Is Cash King?

A question I am frequently asked goes something likes this, “If I make a cash offer for the home will I be able to get it for less than list price?”

While I can’t say if a cash offer below list price will be accepted or not, one thing I do know is that in the entry level housing market there is a very good chance the seller may receive more than one offer and that one out of every two offers is likely to be cash. Additionally, a buyer using financing to complete the transaction can be strong competition as well.

Have a look at the graphic below. (click to enlarge)

Phoenix area homes purchased with cash

Of the 6,633 single family detached homes that sold in the last 30 days, 2,090 (31.5%) of them were purchased by a cash buyer. Looking at homes that sold for under $100,000 (the most active segment of the market) 2,048 homes sold in the last 30 days and a remarkable 1,066 (52%) were bought with cash.

A strong argument can be made that the $100,000 and lower price range it is a seller’s market with homes often receiving multiple offers. Investors, first-time home buyers and 2nd home (think vacation home) buyers are all shopping in the same pool of available homes and the competition can be fierce. Not only is there a good chance there will be more than one cash offer there is also a good chance that a higher offer may be accepted even though it is using financing to complete the transaction.

Is cash really king??? Some common assumptions:

1. You can close faster with cash?
True but unless the buyer is going to throw caution to the wind, time is still required to dot the i’s and cross the t’s. A cash buyer wouldn’t want to skip the 10 day inspection period would they? And today there are lenders who can provide buyers with mortgages in as little as 10 business days. So, unless the cash buyer is willing to waive the inspection it is possible for a financed buyer to close in the same amount of time as a cash buyer.

2. An appraisal isn’t required if the buyer pays cash?
True but not necessarily a sound assumption. Although the Standard Arizona Residential Purchase contract does automatically remove Section 2, the Financing section which contains the appraisal contingency, for cash buyers (see line 49), a Realtor who is representing their clients best interests would specifically include an addendum with appraisal contingency language. (Tip: If this is part of your offer strategy I strongly advise you to get an appraisal it can save you a lot of money.) Therefore, a cash buyer and financed buyer are on equal footing.

The most significant advantage that a cash buyer has is the fact that there is no financing contingency. To the seller this means that the buyer wont be canceling the contract because their loan isn’t able to go through. And if they do cancel outside of the inspection and appraisal contingency they will forfeit their earnest money.

So the bottom line is cash isn’t always “King…” It does have some inherent advantages but from a sellers perspective it’s a simple comparison. Who looks more attractive on a $100K home? A buyer with solid financing who is offering list price and a 30 day close or a cash buyer offering 20% less and a 15 day close? If I were the seller, I’d take the list price offer.