We plan to buy a house and can pay cash, but should we? Is it better to leverage ourselves and keep some money in investments?
Dear Cash Buyer,
Most people try to avoid getting into debt. It’s a wise financial decision but, unfortunately, it’s not always possible. On big-ticket items such as higher education, purchasing a car and buying a house, loans or mortgages are a common occurrence but should you do it if you don’t have to? What are the benefits of making a cash offer on a home or accepting a cash offer for your home?
Benefits of buying a house with cash
If you have the means to buy a house with cash, then you are in a great position. In the past couple of years in Bermuda more than 30 per cent of our sales have been cash transactions. There are many reasons why paying cash for a home is better than getting a loan, even when it comes to the effect of a cash offer on house closing costs.
1. No mortgage payments
If you purchase your new home outright you won’t have to worry about what type of interest rate you get or how much your monthly payments will be. Because you paid for the house in full, you won’t have to worry about thousands of extra dollars over the years being spent on interest payments.
2. Better purchase price
In most cases, home sellers love cash buys. It makes everything more certain, which means that you could potentially negotiate a better price. The seller will know that you won’t have to back out at the last minute due to mortgage issues and that makes your offer more attractive than one with a lot of contingencies.
3. Fewer closing costs
You might be surprised by the impact of a cash offer on house closing costs. Many typical closing costs have to do with a mortgage but if you’re paying in cash, you can avoid various loan fees including a property appraisal fee, a bank finder’s fee and the legal and stamp duties on a mortgage document which, on a mortgage of $800,000 could come to as much as $16,000.
4. Quicker closing
With a mortgage, obtaining financing can take an extra two weeks or more, making closing practical in about six or eight weeks from making the offer. However, when you are paying in cash, you just need to allow for a lawyer’s review of your documentation and the necessary planning search, which takes 30 days. This means the purchase transaction could take place within four or five weeks or less if it is a condo.
5. Quality investment
If you have a large sum of money in cash it won’t earn you any extra sitting in the bank. Real estate is a solid tangible investment, even when the market may not be ideal. If you’re willing to hold on to your property for a few years, statistics show that (barring a real estate crash like we saw in 2008) real estate is a good long-term investment.
Note: It doesn’t make good financial sense to spend every dollar you have on a property; it is also important to have money put aside for emergencies. Many financial advisers recommend at least six months’ joint wages and a $5,000 emergency fund. Don’t be afraid to leverage yourself a little bit if this is the case. However, make sure there are no penalties for early repayment and try and pay the loan off as soon as possible. Obtaining a small loan will be cheaper than a large mortgage and is unlikely to affect the vendor’s decision on your offer.
Benefits of selling a house for cash
Some of the benefits are similar to those of a buyer — quicker closing and fewer fees. So, should you sell a home for cash or is it better to go the conventional route? There may be negotiation for a lower selling price but there are also many benefits with a cash deal.
As an agent I am out there in the real estate “trenches” if you will, every day. We understand that selling a house is not always easy. We do see sales fall apart due to lack of financing. Usually the buyer has not done their homework. They often don’t realise that they will need about 5 per cent cash on top of the purchase price — for legal fees, banking fees and stamp duties — and if they don’t have it that can ruin the sale. With a cash offer the buyer should still be aware of this but usually there are funds available to cover it.
Cash offers in real estate can be a great idea if you know what you’re doing. At Coldwell Banker, we suggest that you talk to a good financial expert as well as an experienced real estate agent to help you decide the best option for you.
• Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for nearly 30 years. Contact her at firstname.lastname@example.org or 332-1793. All questions will be treated in confidence. Look for Ask Heather Real Estate on Facebook