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Compete Against Cash Offers

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Posted On: 08/21/2013

Question:

The real estate market in our area has improved and now we see a lot of cash offers. We would like to buy but cannot pay all cash. Are we at a disadvantage?

Answer:

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Yes and no.

Cash purchasers can have several advantages: Their offers do not depend on lender approval, the seller does not have to pay any points and closing might be faster.

The use of cash can create a quick and simple transaction.

However, sometimes buyers who need mortgage financing can overcome the advantages of a cash competitor. For instance:

• You can work with a lender before entering the marketplace to nail down a qualifying loan amount. While a loan cannot be approved in advance (because the value of the property is unknown, among other hurdles), pre-approval can help assure sellers of your financial stability and commitment to buy the property.

• You can make an offer which does not require the seller to pay any points.

• Most importantly, you can simply make a better offer than a cash buyer, something with a higher price or better terms than a cash buyer is willing to bid.

Many cash buyers believe that because they have financing in hand, they can purchase at discount. This can be the case in some situations, especially when there is a buyers’ market.

However, in many parts of the country, we now have sellers’ markets. The National Association of Realtors reports that existing home prices in May were 15.8 percent higher than in 2012. There have been complaints about inventory shortages, or lack of desirable homes for sale.

In such an environment, owners may prefer a higher offer, financed with a mortgage, rather than an offer for less money backed by cash.

In a sellers’ market, what counts most is not how a deal will be financed but the size of the owner's check from closing.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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