Cash offers - how MUCH more attractive are they?

[John Hartnett]

I've placed a bunch of offers this year, seeking to pursue a buy and hold strategy to build a rental portfolio. The county records show that a recent house settled for $125k cash, while my offer was $135k with 20% down. The house was on the market for 500 days, not a short sale or a foreclosure.

SO - how much more attractive in quantitative terms are cash offers? Should I make ALL my offers in cash and then refinance them?

[Joel Owens]

Hi John,

Cool name. First time I have heard mountain as a last name.... : )

All cash with no contingencies or putting up a bunch of non-refundable earnest money gets a sellers attention. Even though an all cash offer is lower it screams CERTAINTY OF CLOSE versus the risk of underwriting a borrower for a loan and the deal falls apart.

It depends on how long you want to wait before you can refi out if that strategy works for you or not.

What is your particular strategy for buying the smaller rental houses versus other assets classes if you have that kind of capital to work with??

[Doug Pretorius]

@John Hartnett Obviously a cash offer is more attractive, but how much that benefits you depends on the seller's motivation. Yesterday I made a multiple choice offer to a seller.

1. Take over payments - seller didn't want that because he's got $100k in equity.

2. Lease option assignment - seller doesn't want to be a landlord.

3. All cash - seller discounted only $5k.

So in this case it didn't matter what I offered, the seller just isn't motivated enough.

[Wayne Brooks]

On the retail side, listed properties, cash makes some difference, but not that big. The $135k vs $125k may have been a timing thing?  I have financed buyers preapproved with a lender I know, regardless of what preapproval they have.  Most preapproval s aren't worth the paper they're written on.  If someone doesn't trust/verify a preapproval, they'll give cash a bigger advantage.

[Bryan L.]

@John Hartnett 

 - I have mostly bought REOs.  And I usually make a cash offer, with proof of funds, no contingencies, and a large e-m deposit.  And there have been several times that my offer was accepted even though someone else made a higher $ offer.

[Glenn McCrorey]

I don't make all cash offers very often but recently offered "above" the asking price, all cash, no contingencies. The house was in great shape, was a short sale, and a great deal. I didn't get it. The realtor said I was in 3rd position and the bank wanted to work with the first offer. How crazy is that?

[Brian Gibbons]

The cash or terms model

Type 1 - Ugly and Alot of Equity

All Cash only

Type 2 - Pretty and Alot of Equity

All Cash, Lease Purchase and sublet, sub2 and note, contract for deed, some cash now and some later in a note, lease option assignment, wrap - aitd

Type 2.5 Free and Clear - Installment Sale

Pay 105% of FMV with little interest or no interest - acknowledge imputed interest issues from IRS

Type 3 - Pretty and Little Equity - Best Terms Play in a Sellers Market

Sub2 and no Note, installment sale, Lease Option Assignment, wrap and re wrap.

Type 4 - Ugly and No Equity - Short Sale, Deed In Lieu, BK, etc, no play.

@Doug Pretorius  may want to comment.  I know Canada is a whole different finance planet.

[James Wise]

It really depends on the situation.

REO's with a lot of competition the banks want cash offers.

Seller that needs out of a house yesterday wants a cash offer.

Someone who wants to sell but doesn't NEED to sell an occupied rental would hold out for a higher offer.

[Mitchell L.]

It all depends but cash with no contingencies and quick closing is always preferable to financing, especially in todays market with financing and appraisal issues we all face. There are many factors that go into this but if you do submit a finance offer, try removing at least the inspection contingency and put in 20 days or less for loan commitment.. That is the only way you may have an edge, otherwise CASH is KING.

[Doug Pretorius]

@Brian Gibbons Not that much different really. All of the things you listed are about the same here. One of the biggest things to keep in mind in Canada is that mortgages have to be 'renewed', typically every 5 years. Basically all that means is that the interest rate is renegotiated, sometimes in your favor, sometimes in the bank's (depends on current rates). So long-term sub2s, installment sales or lease options are less viable.

[Walt Payne]

@John Hartnett I have won and lost several bids with a fair difference due to cash offers. And in fact I have $325k personal residence for sale and based on what I have seen I would take $20k less for a cash offer.

[Wayne Brooks]

@Glenn McCrorey 

Not crazy at all, since in a short sale, the asking price has no relation to the price the bank will actually accept.  The highest offer may well not be enough.  Sounds like the agent had it under priced.

[Glenn McCrorey]

Thanks Wayne, I agree it was under priced. You win some you lose some.

[John Hartnett]

This is great! First time caller, long time listener! Here's my takeaways:

1. A cash offer is always more attractive, and if we're serious as investors than we're way better off making a cash offer first - and refinancing after the deal.

2. Inspection contingencies can be albatrosses to a deal - so it's not just the financing that can affect a cash offer. I need to get comfortable and confident inspecting SFH's if intend to build a portfolio of 4-10 or more. That is, when I'm serious about making an offer, I should be able to do a home inspection myself to have confidence in making offer without inspection contingencies.

3. 5-10% is a reasonable discount for a cash offer to be as attractive as a financed offer - the real value is that a cash offer brings confidence to the seller that the deal will close. And finally...

4. "John Mountain" is a pretty hokey pseudonym. I'm a little nervous about creating a profile with my real name as my social media exposure is big enough already. I'll change it up soon.

Thanks for the thoughtful replies.