“All-Cash versus Conventional Loan

“All-Cash” versus Conventional Loan

By Steve Meyers

May 16, 2014

 

“All-Cash” purchases are becoming common place in acquiring single-family homes and condominiums in the Unites States.  The most recent report that I read from RealtyTrac indicated that 43% of residential purchases were “All-Cash” across the Unites States with many municipalities above 50%.  Miami is seeing “All-Cash” purchases at 67%.  Below is a simple chart from a Sellers (Owners) perspective.

“All Cash” Buyer

Sales Price = $300,000

Cash received at Closing = $300,000

Days to Close Transaction = 15 to 30 days

Appraisal = There is an Advantage to the Seller with an “All Cash” Buyer because an appraisal is not required.  However, a Buyer may include an appraisal contingency with the Offer to Purchase

There is a Disadvantage to the Buyer because without an independent appraisal, will he/she be paying above market value for the property or, is this the new market value

Financing Risk = Zero

Buyer with Financing

Purchase Price = $300,000

Cash received at Closing = $300,000

Days to Close Transaction = 30 days

Appraisal = The property must appraise at the agreed upon price.  If the appraised value is lower than the agreed price, the Buyer can terminate the contract or renegotiate to a lower price.

Financing Risk = The Seller must be confident that the Lender has properly evaluated the Buyers; credit risk, existing cash to Close, and income and cash flow to pay off the mortgage.

 

From a Sellers perspective, if both the “All-Cash” Offer to Purchase and the “Conventional Loan” Offer to Purchase are equal, the Seller should accept the “All-Cash” Offer.  The magical question is, if the “All-Cash” price is less than the “Conventional Loan” price, what level of risk is the Seller willing to accept for the additional Net Sales Proceeds from the “Conventional Loan”?  Simply put, if the Seller is comfortable that the Buyer will be able to borrow the money and they’ll receive a higher Net Sale Proceeds, the Seller should accept the higher Offer with the “Conventional Loan”.

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