Pros & Cons of Buying a House with Cash
Purchasing a home with cash has many advantages in today’s real estate market whether it is for personal or investment purposes. However, there is still much to consider when deciding to purchase a home with cash or obtaining financing. Here we explore the Pros and Cons of Buying a House with Cash.
In most cases, paying with cash is extremely attractive to sellers and gives you the competitive edge in a bidding war or a multiple offer situation. Sellers are often more likely to accept cash offers for more flexibility closing faster and to avoid buyer’s financing being changed or denied last minute. It is not uncommon for a seller to accept a cash offer at a lower price then other offers with mortgages.
For the buyer, not obtaining a loan on a property eliminates interest payments as well as a big chunk of escrow closing costs such as, origination fees, appraisal fees, and other lender fees. Furthermore, potential discounts and better deals can be strongly negotiated when paying cash and also allows the homeowner to sell the house more easily regardless of market conditions because the home will not be leveraged with a mortgage lien on it.
Like anything, there can also be some cons or things to watch out for when paying cash. Often buyers who pay cash may not elect to get an appraisal done or waive their right to an appraisal contingency. When obtaining a mortgage, getting an appraisal is a condition of the loan. The appraised value protects the lender & the buyer from overpaying for a home. Without a lender requirement to get an appraisal, many who pay cash simply do not perform this step. This can lead the buyer to overpay for their home. When purchasing a home with cash, talk to your real estate professional about your appraisal options.
In certain situations, obtaining financing via a mortgage can also make sense and has significant benefits. It might not make sense to tie up all of your cash or even most of it in real estate because you may be running yourself dry in the long run. You want to be able to maintain flexibility; therefore, a mortgage may be the smarter option, especially if interest rates are low. Also, mortgage interest payments are tax deductible in most cases as paying with cash isn’t. However, it is always advised to check with your accountant or tax professional on this beforehand.
When paying cash, it is advised you look up whether there are laws that may require buyers paying cash to be more transparent about their accounting & provide additional information about the sources of their income to government agencies. This has begun to emerge more & more as a way to prevent illegal money laundering.
As for investors, some elect to pay the whole cost of the home cash. However, it may be a better idea to use as little cash as possible on one property so that you can utilize your capital on other investments so long as the numbers make sense. Private or often called, “hard” money are also commonly utilized. Although interest rates and costs are higher it allows investors to make a return without using all their money. This type of financing is actually considered “cash” in most real estate transactions and works well in a fix and flip situation due to the probable shorter term turnaround. It also can work in long term investment opportunities because once a property is secured and remodeled, investors can then refinance. It is tremendously important to seek proper professional advice and resources when pursuing an investment of this nature.
Ultimately, leaving yourself plenty of financial flexibility is most important when deciding how you will be purchasing such a big asset. Paying cash does make your offer more appealing to sellers. However, make sure you have the capital and resources for major repairs, taxes, down payment on other potential properties, maintenance costs, utilities, and other fees that come with being a property owner. Cash is known as “king.” The “king” can also come with a bigger fall if you don’t harness that power properly. That is why it is always crucial you seek professional advice and know the risks & benefits involved.
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