Cash is King, but Maybe It Shouldn’t Be

cash-offerWith the recent, and drastic, heating up of the real estate market in the Boston area, buyers in multiple bid situations are again making “cash” offers. Just recently, I had a couple make a very strong offer on a fantastic single family home in Lexington. Like most nice homes in good suburbs, it had just gone on the market and there were multiple offers. My buyers ultimately lost out to other buyers who submitted a “cash” offer. In practical terms, the winning bidders made an offer with no mortgage contingency. It doesn’t necessarily mean that those buyers had ready access to all the funds necessary to close on the property without a mortgage. It only means that they were willing to risk their deposit if they couldn’t come up with the funds at closing. My experience is that even buyers who forgo mortgage contingencies still plan to get a mortgage. Rates are at historic lows and the interest, up to a mortgage of $1.1M, is tax-deductible. In addition, I believe that most buyers who have easy access to that much cash are probably buying more expensive property. So where does this leave responsible buyers (and their agents) who don’t want to take the risk of losing a significant deposit?

I think the phenomenon is simply an expression of buyer desperation. Buyers that waive the mortgage contingency may have lost several bidding wars, and are looking for an advantage. I assert, however, that an offer from a pre-qualified buyer who is also “well-qualified” is not significantly better than a “cash” offer.  Sellers should only prefer the cash offer if the price and other terms are also better than an offer from a strong buyer with a mortgage contingency. Cash offers are genuinely stronger in transactions where getting financing is actually difficult, like commercial properties and multi-unit investment properties. Standard single family homes and condos are simply not that hard to finance.* Buyers with good credit, nothing to sell, and a job are going to get financing. The seller should focus more on the offering price and possible inspection issues. Deals fall apart over inspection issues when buyers are not properly prepared for an inspection and then get scared off by something major that they weren’t aware of before they bid on the property. Deals rarely fall apart after a purchase and sale agreement is signed and the buyers then fail to get financing.

Buyer should never waive a mortgage contingency unless they are really prepared to pay cash. It is simply too big a price to pay even for a small risk. At the same time, I would recommend that sellers only place a very small value on the lack of a mortgage contingency. At the closing, the money is green no matter where it comes from and the goal is to sell the property, not keep the deposit.

Next Up: what buyers can do with regards to the other terms to make an offer as attractive as possible.

*It may be important to inquire as to a buyer’s ability and willingness to put down more money in the event the property does not appraise at the selling price.  This is a real risk in the current market of quickly increasing prices.