The two main reasons that mortgage offers with pre-approval letters are struggling more than ever to compete in today’s market: a hypercompetitive seller’s market and the obstacles that arise from relying solely on the traditional mortgage process. In today’s blog, we look at the two reasons all-cash offers continue to be the most competitive way to win on a home.
Cash is King
If there’s one term that has always been music to sellers’ and real estate agents’ ears, it’s “all-cash”. While all-cash deals have always been the unicorn of real estate offers, they are starting to feel like the new standard as they now make up about 36% of the housing market according to a recent report from CNBC.
How did we get here? In 2020, real estate took a dramatic turn in the way homes are bought and sold. The housing market was already struggling with a noticeable lack of supply. Then came the pandemic, which fueled a desire for homeownership like we haven’t seen in a long time…or arguably, ever.
This unprecedented demand resulted in fierce bidding wars. Multiple offers being presented on the first day of a home being listed became the new normal. These bidding wars combined with wealthy out-of-state buyers relocating from other markets set the stakes even higher for competition, triggering a flood of all-cash offers across the country.
Now, as we enter 2021, sellers are positioned to be pickier than ever as they review offers. What is the cream that’s rising to the proverbial top of every seller’s consideration list? The title of this blog probably gave it away, but it’s all-cash offers. Everyone knows that cash is king in real estate, but why? Well, it all comes down to two things: speed and certainty.
Sellers Want Certainty
Most buyers secure financing by borrowing from a bank which brings with it several handicaps. These handicaps are known as contingencies. Sellers naturally want to deal with buyers who face the least number of contingencies. Buyers who submit traditional mortgage offers may attach a pre-approval letter to the offer as evidence they can close the deal. All-cash offers, however, attach documentation of proof of funds with today’s date.
Proof of funds are exactly what they sound like. They are tangible proof that a buyer has the cash to back up an offer. Proof of funds is money in the bank, versus a pre-approval letter, which vaguely indicates “There might or might not be money in an escrow account a month from now”. While It may seem obvious, sellers will always prefer the certainty of cash at the closing table.
If certainty is a desired factor in the seller’s decision-making during normal market conditions, how much more prevalent is it in a tight seller’s market? An all-cash offer is synonymous with proof of a buyer’s funds in black and white. There is no waiting and guessing with a cash offer to see if the buyer is going to qualify for a loan with the bank. Instead, cash offers give immediate certainty and peace of mind. Although nothing is completely guaranteed in real estate, an all-cash offer is the closest bridge to a done deal.
Sellers Want Speed
In a real estate offer, time is of the essence. Cash speeds up the closing timeline. A mortgage offer with a financing contingency can delay a transaction or even cause it to fall apart. In fact, according to Realtor.com, the average closing time for an offer with a mortgage is 50 days…and that’s the average!
Cash, on the other hand, can close in as little as 72 hours. Cash gets to the closing table faster, because there is no need to wait on contingencies that need to be cleared. Mortgage contingencies must be cleared one by one to satisfy the lender’s requirements. These requirements range from appraisals to various aspects of underwriting (employment/income verification, debt-to-income ratio and more). Every one of these contingencies is, at best, an inflection point that has the potential to slow down or destroy the path ahead, adding even more potential for a deal to go sideways or collapse altogether.
But an all-cash offer removes every one of those roadblocks making the road ahead clear to close. This means the seller gets to move on with life, take the money and run.
When the “cash” box is checked on an offer, the conversation between the seller and the listing agent immediately changes from “are they able?” to “how soon can they close?”.
P.S. Buyers get a better deal when they can put their money where their mouth is
Cash offers move buyers to the front of the line, while providing them more leverage in their negotiations. This upper hand can be used to negotiate a discount off the asking price or ask for other terms and conditions that are favorable or important to them. Perhaps they need certain repairs done prior to closing or would like a little extra time to close. With cash, buyers become much more empowered to creatively strategize with their agents for terms and conditions that meet their needs.
Cash is a Win-Win-Win
Cash is a Win-Win for sellers and buyers, but it is also a win for real estate agents. Realtors appreciate a cash deal for the same reasons sellers do: the speed and certainty. For a real estate agent, cash ensures a much faster and reliable payout of their commission.
Well, if a cash offer is clearly the smoothest and most certain transaction, then why aren’t all real estate offers all-cash? Clearly, not all homebuyers have access to that kind of money or liquidity.
We want to give everyday people the same speed and certainty that a cash offer brings, but with the ability to pay it off over time like a mortgage. Colorado Online Offers believes anyone who can qualify for a mortgage deserves a fighting chance at homeownership and should be able to submit a cash offer. We offer homebuyers who qualify for a mortgage the ability to make all-cash offers on a home at no extra cost. This gives sellers the speed and certainty they seek, while giving buyers the strongest chance of winning. If you want to start making the strongest offers in real estate, Get Cash Approved today!