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Whether all cash offers are worth it

| Aug 4, 2020 | Residential Real Estate |

Mortgage rates are at record lows. But many purchasers are skipping financing and making all cash offers on residential real estate to take advantage of other benefits.

What it means

Paying in cash eliminates the need for obtaining a mortgage and dealing with lenders. Over 25 percent of single-home and condominium purchases in 2019 were all-cash purchases, according to ATTOM Data Solutions.

Many all-cash purchasers do not live on the property, however, because these homes and condominiums may become income producing properties. Their owners intend to earn money from tenants or travelers without paying a mortgage.

All-cash deals usually close faster than transactions involving a mortgage. But there is usually a 30-day closing period so the seller can obtain certifications and prepare other documents. Cash buyers still need to complete documents such as a settlement statement and a few title company documents but they usually face substantially less paperwork.

Advantages and disadvantages

Paying no mortgage interest or principal saves substantial money for a long period. Also, purchasers who are not traditional employees and who normally have trouble obtaining financing can reduce some obstacles to real estate purchases.

Paying cash improves your negotiating position and the potential for a better purchase price. Sellers facing multiple offers will typically accept the cash offer because of its certainty.

Buyers pay the escrow fee in financed purchases. But the escrow fee is usually divided between the buyer and seller in all cash transactions which can save, on average, $700 to $800. Application processing, loan initiation and income verification fees and typical closing costs are eliminated.

There are disadvantages, however. Unlike lender-financed purchases, there are no required appraisals and all-cash purchasers may end up paying too much for the property. All-cash purchasers all lose the substantial tax deduction for loan interest.

Process

You must assure that you have money to purchase the property and cover property taxes, a home inspection, homeowners’ insurance and moving costs. Pay for a home inspection to assure that your property is worth its price and there are no hidden defects.

Obtain bank documentation to assure the seller that you have adequate funds. Be prepared to show more earnest money which should be five to 10 percent of the purchase price.

Numerous laws govern closings and purchasing real estate. An attorney can help assure that your rights are protected.

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