Finding a home in the U.S. has become increasingly more competitive as the number of all-cash offers has increased over this past summer. About one in three homebuyers in July submitted an all-cash offer to purchase a property, nearly breaking the record set back in February, according to Redfin.
For typical homebuyers without hundreds of thousands of dollars at their disposal, the process of finding a new home can be a frustrating one.
It is common for sellers to accept an all-cash offer versus one that is financed, primarily for the seller’s sake of convenience. By accepting an all-cash offer, a seller avoids potential problems, such as the transaction falling through due to a potential buyer having difficulty securing financing or qualifying for an individual home loan.
With all-cash transactions on the rise, what steps can would-be-homeowners take to be more competitive in this current housing market? Here are some Do’s and Don’ts when competing against cash offers.
The “Do’s” Of Competing With Cash Offers
The top three ways to successfully compete with an all-cash offer to purchase a property include being pre-approved for a home loan, increasing the deposit amount, and including an appraisal gap guarantee.
Get Pre-Approved For A Home Loan: When getting pre-approved for a home loan, an applicant will submit his financial details to a mortgage lender in order to qualify for preliminary loan approval. Upon pre-approval, an applicant will receive a letter stating how much he will be able to borrow to purchase a home based on key personal and financial information. A pre-approval letter can provide a seller with more confidence in the buyer’s ability to secure a mortgage and close the deal.
Make A Larger Deposit: Despite the lack of significant liquidity to purchase a home entirely in cash, if a potential homebuyer can offer a seller a more substantial money deposit, it will likely raise their chances. An earnest money deposit, or good faith deposit, is the sum of money put down on the property to demonstrate the buyer’s seriousness about the home purchase. A larger deposit can reassure a seller about the buyer’s financial situation.
Include An Appraisal Gap Guarantee: An appraisal gap guarantee is a clause in the sales contract of a home that stipulates a promise by the buyer to cover the price difference between a home and its actual appraisal value. This typically happens when the appraisal shows that the home is worth less than what the buyer is paying for it.
The above suggestions are tools that can mitigate a seller’s worries and reassure him that a transaction will go through.
The “Don’ts” Of Competing With Cash Offers
The two biggest things a buyer should avoid doing when competing against an all-cash offer include waiving too many contingencies and paying more than the home is worth.
Waiving Too Many Contingencies: In a competitive housing market, buyers will sometimes waive certain contingencies commonly included in an offer. Contingencies protect a buyer by laying out any situations that would allow him to back out or renegotiate the deal. The most common contingencies include a home inspection contingency, a financing contingency, and an appraisal contingency. While these contingencies can protect a buyer if the sale of the home fails to close, they also may increase the likelihood of a seller accepting another offer.
Paying More Than The Home Is Worth: One of the biggest mistakes a homebuyer can make is offering above the asking price, resulting in the buyer paying more than the home is worth. In such a case, a buyer could end up with a property that he cannot sell for as much as he paid for it. Another problem is that mortgage lenders also will not lend a buyer more than a certain percentage of the home’s actual value, meaning the buyer will have to put up a lot more money out of his own pocket.
Even if a buyer has zero intention to resell a property, it is always important to have resale value in mind in case unexpected circumstances arise.
