Cash Purchase Discount?

23 Replies

We are just starting out in the REI game in Central PA and we have a business plan meeting with a local bank to discuss an unsecured LOC over traditional financing. We want to drive home the fact that cash purchases give us more buying power in the market.

On average what would be the savings/discount when a property is purchased with cash?

I know it varies per state/market but we are just trying to find some type of figure that we could use.  Thanks in advance!

Hi @Ryan Rudy , I'm going to come out of the gate here with a different angle:  be careful!  I consistently see cash buyers overpay for a property and, being well aware of this, many investors and speculators (builders, wholesaler, agents, etc) target cash buyers with properties because they know they don't have to "worry" about a low appraisal.

So, in theory "cash is king" leads to discounts on deals, but if we approach the subject with intellectual honesty we'll find that this frequently isn't the case.  

The biggest advantage cash has over finance outside of the lack of appraisal/lending contingency is speed.  If you're going to truly execute your strategy in a way that buys at a discount then it will be based on the discount that speed can leverage.  So, what is the value of speed?  More to the point, to whom is speed valuable?

@Ryan Rudy at the end of the day that's really going to come down to the sellers personal situation. For example if they're in a position of financial hardship and need to sell the property asap then an all cash offer for $20k below asking may sound very enticing. In comparison to the seller who isn't in a rush to sell and is set on getting their price. Full cash offers doesn't necessarily mean you're looking for a discount but it's a lot more common for an FHA buyer to pay at or well above the asking price. (This is all assuming you're looking to purchase a 1-4 unit property.)

They’re ALL cash buyers at the closing table.  I’ve had potential buyers thrown that at me like it was meant to impress, I’m not.

@Will Fraser that is an excellent point.  We absolutely love the calculators that BP provide and plan to use them for any and all deals that we are looking at.  We find that it takes out the "emotional" response to a property.  

We will be pursuing rental properties while using the BRRRR method. So the property will eventually need to appraise for a substantial amount for the refinance.

I did not consider the speed of the transaction to be a sticking point, so thank you very much!

@Cody Barna yes we are looking for SFH or duplex to start. We know the market is crazy right now and people may not be in a hurry. We are working on being able to have options as a buyer. We would be targeting the houses that have been on the market for a longer period of time than their comps and determine why and if it is worth purchasing. Thank you for the feedback.

@Ryan Rudy others will disagree but I think it's a tremendous advantage to not have a loan contingency as a buyer. 

The small MFH (2-4 unit) market is very strong in my area right now. But a ton of that noise is from people that don't know how to purchase an investment property and/or have agents that don't understand financing. Just because you have the desire to purchase a property doesn't mean that you have the ability to do so. The lender is the true decision maker. And cash means there is no lender. 

I personally would heavily consider a 5-10% lesser cash offer than an equivalent loan contingent one. It's all the same at the closing table but it's one less hurdle to get to it. 

@Ryan Rudy

I’ve been outbid a couple times by cash buyers that offered less than me. But, I wouldn’t expect a huge discount. I’ve found that what really makes a strong offer is terms. Fast closing, and no inspection. Obviously you need to get a real good look at the property before you do this.

@Ryan Rudy Hi Ryan - speed to closing can be a tough one right now.  Here in Burlington, VT so much has moved to a crawl due to COVID.  As the seller, I need to have a Fire INspection as well as all the Lead Inspections and annual Code Inspections all up to date.  If they're not, it's iffy as to when the inspectors want to go in.

Even in a non-COVID period, it really saves no time if they have cash as they're banking approval runs in parallel with me getting all the inspections and the buyer getting the appraisals done.

@Will Gaston thanks for the feedback! I would have to think the more options a buyer has the better off they are. Apparently it is pretty difficult to obtain a LOC for REI. We are hoping that this bank can come through for us!

@Mark H. Porter that's wild!  We actually moved in May right in the middle of the COVID hysteria down here in PA.  We had a month close which was pretty quick.  We had an inspection and traditional financing.  So hopefully when we are able to start legitimately start putting offers in we can get the close process done in an efficient amount of time.

@Ryan Rudy I bought 2 properties cash recently and I start my negotiations at 10 to 12% below asking price. I won't settle for anything less than 7% below asking price. My last 2 properties was at 8% and 7% below asking and my recent one appraised at 25K above what I paid. Cash is King and it wins out over traditional financing both properties I purchased had traditional buyer who offered more but they saw my proof of funds and knew they had no issues closing with me. You have to pay for that peace of mind. Sone people will do it and some won't and if they don't its not for me.

Hope that helps.

@Manny Del Val thanks! We want to be able to provide our strongest offer and I think cash can definitely assist with that. We are trying to get a LOC to assist with the purchase and rehabilitation using the BRRRR method. We are putting our business plan together for a mid September meeting. This will definitely help, thank you!

Generally not much, maybe 5k. A cash offer mans you can close faster - that does not even apeal to some sellers. And you don't have the risk of lending falling through, but thats a matter of vetting the pre-approval. It's all cash at closing anyway.

Of course it always depends on the specifics - the trick is often to craft an offer that hits the hot buttons for the seller. If the deal had fallen through before on inspection, an offer without inspection contingencies is VERY appealing to that particular seller.

Make sure you find out what the seller wants (duh!) before crafting the offer. My listings even say call listing agent BEFORE writing offer and 80% of the agents still won't and just throw an offer into my email and hope it will stick.. 

@Ryan Rudy

Hate to burst your bubble, but I've got 5 years experience, few dozen deals, built multiple lender relationships, and still can't get an unsecured LOC greater than $25k. So don't get your hopes up too much.

To answer your question cash discount depends on motivation level and exasperation level of the seller. You can get a giant discount if you find a seller who just had a buyer back out because of a bad inspection or financing fell through. If the house was just listed with an agent, is in perfect condition, those people can probably wait for the higher offer that includes financing.

Most of the stuff on the MLS right now is overpriced junk. Be very careful finding good deals on the MLS. There's a lot of buyers overpaying for properties right now. Be sure to factor in your full rehab costs, holding costs (interest, utilities, taxes and insurance), closing costs and profit margin. Most buyers don't fully account for all of those items.

Are you flipping or BRRRRing?

@Marcus Auerbach

Thanks for the insight!  We are just trying to get all the options we can before we jump into our first deal.  From everything that we have learned from this post, it's necessarily the cash purchase as much as accommodating the seller to close the deal.  We will make sure to contact the seller agent  before any offer is made to make sure our offer is customized to what to the seller is looking for.

@Kyle M.

Yeah we are finding out that it may be pretty difficult to get a unsecured LOC. We have discussed putting down some cash for a cash secured LOC and hopefully getting a little more. We have been talking with 3-4 lenders now but our big meeting is in September with a close friend.

Thanks for the heads up with the MLS inventory. We are really cautious when looking at the MLS. Prices are absolutely ridiculous right now.

If you have some time we would love to pick your brain about your experiences since you are a local investor.  My wife and I both grew up in Central PA and know the areas pretty well.  We are just trying to get as much information as possible.  Any advise would be fantastic. Thank you in advance!

@Kyle M.

I forgot to mention that we are looking to use the BRRRR method. We have a good connection with a fantastic contractor that is in it for the long haul, so we looking to get properties that may need some to a lot of work done.

@Ryan Rudy In my market cash usually doesnt mean a discount, it just makes you more competitive. With the majority of properties receiving 3-20 offers most sellers dont mind waiting a few extra weeks for a much larger purchase price to close. As long as the lender/buyer are vetted and/or a backup offer is locked in the financing contingency doesnt seem like a huge hurdle to overcome.

Almost exclusively I buy my properties with all cash offers even when it's not necessary. Discounts can be found but not what most new cash buyers expect and often cash has no bearing to the seller at all. The speed to closing is how I have found cash gives me an advantage on a property. When I mean speed Im talking hours or minutes. Not days or weeks. No inspections no contingencies. Acting with speed means you really have to know what you are doing to minimize your risk. If your business plan to your banker sounds like you are buying sight unseen, no inspections, no contingencies etc getting an unsecured LOC is your concern. Bankers will not lend to you unless you have an established relationship and a track record and even then unlikely. Its a dangerous game, the rewards may not be worth the risk. There are other strategies in the REI space that have less risk associated with it. Also, if you do get into cash buying you will quickly find out there are many more cash buyers out there than you might be imagining.