Cash home sales are a growing trend, but buyers should be careful about staking their financial future on this option.
With housing prices increasing quickly in many areas of the country, many buyers are turning to all-cash deals to buy a home. In fact, ATTOM Data Solutions reports that cash purchases made up about a quarter of all single-family homes and condos sold in 2018.
While they can be beneficial to some people, all-cash buyers aren’t for everyone. Here’s what you need to know about all-cash home sales and whether it’s right for you.
The most common type of all-cash buyer is an individual buyer purchasing a home without the help of a bank. These types of buyers are often called “iBuyers.” They may also be real estate investors.
If you’re a first-time homebuyer and have little to no equity in your home, all-cash offers are an excellent way to get into the market. They can also help you save money in the long run since they typically allow you to purchase a home with less of a down payment than a mortgage. Also read https://www.investorhomebuyers.com/
All-cash homebuyers have been taking advantage of historically low interest rates to increase their affordability and make more competitive cash offers. For example, a recent Redfin report noted that buyers who put down 5% or more of their purchase price have seen their share of all cash offers surge to levels not seen since 2014.
As a result, it’s important for sellers to understand how this can affect the value of their homes. In some cases, all-cash buyers can make offers that are below the property’s fair market value because they expect a discount for paying cash.
Another potential disadvantage of all-cash offers is that they can be difficult to negotiate. This can be especially true if the offer has multiple contingencies. For instance, if a buyer wants to use the sale of their current home as a down payment on their new home, they may need to include an escalation clause in their offer to make sure the seller agrees to their terms.
Moreover, all-cash buyers often have to prove their financial capability to sellers. This is because, unlike with a mortgage, they won’t have a lender pre-approving them for the amount of the loan. This can be a disadvantage, particularly if they’ve stretched their finances too thin to make the down payment on a home and then stretch again when it comes time to sell the house.
Closing Costs and Tax Implications
The closing costs for a cash deal are usually much lower than a mortgaged sale because lenders do not pay for these services. However, there are still some costs to consider that you might not have with a mortgaged sale, including title and escrow fees.
In addition, all-cash buyers may not be eligible for as many tax write-offs as a mortgaged buyer. As such, they might be liable to a higher tax bill on the proceeds of their sale.