Cash is Rarely "King"

Paying cash for a property is often thought to be a position of leverage for the Buyer. "If I have cash--I can get a better deal." Unfortunately, this is seldom the case. There are some instances where cash is a requirement of the transaction and in these somewhat rare transactions the buyer often has the opportunity to buy below the future market value of a property, but these properties needs dramatic rehabilitation and these homes are the exception to the rule. Let me explain.


Seller Owned Property. The first realization for the buyer with a seller owned property transaction is that sellers seldom care if you are paying cash or your bank is paying cash to them. Either way, in ~30 days, they are going to get cash for the house. It is exactly the same money to them at closing. So, your offer of 10% less for cash vs. an offer of 10% more coming from your bank loan is a very easy decision for sellers--Cash loses every time. On the other hand, if the buyer offers 20% down payment (cash) vs an offer that has 0 - 3.5% down payment, your "20% cash offer" may represent a lower risk to the seller and have greater appeal if it is of similar offer value. But is it worth 1% less on the offer? 2% less? 3% less in offer price? Probably not. Bottom line--cash and bank money are all the same on the day of closing. If the seller can wait a few more days, they may make more with a "non-cash" deal than a "cash deal".

Bank Owned Property. The phrase that I hear buyers often say when it comes to bank owned properties is this: "With all the foreclosure homes that banks own today, they should be happy to get any offer and get it off of their books." Well, if this were true, bank properties would be wildly popular among investors and they would all sell on the first day of the listing with multiple bidders. You would know dozens of people who purchased their homes as foreclosures. In fact, why would anyone buy a house any other way? Unfortunately, this picture is seldom accurate. When was the last time your bank offered to give you "free money"? Bankers have to be fiscally responsible for the homes that they inventory from foreclosures and they have bottom a "bottom line" that they can afford to lose on any given property. There are ways to be smart when buying bank owned properties, but going in and offering 20-30% below market value in cash to a bank and expecting to have your way is a strategy that almost never works. Banks, like sellers, are not impressed with cash and more importantly, Banks know the market value of their properties. They are not guessing what it is worth. Again, it is all cash to the bank when you close on the property and for every ~$1500 more that the bank receives on a deal, they can afford to sit on it another month. And a bank can sit on a property for a long time without selling it. Most banks have deep pockets and they can sit on a house for 6-12 months if necessary.

The Rehab Property. This is the property that needs cash. If a property is in need of major repairs such as a faulty foundation, holes in the roof, or a substantial structural issue that the seller is unwilling or unable to repair before selling--these properties are often considered to be "unwarrantable". In other words--a bank will normally not issue a loan on these homes. An unwarrantable home necessitates an all cash transaction--thus reducing the number of potential buyers. In these cases, Cash is King. This does not mean that the seller (often a bank) will give the property away, but it does mean that the property will probably sell well below the future market value after the rehabilitation is complete. It is still important to note that banks are not in business to give away money. There are breaking points with all deals.

Cash is helpful. Having cash to put down on a real estate transaction is not only necessary, but is always important. However, the level of importance it has for a particular transaction or strategy varies. More cash can help lower your interest rate, eliminate the need for PMI insurance, or give you the advantage in a competitive bid. But Cash is almost never the "Four Aces" hand that allows the buyer to control the transaction and have his/her way with a seller. It is much more complicated than simply saying "Cash is King!"

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