Homebuyers

The Cash Advantage: How to Save Big When Buying a Home with Cash

Homebuyers looking to save money may be able to secure a discount by using cash.

All-cash buyers often have a competitive edge in bidding wars and may be able to save money on the purchase price of the home. They may also avoid paying as much in closing costs.

"Cash can be more enticing for sellers," said Huntsville, Ala.-based real estate broker Matt Curtis. "Sometimes sellers do give more concessions to somebody paying cash."

That's because many sellers prefer cash buyers. They often believe these buyers are more financially stable and the deal won't get scuttled because someone has trouble securing a mortgage.

Cash buyers may also be able to close deals faster than those who need to go through the mortgage financing process.

In some cases, a cash deal can close in as little as seven days, while the average time to close a purchase loan in July was 43 days, according to data from ICE Mortgage Technology.

About 27% of all existing home sales in July were cash transactions, according to a recent National Association of Realtors report.

Curtis was able to negotiate a discount on a single-family home he purchased last month from a large builder by paying in cash. The builder was buying down mortgage rates to lower levels to make the newly constructed homes more affordable.

Since he wasn't using a mortgage, Curtis negotiated with the builder to knock $15,000 off the price of the home.

He also didn't pay the mortgage fees that lenders typically charge borrowers, which reduced his closing costs.

"Sometimes you can get a better deal with cash," said Curtis.

All-cash offers can provide an advantage in bidding wars

If a seller receives two nearly identical offers for their home, cash buyers often have an advantage.

Sellers may even pick a cash offer over a higher bid for their home, especially if buyers are offering well above the asking price.

"There is no concern when accepting a bid that the deal will fall through, at least from a ‘can't get a mortgage' perspective," said Keith Gumbinger, vice president of the mortgage information site HSH.com.

If the home doesn't appraise for as much as the buyers offered, then the buyers may have trouble coming up with the difference. That could jeopardize the deal.

"Paying cash for the property can also eliminate mismatches in appraised value versus asking/sales price that can trip up a sale," said Gumbinger. "The cash buyer is limited only by the amount of funds they have or are willing to spend."

Who is making all-cash offers?

In Huntsville, Ala., cash buyers tend to be older home shoppers who have built up equity in their homes and other investments, said Curtis. They can sell their existing real estate and investments to raise money for their new homes.

"They've done very well, so they have cash on hand to make these investments in their later years in life," said Curtis.

Cash buyers may also be first-time buyers who receive gift funds from family to help them afford homeownership.

But not everyone who buys with cash has all that money on hand.

In competitive markets, some buyers can work with their lenders to produce cash offers. Lenders may purchase the home with cash. Once the original buyers have secured a mortgage, the lenders generally sell it back to them, charging a convenience fee for the service.

The downsides to buying a home in cash

The biggest obstacle to purchasing a cash home is that many buyers, especially first-time buyers, don't have that kind of money.

"Most folks don't have hundreds of thousands of dollars freely lying around, except perhaps when they have sold a property and are downsizing or relocating to a lower-cost housing market," said Gumbinger.

Even those who can sell investments or another home to come up with the money risk losing out on higher returns they may have earned in other financial investments.

They may also need to pay taxes if they take money out of investments.

"There's always the question of whether buying a home with cash and ‘locking up your money in a house' is the best idea," said Gumbinger. However, "there are a few specific advantages to being able to purchase using all cash."