What is the power of cash?

17 Replies

What is the power of buying with hard cold cash? We all heard the phrase “cash is king”, but to what extent? If you and a seller agreed on a $100k price, 20% down with a 30 year mortgage.. what would be the cash price? My guess is the true power cash has will vary depending on markets, seller motivations, and other variables. In your experience, does having the ability to make cash offers give you a significant edge in the market? Just something I’ve been thinking about and wanted to hear some opinions on.

Hi Adam,

Based on my experience, cash helped us get the offer accepted, but it didn't help in negotiating the price that much. Most of the time we do financing though. 

Of course everything depends on the situation of the seller, so I don't think there is a specific formula or ratio for that. If the seller must sell the house ASAP, there should be room to negotiate. If the seller is not in a rush, then it will be hard to lower down the price based only on cash vs mortgage. So I would advise to give cash for the properties that are great deals and there is a lot of competition over the house. 

Plus, calculate the alternative losses, as you could always put this money into stock market or buy another property in the meantime. That will help you understand if it is worth it and what your actual return on this project is.

Bob wants to sell his house. Person A makes an full price offer, contingent upon financing, & Bob agrees. Bob gets excited & begins planning for the future.
2 weeks later person A finds out they have terrible credit & the bank won’t loan him enough money to buy Bob’s house. The deal falls through, & Bob is sad.

Next, Person B & C get into a bidding war, & eventually Bob settles on Person C’s offer, for $15k above asking. Bob gets excited again. Person C gets approved for the loan, but only up to 80% of the appraised value of the house, which comes back at $5k less than Bobs original asking price, which means Person C now has to come up with an additional $20k to close the deal. They ask their parents, friends, and even great uncle Charlie, but can not find the extra money, and once again the deal falls through. Bob is once again, sad.

This all happens twice more, & by this time Bob is now frustrated & a bit angry, because his plans are being postponed by one unsuccessful offer after another.

Eventually, person F walks into Bobs house with a suitcase full of cash. Person F shows Bob the suitcase full of cash, & explains to Bob that she doesn’t have to ask the bank, her parents, her friends, the credit reporting agencies, the appraiser, or even great uncle Charlie, for any kind of permission whatsoever to buy Bobs house. She then offers to buy Bobs house for $25k below his asking price, & tells Bob that if he agrees, he can have the suitcase full of cash right here, right now, & sticks out her hand to shake. Bob is delighted to be done with the whole process, & the deal is done.

Cash doesn't change the market price of things.

it gives you an edge in negotiating, because you can close faster.

it allows you perfect liquidity when deals pop up

cash is absolutely king because of it's flexibility.

@Ryan D.  

has a great point.  One other thing to keep in mind from his comments--the key to a good deal is a seller that is motivated and NEEDS to sell (as opposed to just WANTS to sell.)

I often make 3 offers:  all cash, 50% of market value.  With NO contingencies, ie, no inspections, no mortgage clause, etc.  

2nd: 65% of market with x down and bank financing.

3rd: 75% of market with seller financing.

Depending on the 'hotness' of your market and the motivation of the seller, your percentages can vary.  But by giving options, you'll find you end up with more deals.

Good luck!

Cash is huge in c class neighborhoods in lower income areas virtually all houses are bought and sold this way because banks won’t give loans out on them . The government forces banks through fAir lending act to not discriminate by a given area . The bank circumvents this rule by simply setting a high enough price point that they won’t lend out on cheap houses

Originally posted by @Marc Winter :

@Ryan D.  

has a great point.  One other thing to keep in mind from his comments--the key to a good deal is a seller that is motivated and NEEDS to sell (as opposed to just WANTS to sell.)

I often make 3 offers:  all cash, 50% of market value.  With NO contingencies, ie, no inspections, no mortgage clause, etc.  

2nd: 65% of market with x down and bank financing.

3rd: 75% of market with seller financing.

Depending on the 'hotness' of your market and the motivation of the seller, your percentages can vary.  But by giving options, you'll find you end up with more deals.

Good luck!

I like that strategy for making an offer, it mixes in several creative methods 👍🏼 

@Adam Burns Cash helps when submitting offers. A cash buyer is better because the seller doesn't have to wait for financing to come through and any hoops the bank makes everyone jump through to close. As a seller cash = faster close, no fha hoops to jump through, no other contigencies that the bank requires be addressed before closing.

If you already agree to buy a property,  and have a contract, then decide to say "hey I'll give you less in all cash" there is not much power there. Unless the deal is about to fall through because of the financing and the seller doesn't think they'll get another buyer.

So yes, it gives you an advantage mostly before having a contract.

Especially in this crazy market where MF are gettig gobbled in days, anything you can do to simplify and focus the seller on your offer will help get it done. I got a 12 unit last year and I really believe my cash offer gave me control of the deal. My contingency was an inspection and financials. We closed on his schedule.

The biggest benefit I think is that cash allows you to offer on properties that do not qualify for a loan, reducing the buyer pool greatly so normally much better deals available in that category.  With homes that qualify for normal loans, cash offers are stronger than buyers with loan contingencies as long as there's not a bunch of other contingencies in the offer gumming it up, anyway  -- so you can sometimes beat out other offers, even higher offers, that require loan approval, but many sellers would consider a solid offer with a loan pre-approval over a much lower cash offer, so the pricing benefit of all cash is reduced in homes that readily qualify for loans.        

Cash allows you to move quickly whereas traditionally financing can take up to 45 days.  Cash allows you to solve problems much faster, and gives you an edge over other investors / buyers.

Cash also allows you to buy auction or distressed properties that don't qualify for loans.

I would say 5% is the power of cash in your 100K/ 20% down example (assuming you have good credit)

All cash could probably take that deal down for 95K all cash quick close.

I think that is how the seller would view it as they would give up 5K for a lower net price but a slam dunk all cash offer.

At 90K all cash they would probably take your 100K offer with financing as they'd roll the dice on your loan being approved.

Originally posted by @Arun D. :

I would say 5% is the power of cash in your 100K/ 20% down example (assuming you have good credit)

All cash could probably take that deal down for 95K all cash quick close.

I think that is how the seller would view it as they would give up 5K for a lower net price but a slam dunk all cash offer.

I think the market you’re in is a huge factor; There may be a 5% Cash Power (did I just make that up?) in your market, but if I had to guess I would say in my neighborhood it would be around 10-15%. 

In parts of Birmingham, cash is the only way to close. Lending is almost non-existent in the sub-40k market. So cash can be pretty powerful when it's the only way to get a deal done.

Also, I like cash transactions because they're soo easy (less paperwork and headaches.)