In a busy seller’s market like we’ve seen over the last year in Saskatoon real estate, chances are you may have heard the term “cash offer” come up at least once. No, we’re not talking about a buyer with a briefcase full of cash like we’re in a spy movie (though that does sound a lot cooler). We’re talking about an exciting and highly enticing type of offer that stands out from the rest.
What is a Cash Offer?
A cash offer is when a buyer has enough money between their cash and investments to purchase a property outright without borrowing funds from a bank or mortgage lender. It means that they have spoken to either their bank or financial advisor and have proven funds lined up, so their offer will not be contingent on financial approval.
Types of Buyers with Cash Offers?
Though we may write it off as such, a cash offer does not mean that the buyer is inherently wealthy with overflowing bank accounts. In fact, cash offers can come from a variety of buyers! Here are some common types we see:
Real Estate Investor or Company - Usually with several properties and quite a bit of equity, real estate investors or investment companies tend to have enough financial freedom in their portfolio for a cash offer.
Profitable Home Seller - For those who sell for more than they owe on their mortgage, some money is often left to play around with when buying a new home.
Fixers & Flippers - Buyers looking at lower-end or foreclosed homes for sale usually work in a lower price range with more cash affordability. And if they’ve been fixing and flipping houses for a while, they may have some residual income to work with from their last project.
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Retirees - While it may seem as though these would be the last buyers to come with a cash offer, retirees are typically downsizing from a larger home. And after paying off that mortgage over the past number of years, they may have had quite a bit of equity left to earn them a healthy sum to work with. They may also have access to life savings or retirement funds set aside for precisely the intention of buying a house, making a cash offer a little more likely than you may have assumed.
The Pros & Cons of Cash Offers as a Buyer
As a buyer, offering a cash offer does have several advantages you may want to consider. First, with no credit checks being performed or borrowing of any kind, a cash offer will have no impact on your credit score. This also means less paperwork and documentation to worry about along the way, not to mention all the equity in your home will be yours! Of course, there also won’t be any interest payments to work through over the coming years, and if you’re in a competitive seller’s market, it can genuinely make your offer stand out.
There are also several disadvantages to a cash offer as a buyer. The most obvious is the upfront cost. A cash offer is expensive; there’s no way around it. You will be using only your funds, which you won’t just need to pay for the house. You will also still need enough to pay for other closing costs when buying a home, including insurance, legal fees, and property taxes. And though the idea of not having shared equity may sound phenomenal, it also means all the onus of the property falls to you should anything occur financially. You are entirely invested in your property and cannot take advantage of mortgage-related tax deductions, either.
The Pros & Cons of Cash Offers as a Seller
Without a doubt, the greatest advantage of a cash offer to a seller is the speed and security of the sale. Most offers that come through on homes for sale will be conditional on financing and an appraisal. However, given that the buyer is not borrowing the money, they won’t need an appraisal for their lender, nor will they be waiting on a mortgage approval to come through, which can sometimes take up to 2 weeks. Not only does this mean a quicker sale, but with fewer contingencies, there is also less risk of the offer falling through.
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Note: Just because the buyer may have fewer contingencies does not mean you can’t come back with your own. I highly encourage sellers considering a cash offer to counter with an offer conditional on proof of funds. This could be a letter from their bank or investment portfolio just guaranteeing the funds exist and that they are not in bad financial standing.
However, it isn’t always an ideal choice for a seller, and there are some disadvantages to be aware of when considering a cash offer. With a cash offer, the buyer isn’t being vetted by a lender before the deal closes, which can make some sellers warier. In fact, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) even cautions sellers against “unusually large cash amounts used to fund any financial aspect of a real estate transaction” as a potential indication that the transaction may be suspicious. This does not mean you should automatically rule out all cash offers as off—many are very legitimate. But, if you are concerned, talk with your REALTOR about filing a formal complaint.
The other disadvantage of a cash offer is that it may be lower and, in some cases, significantly lower than other offers. A buyer may use the stability and strength their cash offer provides as a bargaining chip to spend a little less, which will be something you’ll want to weigh out as a seller. Do you want to prioritize the guaranteed sale or the possibility of a more lucrative one?
Though cash offers aren’t as common as typical mortgage offers, you may be surprised to encounter one in your real estate dealings. Whether it’s as a seller or (lucky you!) a buyer, they certainly do come and go and may be of benefit depending on the transaction at hand. Not sure if a cash offer might be for you? Contact your local Saskatoon real estate agent to discuss your options today!
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