The Wall Street Journal recently wrote an article about the downsides of paying cash for a home.
About 50 to 75% of all of my home sales are cash offers. Here in the desert we have many second home buyers and investment buyers who usually pay cash. We have many Canadian buyers, as well, and most pay cash, when purchasing a home. I warn my cash buyers of these potential problems, but here is a warning from another source.
All-cash offers usually trump all others because the seller can be sure that the lender won’t kill the deal by not approving the buyer’s financing or appraisal. Since cash buyers can close quickly, sellers who are ready to move on with another home purchase find that a plus, too. So cash buyers often can buy a house for less money than someone who must get a mortgage. However, there is a downside. Without a bank as a backstop, one can easily make a mistake, and the consequences will be the buyer’s responsibly alone.
Making sense of the story
• Most buyers find getting a mortgage to be a nail-biting hassle because they have to go through various levels of approvals. They must make a down payment, meet loan-to-value ratios, and pay for independent appraisals, title insurance, and homeowner’s insurance. These precautions are done for the bank’s protection and not the buyer’s. But they have the ancillary effect of protecting buyers who may be swept away by emotion after finding their dream home and making a purchase they shouldn’t.
• Consider appraisals: Lenders always require them, but cash buyers rarely get them. Instead, cash buyers rely solely on comparable sales supplied by their agents, or plucked from websites such as Trulia or Zillow, to give them an idea of what to pay for a house.
• In some cases, cash buyers don’t carefully compare the square footage, number of rooms, quality of construction, and other factors that appraisers do when they rule on a house’s worth. So the possibility that cash buyers could pay more than market value for a home is very real.
• Ironically, there is a possibility that a cash buyer could lose a house in a bidding war because they bid too low, assuming that sellers will automatically choose cash over a mortgage. That is not always the case, especially if the buyers are prequalified and the sellers don’t need a quick closing.
• In rapidly heating markets, some cash buyers may forego inspections to make their offers irresistible. That is one of the worst mistakes any buyer can make, since serious flaws can be hard to detect for untrained eyes.