What is an all-cash real estate offer, and should you make one?

Ariel Skelley/Getty Images

With limited inventory in the housing market, homebuyers in especially hot markets are rushing to snap up properties as soon as they’re listed. Some aren’t bothering to deal with borrowing any of the funds to make the purchase. Instead, they’re making all-cash offers.

What is an all-cash offer on a house?

What does an all-cash offer mean? All-cash offers take the need for securing a mortgage out of the homebuying equation, eliminating the potential challenges of working with a bank or lender.

There are plenty of buyers who can afford to do it, too. According to data from real estate brokerage Redfin, around 30 percent of home purchases in the first half of 2021 were all-cash deals, the highest figure since 2014. In some cities, all-cash offers are becoming the norm. For example, more than half of all purchases in Naples, Florida were all-cash deals.

Not everyone who makes an all-cash offer is going to live in the property, though. Some of those homes and condos are income properties, and those owners are often looking to pay no interest to a lender while earning money from tenants or travelers.

Pros and cons of an all-cash offer

If you can afford to buy a house without borrowing a mortgage, you’re likely in a good spot with your bank account. However, make sure you weigh the potential upsides and downsides of making an all-cash offer:

Pros

  • You could save a lot of money in the long run. The biggest upside for a cash offer is the long-term benefit of paying zero interest or principal on a mortgage, which can add up to big savings over the typical loan term. By handing over the money in an all-cash offer upfront, you’ll avoid paying interest charges.
  • You’ll have a more attractive offer and more bargaining power. All-cash offers tend to look especially appealing to sellers. Since hiccups can happen with securing financing from a lender — the appraisal can come back too low, or the buyer’s finances can change, for example — a buyer with cash looks like a sure bet. When your offer’s more attractive, you have more negotiating power. Think of it this way: Would you rather sell something to someone who can pay immediately, or someone who needs to ask someone to borrow up to 97 percent of the cash?
  • You can cut your closing costs down. Since you won’t have to pay a lender to review your application or originate your loan, an all-cash offer can translate to significant savings in terms of closing costs.

Cons

  • You could stretch yourself too thin. While paying in all cash helps you avoid getting into a 15- or 30-year loan contract with monthly payments, you could also wind up wishing you held onto some of that money. Ask yourself about worst-case scenarios: If you lose your job in three years and have no income, would the money you’re about to hand over for an all-cash deal make a difference in your stress level?
  • You might wind up waiving some important steps in the process. When you get a mortgage, a lender will require an appraisal. When you pay with cash, you might be tempted to skip that step, leaving you susceptible to paying a lot more than the property’s value.
  • You’ll pass up some potential tax perks. Paying interest on a home loan isn’t all bad news. When tax time arrives, homeowners with mortgages benefit from writing off the interest. If you pay in all cash, you won’t get that deduction.

All-cash closing vs. traditional closing

All-cash offers tend to close faster than deals where a mortgage is involved. However, it’s not as simple as forking over the money and shaking hands. There’s still work involved, and the seller will need to check some items off the list. In Chicago, for example, the seller will need to receive zoning survey certification, water certification, association documents if buying a condo, title documents and other formalized information about the property.

Cash buyers will still have to deal with some paperwork, too, but the number of documents required is significantly fewer than what is required for a traditional financed closing.

How to make an all-cash offer

  • Budget for both the property and extra expenses. In addition to having the money for the property, you’ll need to make sure that you can cover other costs such as property taxes, homeowners insurance and moving expenses.
  • Prepare to prove your personal finances. A seller isn’t going to simply take your word that you have the money. Get proper documentation from your bank that shows you have the funds ready for the transaction.
  • Be ready to be more earnest. All-cash offers are about the cash. With no lender involved, the seller might ask to see a bigger amount of earnest or deposit money when you sign the contract.
  • Get a professional to look at what you’re buying. You’re paying a lot of cash, so once your offer is accepted, pay for a home inspection to verify there are no hidden flaws with the property. Better yet, have a contractor walk through it with you to help you identify potential projects and how much they could cost you.

Bottom line

The ability to pay all-cash for a property can eliminate a lot of the stress of homebuying, but make sure it doesn’t derail the rest of your financial goals and obligations. Think carefully about the other big objectives on your radar — saving for retirement or paying for college for your children, for example — to determine if paying all-cash will impede those other goals. Compare the differences between paying all cash vs. applying for a mortgage to figure out the best move for your finances.

Learn more: