Discount for 100% cash purchase?

14 Replies

I have heard of instances where investors include a "discount" in their offer/purchase price for purchasing properties with 100% cash.

If this is common practice, what kind of discount are we talking? A percentage? Or a flat 20-30k (just to throw out numbers)?

Any thoughts?

In my experience it is not really a percentage or a flat amount per se. It is more what value is placed on getting a deal closed more quickly and also the greater assurance that the deal can close.

The last property I bought I got a sense that 20K was that number for the seller. Every seller is going to be different though. Some may not believe there is any value in closing sooner.

Certainly will vary based on the buyers needs and the actual amount of flexibility there is available on the property itself...

If the Seller owes more than what you can offer, then you have a problem

Ask a lot of questions about the buyers reasons for selling and find out how much he still owes on the property...

If he needs a lot of money in the next hour you are gold, if you have cash in your pocket and he does not owe anything on the property

Offering cash is just a way of showing there are not any financing contingencies. You should be able to get a more aggressive price with that, but you really gotta analyze the deal a lot more than just shooting out low ball offers for cash. Know the previous purchase price, know the amounts of underlying mortgages, and know if they are current. Those are just a few things to understand prior to making an offer.

Ken, I would like to toss you back a question. Why would you want an answer to your question? In other words, if you get an answer, say 10%, what do you plan to do with the answer?

My point is that any answer given to your question will be wrong and here is why. There are thousands of variences in real estate and thousands more of reasons for why one would be selling. Discounts are negotiated due to specific factors and circumstances present in each and every deal, no two deals are the same (similar to snowflakes). Attempting to assess an "average" discount for a cash offer is useless for individual circumstances.

There are very few shortcuts to success. Do your homework on each deal, crunch the numbers accordingly, and make your offers based on your due diligence, not some average guess work of a discount.

In the case where the seller was offering financing, yes, all cash does command a discount, because the seller carry back note would have only been worth a % of the face amount due to the TVM.

In the case where the seller was expecting the buyer to come in with a 3rd party loan, the answer is yes as well, since all cash means that there will not be any sort of financing contingency in the deal.

Originally posted by SolidReturns:
In the case where the seller was offering financing, yes, all cash does command a discount, because the seller carry back note would have only been worth a % of the face amount due to TMV.

In the case where the seller was expecting the buyer to come in with a 3rd party loan, the answer is yes as well, since all cash means that there will not be any sort of financing contingency in the deal.

I agree with LOC, both of these scenarios are true, however, to stamp a set amount or average of that discount that should be applied is impossible, as every situation is different.

Yes, there is no "fixed" or "set" discount. Of course, I would suggest that you get as big of a discount as possible as a buyer, and give as small of a discount as possible as a seller!

Seller like to brag about how much “they sold their house for†at parties. Carrying back a note on stupid terms is often a way to get the seller to get their higher price so that they can brag about it. The cash price is the no-hassle, what-they-are-willing-to-take price. Consequently, there will be a discount. From a ROE standpoint paying cash doesn’t always offer a discount though because there are transaction costs to refinance or utilizing your cash in the deal is inferior to financing it at a higher sales price.

Originally posted by Will Barnard:
Originally posted by SolidReturns:
In the case where the seller was offering financing, yes, all cash does command a discount, because the seller carry back note would have only been worth a % of the face amount due to TMV.

In the case where the seller was expecting the buyer to come in with a 3rd party loan, the answer is yes as well, since all cash means that there will not be any sort of financing contingency in the deal.

I agree with LOC, both of these scenarios are true, however, to stamp a set amount or average of that discount that should be applied is impossible, as every situation is different.

Will,

I see your point.

As an investor, my intention is not to apply a "standard discount" to my offer prices per se, especially not without proper due diligence. But it's always nice to a sense of what others are doing "in general" and the advantages (and disadvantages) to various scenarios.

Everyone, thanks for your feedback.

One other point in getting a deal written (at your desired price) is to offer a greater "earnest money" deposit. Sometimes that skin in the game will count as a major incentive to accept. Putting $10,000 vs $1,500 up front says something about your seriousness to get the deal closed - and maybe then you don't have to comit all your cash (providing a better ROE, as Bryan suggested).
I don't believe in leveraging assets highly - but I always want to ensure my cash is working to its fullest extent.

TTFN,
Greg

I had an investor who was a regular customer, when I was a Realtor, who had very deep pockets. The place he did well with cash was buying properties that were not financeable but had great lots. Usually 40% discount minimum.

He would also hammer out tough low down contracts on units then a while after closing offer a deep discount for cash, again 40% seemed to be what he was after.

i my market, which is pretty active, cash will get you a contract when up against conventional. I would say the 'discount' isn't more than a few K. I have personally been under the lowest offer by 2K and still closed the deal due to no contingencies.

For me it is a balancing act, if I want the property and it makes sense on paper I don't want my offer to be rejected. If the deal isn't super juicy, I may poke around with lower offers knowing I'll find another deal as attractive, if not more so.

Originally posted by Mark Claire Updegraff:
For me it is a balancing act, if I want the property and it makes sense on paper I don't want my offer to be rejected. If the deal isn't super juicy, I may poke around with lower offers knowing I'll find another deal as attractive, if not more so.

Makes sense, thanks

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