Is cash really king when purchasing real estate? The short answer to that question is yes, and there are some good reasons why that’s the case.
Contracts to purchase a home typically have a number of contingencies and deadlines in them that allow a buyer and/or seller to cancel the contract if certain issues aren’t resolved within the stated timeframe. Because two of these contingencies only occur when there’s a mortgage application involved, a cash transaction has fewer potential obstacles and is, therefore, more likely to close successfully. Hopefully, the seller’s agent requested proof of funds (bank or brokerage statements showing that the buyer has the full purchase price available) before the offer was accepted.
The first contingency is the appraisal which is only required when the buyer is seeking a loan approval. If the appraisal value is less than the purchase price, the buyer can cancel the contract and have their escrowed good-faith money refunded. Perhaps the buyer is already experiencing “buyer’s remorse” and can’t sleep at night worrying about the deal. They may welcome the opportunity to be able to walk away. A buyer may also not be willing to pay more for a property than the appraiser’s stated opinion of value. They might feel that they are overpaying and that maybe they’re not getting their money’s worth. They may be so upset that they’ll walk away without giving the seller a chance to negotiate. It happens.
The second financing-related contingency is the loan approval. If a lender doesn’t approve the buyer’s loan within the stated timeframe, and the buyer has cooperated with the loan officer and provided all requested documentation in a timely fashion, the buyer can walk away. Before accepting an offer, an experienced seller’s agent will request a pre-approval letter and a positive conditional approval report from the buyer’s loan officer’s DeskTop Underwriter (DU) loan application evaluation software.
Finally, a delay in obtaining a loan approval can cause the closing date deadline to be missed. If this happens, either the buyer or seller can cancel the deal. There is NO obligation to extend the deadline. Perhaps, the seller has more favorable backup offers that they are willing to pursue if the current deal falls through. It happens.
So, if I was the seller and two comparable offers came in, I’d pick the cash offer even if the offer price was lower. There are fewer deadlines and a greater possibility of a successful closing. Works for me. Long live cash!