What is an all-cash offer?
Updated March 8, 2022
When a buyer makes an all-cash offer on a property, they’re forgoing traditional financing and agreeing to pay the entire purchase price of a home upfront.
All-cash offers can become more or less prevalent depending on the dynamics of the real estate market at a given time (and are more common in certain cities, price points, and during seller's markets), and have a variety of pros and cons.
Benefits of Cash Offers
There are a variety of reasons a buyer might offer to pay all cash, including:
- Making their offer more appealing to sellers. All-cash offers tend to be more common in competitive housing markets, because sellers often prefer them over offers that involve financing and they can give a buyer that leg up they’re looking for. An all-cash offer is not contingent on a buyer securing a mortgage, and therefore will have a more expedient closing process, and may feel like a safer bet than a comparable bid that involves financing. Some buyers have been known to purchase a home in cash in order to beat out competition and speed up a deal, then retroactively take out a loan on the property after the sale has closed.
- Avoiding fees and interest payments. Though all-cash buyers pay much more upfront, in the long term, they can avoid expenses including bank fees, local mortgage taxes and the long-term costs of interest. By comparison, a buyer paying off a standard 30-year mortgage will ultimately pay far more than the original value of the house as they’re paying down both the principal and the interest on a loan.
- Purchasing as a foreign buyer. As a rule, investors and foreign buyers are much more likely to purchase properties in cash, in part to avoid the difficulties of securing a loan, and also a means of maintaining an added degree of privacy on a major financial transaction.
Drawbacks of Cash Offers
- Financial concerns. Besides the obvious downside of an all-cash offer—parting with a significantly larger amount of money upfront—some buyers who are able to pay in cash may still choose not to for reasons of broader financial strategy.
All-cash offers can become more or less prevalent depending on the dynamics of the real estate market at a given time. Photo: Pixabay
While cash buyers avoid the longer-term cost of interest, they’re also tying up a significant amount of formerly liquid assets in a single investment that’s not guaranteed to appreciate at the same rate as the broader financial market. (For instance, the average annual appreciation rate of homes in the U.S. is 3.9%, whereas the average appreciation of the stock market is 10% before inflation.) With this in mind, some buyers who might otherwise choose to pay in cash will instead opt for financing—particularly in times when interest rates are low—as a way to keep more of their money invested in financial markets, and earning returns that are greater than what it might cost them to take out a loan.
- Missing out on tax deductions. Buyers who pay in cash don’t qualify for mortgage-related tax deductions, meaning that they’re unable to reap any of the standard tax benefits associated with homeownership.