As the U.S. emerges from the COVID-19 pandemic, the market for single-family homes is red-hot in many parts of the country. Houses in those areas can sell very quickly, and often for more than the asking price. Part of what's fueling the frenzy is a growing number of buyers willing to pay cash, including individual investors and private-equity partnerships expanding their real estate portfolios.
Cash buyers typically have several advantages over the majority of buyers who require financing for a home purchase:
- A cash offer isn't contingent on a lender's final mortgage approval. Nor is a property appraisal typically required for the purchase to be approved. If you make an offer that exceeds the home's asking price and the lender appraises the home for less than your offer amount, you might have to either make up the difference in cash or lose out on the financing. A cash buyer, on the other hand, can bid above the asking price without worrying about lenders or appraisals.
- Cash buyers can close, or finalize, the sale immediately. Processing a mortgage application can take up to 60 days, although preapproval (see below) can reduce the turnaround time significantly. A well-organized cash buyer can close the deal in a couple of days.
Ways to Even the Field With a Cash Buyer
In light of the disadvantages you'll face against a cash buyer, your strategy for competing should focus on assuring the seller of your financial ability to complete the sale, and organizing the steps in the closing process so you can be efficient and flexible in meeting the seller's needs. Tactics that can help in this effort include:
- Get a mortgage preapproval letter. This is your single best way to better compete with cash buyers. Preapproval involves going through nearly all the financial review steps the mortgage application process entails, and gets you a letter from the lender indicating how large a loan it is willing to give you, and at what interest rate. Preapproval indicates to a seller that you have the financial backing necessary to complete the sale. It also can speed up the formal mortgage approval process, shaving 30 days or more off the turnaround time.
- Be prepared to bid more than the asking price. While real estate investors may be willing to exceed a house's listed price, they are often seeking bargains, and may be guarded in their willingness to bid too much over the listed price. Sweetening your offer by bidding over the asking price may be prudent, but take care against exceeding the property's likely appraised value. (Your real estate agent should be able to guide you in this.)
- Work with experienced professionals. A real estate agent or broker who's knowledgeable about the market can help you zero in on an offer the seller is likely to accept, but that won't exceed the home's appraised value. A seasoned real estate lawyer can help streamline the sales process and protect your interests during negotiations.
- Be prepared to close as quickly as possible. Work with your real estate agent and attorney to have as much closing paperwork prepared ahead of time as possible; have a building inspector on call to do your due-diligence inspection as soon as you get tentative acceptance on an offer; find an insurance agent if you don't have one and have them set to write up a fire and casualty property on the new house as soon as your offer goes through. (Your lender will require the insurance, and the policy shouldn't cost you anything until your closing date.)
- Also be willing to delay the closing date or accommodate a seller's special circumstances. This may seem paradoxical, but while many sellers are eager to close a sale quickly, some may appreciate your willingness to give them extra time or allow them some other considerations before closing. For example, they might need a few weeks to await completion of construction or renovations on their next home or ask permission to store a boat or RV temporarily on the property. If your circumstances allow it, flexibility on such matters could make you more attractive than a cash buyer to such a seller. Whatever terms you agree to, get them in writing with the help of an experienced real estate professional or attorney, so you have clear remedies in case the seller doesn't honor their side of the bargain.
- Appeal to the seller's sense of continuity. Homeowners typically invest a lot of themselves in their houses. Many are happy to see buyers who share their love for a property and who "get" what makes it a home. If you are sincerely passionate about a house, a letter expressing your vision for how you and your family would love it just might give you the edge over investment buyers. Keep it fairly brief and avoid flattery (which can sound insincere even if you mean it). This is no guarantee, but it can't hurt.
Make Sure Your Credit Is Mortgage-ready
If you're just beginning to seek financing on a new home, or if you've begun looking into mortgage preapproval and find the authorized loan amount less than you'd hoped for, or the interest rate steeper than you'd expected, it might be wise to step back and make sure your credit is mortgage-ready.
If possible, consider waiting six months to a year before applying for a mortgage and take steps as needed to improve your credit scores, such as:
- Pay down credit card balances, especially those with balances that exceed about 30% of the card's borrowing limit.
- Review your credit reports and dispute any inaccuracies that might be bringing your credit scores down.
- Refrain from applying for new loans or credit cards for at least six months before submitting a mortgage application.
- Track your progress by monitoring your credit scores. You could see score increases in as little as a few months but focusing on these good habits for a year or more could bring even greater improvement.
Contending with cash buyers in competitive real estate markets adds another challenge to the potentially stressful process of financing and buying a new home. If you get your finances together and are nimble and flexible in your ability to meet sellers' closing requirements, you and your team of professionals will have more than a fighting chance against real-estate investors.