Can mortgage borrowers compete with cash offers?
In today’s hot real estate market, you’ll often hear that “cash is king.” And in fact, nearly 30% of all home buyers opted to go all-cash in early 2021 according to Redfin.
This cash influx can make an already-difficult market even tougher for home buyers who need a mortgage loan. But that doesn’t mean buyers using financing are out of luck.
There are still ways to compete and win the house you want — even against the most cash-flush buyers. Here’s how.
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7 Tips to compete with an all-cash offer
Offering all cash can definitely catch sellers’ eyes, but there are other ways to sweeten the deal if you’re using a mortgage.
Here are just a few strategies that can help you beat out the competition:
1. Get approved for your mortgage
Getting mortgage pre-approval before you try to make an offer on a house is a must.
Many mortgage lenders offer fully underwritten preapprovals, which means your credit has been checked and your finances verified. It’s basically an “all-clear” for your mortgage loan, except you haven’t found a house just yet.
With these types of preapprovals, you can give sellers confidence. Even with a financing contingency in your contract, they know you’re a safe bet to buy their house and follow through.
2. Waive contingencies
The easier you can make things for a home seller, the better. And waiving contingencies is one of the best ways to sweeten your offer.
This might mean waiving your:
- Financing contingency: Waiving this contingency means you wouldn’t be able to back out of the deal if your mortgage loan falls through
- Sale contingency: This one is reserved for existing homeowners and stipulates that you must sell your existing home before following through with the purchase. (It’s also one of the least attractive contingencies for sellers)
- Appraisal contingency: This allows you to back out or renegotiate if your appraisal comes in low
According to Redfin, waiving the financing contingency is one of the best ways to compete in a bidding war. In fact, it could improve your likelihood of success by as much as 31 percent.
But not every contingency should be waived. In particular, most experts recommend including an inspection contingency — no matter how competitive the market is.
Waiving an inspection could mean missing serious underlying issues on the property. And, according to the same Redfin study, waiving the inspection contingency has “no significant improvement” on most offers.
Make sure you talk to your agent about the risks and rewards of waiving contingencies if you’re considering this.
3. Increase your earnest money deposit
Earnest money is essentially a good faith deposit. It reserves your right to buy the home, and if you back out of your contract without reason, the seller gets to keep it.
If you really want to stand out, increasing your earnest money deposit is a great way to do it. It shows the seller that you’re serious about buying their house and that you’re willing to stake your hard-earned dollars on it.
4. Offer above asking price
Many times, cash buyers come in with lower-than-asking-price offers, largely because of the ease their transactions come with. If you’re up against a cash buyer that’s low-balling the seller, going above and beyond the listing price may be a way to stand out.
You can also think about including an escalation clause, which increases your offer automatically if someone outbids you (up to a certain threshold, of course).
5. Include an appraisal gap guarantee
In today’s hot market, it’s pretty common for appraisals to come in low. Naturally, this worries sellers (they don’t want you pulling out of the deal if the home’s appraised low).
To relieve these fears, you might consider adding an appraisal gap guarantee to your offer. This tells the seller you’ll cover any discrepancy between the bid and the appraised value.
This is typically only an option if you have some extra cash saved up outside of your down payment. Covering an appraisal gap would mean paying extra above and beyond the money you’re putting down with your lender.
6. Get personal
You can also write a personalized offer letter to the sellers detailing what you love about the home and why it’s the perfect fit for your family. Some buyers even include photos of their kids or pets with these.
It’s a nice way to differentiate yourself from other buyers and really pull at sellers’ heartstrings.
7. Consider a cash offer alternative
There are some companies that offer cash-buying solutions that don’t actually require the upfront cash.
Ribbon, for example, lets you pay 1% of the home price (so $2,000 on a $200,000 home) and then backs your offer with cash.
There are other similar options, too, including Accept.inc, Homeward, and more. Big-name brands like Opendoor and Homelight even have cash offer programs as well.
The bottom line
Cash buyers are a common sight in today’s housing market, but they’re not invincible by any means.
Talk with your agent, get an underwritten preapproval from a mortgage lender, and go into your home search ready to compete.