On the rare occasion that you encounter a buyer who is considering purchasing their home in cash, it’s important to be prepared—especially if they’re turning to you for advice about whether they should get a mortgage or just pay cash. Buying a property using cash changes the process significantly, and the cash buying rules are subject to change. Luckily, paying cash tends to streamline the process, not make it more complicated, to the point that some sellers want to incentivize cash payments, and they’ll even offer discounts for those who are able to make such a payment.
Why do people buy property with cash?
There are three main reasons why a buyer would want to purchase using cash instead of financing a home with a mortgage. First is that they own their home from the get-go. This adds an extra layer of security—it makes the home a solid investment, regardless of external circumstances like an economic downturn or a real estate market correction. Second, by paying cash, buyers avoid paying any interest on that home. Interest rates on loans can stack up over time, and paying cash can mean saving tens or even hundreds of thousands of dollars. Lastly, paying cash allows buyers to dodge the fees associated with getting a loan, such as mortgage origination fees and appraisal fees.
The disadvantages of paying cash
Paying cash for a house isn’t always the best decision. Buyers risk losing liquidity by investing too much in one single asset. This is why buyers that want to live mortgage-free spend years pinching pennies and living scrappily in order to save enough to pay cash.
By making a one-time cash payment, buyers can no longer deduct their mortgage interest from their income tax. They will still incur other costs, like closing fees, insurance and property taxes, and general upkeep. Lastly, if a buyer pays cash, they have no leverage—in other words, they won’t be able to make as much profit from the increase in value of their home over the mortgage repayment period. This also makes reselling the home more difficult.
The Advantages of Paying Cash
The process for a cash purchase of a home is different than taking out a loan. Fortunately, most of these differences streamline the home buying process, rather than making it more difficult. Home buyers avoid credit checks or dealing with pre-qualification. The buying process itself is simpler too, since it allows you to forego the various financial verification documents associated with purchasing a house.
For a realtor, cash buyers are dream clients. Although it’s rare, paying cash makes the whole process simpler all around. Sellers are more inclined to accept cash offers, since it mitigates the risk of some unforeseen accident that makes the buyer unable to make a monthly payment.