are in a hurry to relocate. The sale might be part of a divorce settlement where the sellers can’t agree on the fixes. Either way, do you really want the seller, who may well be more concerned with price than quality, to be responsible for important repairs and maintenance?
You can help the seller avoid repairs by offering to the buy the house as-is. But only after getting a professional inspection! In this case, the inspection report should not be treated as a to-do list for the seller. Rather, it’s a make-or-break document that lets you know whether you should go through with the purchase or walk away.
The shorter the inspection period, the better—think one week or less. Before submitting your offer, ask your inspector how long it will take to conduct the inspection and receive the report, and tailor your offer accordingly.
Most money
Many cash buyers are investors who need to buy at a low price in order to make a profit. They typically have a threshold they’re not willing to cross, and mortgaged buyers can sometimes outbid them by paying just a little more. A strategy buyers often use is the escalation clause—but does this really make your offer more attractive to the seller?
Let’s say you make an offer of $500,000 but have an escalation clause that says you’ll beat rival offers by $2,500 up to a ceiling of $525,000. It looks good on paper, but escalation clauses are cumbersome for sellers, especially if two or more buyers have them. The better advice when competing with cash buyers? Stop messing around and just offer the $525,000.
Quick closing
You may already know how deflating it is to lose out on a house. Sellers suffer similarly when they accept an offer and the buyer later withdraws because of problems getting a mortgage. This is one of the main reasons sellers find cash offers more attractive—there’s no lender to say no.
There’s a pervasive belief that cash offers are more likely to close, but a recent study done by the National Association of Realtors finds that only 5% of all contracts are terminated before closing. Cash offers do tend to close faster, however, since they aren’t subjected to mortgage underwriting, a process which can take weeks.
Sellers want sure, fast transactions without lender glitches, so you have to make your offer resemble an all-cash deal. This is where waiving contingencies comes into the picture.
Rent-back
Most sellers plan to buy another home and use the proceeds from the sale for their down payment. After selling their home, they sometimes ask to remain for a few days or even a few weeks.
You can meet this need by offering a rent-back: A clause that lets the seller stay in the home for a specified period. Lending rules typically cap the rent-back period at 60 days.
In a typical market, the seller would pay daily rent equivalent to 1/30 of a mortgage payment. But in a competitive market, few buyers charge rent, as it would put them at a competitive disadvantage.
Agreeable buyer
Think twice about writing a personal letter to the seller, as you may unintentionally cause them to violate fair housing laws. If you feel you must include a letter, don’t make it about you. Instead, describe how you can tailor your offer to suit the seller. An example is leaving the rent-back clause out of your offer, but letting the seller know you’re open to the idea in your letter—a great way to let the seller know you’re an agreeable buyer!
