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Lukas Flippo, Indianapolis Star
Across the nation, more and more would-be homebuyers and investors are offering cold, hard cash for homes.
While this is nothing new for investors, the uptick in people seeking to buy their next home without a lender involved has many wondering the difference between financing options.
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Here’s what you need to know:
They’re great for making your offer stand out
Cash offers are traditionally associated with investors trying to scoop up properties, but they’re growing increasingly popular for individual buyers who want to make an offer a seller can’t refuse.
If you find your dream home, a cash offer can be a great way to show the current owner that you really want the home and are willing to make the transaction as stress-free as possible.
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“Sellers really like it because one of the biggest contingencies in the process is financing. And so when they have an offer on the table that does not have that contingency, it really makes the offer attractive and firm,” said Doug McCoy, director of the Center for Real Estate Studies at the Indiana University Kelley School of Business.
Don’t expect market value from an investment buyer
Traditionally, cash offers for homes are made in typical investment fashion: They’re trying to buy low in the hopes of selling high.
While individuals making offers may pay market price or even a premium for your home, investors, hedge funds and venture capitalists tend to do the opposite.
That means you should be cautious about those unsolicited phone calls trying to buy your home for cash. They’re hoping to buy it from you, often to quickly turn around and sell it again, which means they need to make a minimum investment.
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“We, as investors — we cannot offer market value for home, because we’re looking for properties that we can add value to,” said Laura Guy, owner of The Indy Home Buyer, a local two-person company involved in buying and selling properties.
When fielding offers from real estate investors, sellers can expect an offer 5% to 10% lower than what they would have received in the traditional market.
Distressed homes and fixer-uppers
When lenders are involved in a home sale, they want to make sure the property can be sold to someone in a hurry if the buyer defaults. That also adds checks and balances because lenders want to make sure homes appraise for the value of the loan. This can make selling properties which have fallen into disrepair difficult.
Whether selling to an investor or someone who has an interest in fixing up the home, taking cash is an easy way to get around this issue. When selling to a cash buyer, the buyer has the final say.
“This is an easy way out for people, if they don’t want to go through the process of updating their home and fixing it up,” said Jim Litton, owner of F.C. Tucker, Indiana’s largest independent real estate firm.
Cash isn’t always the best option for the seller
Cash offers can be great, but they’re not for everyone.
Right now, the competitive Indianapolis market has made buyers more likely to come out of their own pockets and match other offers, but sellers would still do well to market their homes. Conventional wisdom dictates that cash offers are 5% to 10% less than a mortgage-bound offer would be.
And whether the buyer is paying cash or taking out a loan, at the end of the day it’s all money in the seller’s pocket.
“The traditional way of selling your home by getting the home spiffed up, listing with a real estate broker and selling it is generally the way you’re going to get the highest and best return,” Litten said.
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