Here is a common misconception that you hear every day: "CASH IS KING". Cash is commonly thought to give a buyer a position of leverage with a seller. Unfortunately, cash is only an enticement to sellers when lenders are not giving loans. Here is the simple reason why--All deals are "cash" to the seller at closing. No exceptions. So, when presented with a good offer from one buyer vs a cash offer from another buyer for less money--the seller will always gravitate toward the better offer over the cash offer. At closing, every offer is cash to the seller, so the idea that Cash is King is actually a misconception of real estate. In good market conditions, Sellers are only interested in the best offer.
Look at this from the perspective of the seller.
Look at this from the perspective of the seller.
Individual 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 about 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 3% less for cash vs. an offer of 3% more coming from a buyer with a bank loan is going to get shut down almost every time. On the other hand, if the buyer offers 20% down payment (cash) vs an offer that has 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". Why should the seller settle for less?
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 flying off the shelf with investors. Believe me, I invest in property and if this were true, I would be buying homes left and right. In fact, why would anyone buy a house any other way if this were true? Unfortunately, this is seldom even remotely true. 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 with the bank is just not smart. Banks, like sellers, are not impressed with cash and more importantly, Banks and their agents most typically 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 1% more money that the bank receives on a deal, they can afford to sit on it longer. In fact, a bank can sit on a property for a long time without selling it. Most banks have deep pockets and they are not afraid to wait for a better offer.
Now for the exceptions. There are some instances where cash is a requirement of the transaction and in these somewhat rare transactions, the buyer who has cash often has the opportunity to buy below the future market value of a property, but these properties have other challenges--such as the need for dramatic rehabilitation and work.
The Rehab Property. This is the property that needs cash. If a property is in need of major repairs such as major foundation repairs, holes in the roof or a substantial structural issue that the seller/bank is unwilling or unable to repair before selling--these properties are often considered to be "unwarrantable". In other words--a bank will 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 indeed. This does not mean that the seller or bank will give the property away, but it does mean that the property will probably sell 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.
In the end--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 Private Mortgage Insurance (PMI) or give you some advantage advantage in a competitive bid of similar value. 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 that and Cash is Seldom King.