Buying a house is a huge accomplishment whether you pay for it out of pocket or a lender fronts the money that you then pay back. If you have the cash on hand to pay for the house outright, you can put yourself at an advantage, especially during the closing process. However, even though a cash purchase will reduce the amount of paperwork during closing, it won’t eliminate it altogether. Realizing what’s involved in advance can help prepare you for the process.
Making a Cash Offer on a House
If you’ve set aside the money for a house and found one you want, you’ll need to state while making your offer that you’re paying with cash. This lets the seller know that there won’t be any issues with financing. Cash offers also relieve some of the pressure with appraisals and inspections since lenders will often place contingencies when they prequalify a homebuyer. In other words, if the home doesn’t appraise for the amount of the loan or has serious issues, the lender could pull out, whereas the buyer has discretion as to whether he wants the sale to move forward.
If you’re working with a real estate agent, you’ll want to let that agent know from the start that you’re paying in cash. This can help with the negotiation process since you may be able to offer less than a buyer who is getting financing to pay for the home purchase. If you’re in a competitive market, you may even be able to give yourself an edge by eliminating the requirement for an appraisal, although you’ll want to be careful about skipping the inspection process. Having someone go over the house and identify any major issues will give you the protection you need for your investment.
Proving Available Funds
Even before you make an offer, you’ll need to think about showing that you have the funds available to pay cash for the purchase. Understandably, a seller won’t want to officially take her home off the market without knowing for certain that the sale will go through, so one way to provide that peace of mind is through proof of funds. One of the easiest ways to do that is to offer a copy of your bank statement, showing that you have the money in the bank. However, you may feel hesitant about handing over your bank statement. For that reason, many financial institutions provide a proof of funds letter that can simply be handed over to the seller’s agent on demand.
It’s important to note that a proof of funds letter may take a couple of days to obtain. Many sellers will be fine with waiting that short amount of time, but you’ll probably be on pins and needles during that period as you wait to see if your offer was accepted. If the seller’s agent will accept a bank statement, you can likely black out any information you’re concerned about revealing, such as your account numbers, and hand that over to speed things up.
Cash Closing Time Frame
Many homebuyers erroneously assume that paying with cash will speed things up significantly. While it does cut down on some of the most time-consuming parts of buying a house, the cash closing process still takes time. You’ll need to schedule a property inspection and title search, which can delay closing if you can’t push things through immediately. Still, you’re eliminating the due diligence process from a lender, which is generally what pushes closing time to 30 days. If you’re buying from a seller who is purchasing another house, you may find you’re waiting 30 days to meet the seller’s timeline anyway. However, having the flexibility to close quickly could open you up to purchase a home that is in foreclosure or needs to be sold quickly due to a seller having to move. This in itself may allow you to make a low offer that wouldn’t be accepted otherwise.
Assuming your property inspector can work you in right away and your real estate agent can push all of the documentation through, closing with cash will take place much quicker than if you were taking out a mortgage on the home you’re buying. The good news is that you’ll be in control of much of this since you’ll be able to set deadlines for things that need to be done. If the home inspector finds that you need repairs, for instance, you can tell the seller you’d like to have them done in a few days. If they can’t, you can decide that you’ll make the repairs in exchange for getting into the house sooner. Most importantly, paying cash completely destructs the assumption that closing will take 30 days from the time you make an offer.
Paying for the Purchase
If you have visions of showing up at closing with a briefcase full of money, you’re imagining it incorrectly. In reality, the real estate agents will expect you to wire the funds from your bank to the seller’s bank, and you’ll do this shortly before closing. This is no different from what you’d be expected to do if you were taking out a mortgage on the house. In that case, the mortgage company would ask you to wire the funds for the down payment. The seller’s agent will expect the funds to be in place before you show up for closing, so make sure you check with your bank to determine exactly how long it will take.
In some instances, you’ll be able to pay the amount due by personal check or cashier’s check. However, since the seller’s agent may require that you wire the funds, you’ll need to check in advance to make sure you’ll have the appropriate funds where they need to be on the day of closing. If you do choose to pay by check, you’ll also need to make sure you have enough in the account to cover any amount you write.
Selling a House to a Cash Buyer
If you are the seller, you understandably will have concerns as you’re accepting an offer from a cash buyer. When you sell a house cash, you don’t have to deal with the inconveniences of having buyers fall through on the deal due to not being able to get financing. If you’re in a time crunch, it may even be worth accepting a lower deal from a cash buyer knowing that you’ll be able to reduce the time to close by cutting out the weeks the buyer will have to spend lining up a mortgage with a lender.
However, there is an instance in which sellers should beware. You may have seen signs or even gotten offers to buy your home with cash. Although there’s nothing wrong with selling your home to a cash-backed investor, there are those who will offer you less than your house is worth by selling you on the ease of having cash in hand. In those cases, you’re usually better off putting your home on the market and going through traditional methods. If you do choose to accept such an offer, you need to read the fine print and, if possible, have an attorney or real estate agent represent your interests in the transaction. Otherwise, you could find yourself getting a bum deal.
- Century Mortgage Company: My Home Didn’t Appraise For Its Purchase Price. Now What?
- Realtor.com: Proof of Funds Letter for a Real Estate Purchase: Why Home Buyers Need It, Bad
- Realtor.com: How Long Does It Take to Close on a House?
- Consumerism Commentary: Buying a House With Cold, Hard Cash
- HomeLight: Wait! Read This Before You Sell Your House for Cash
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.