Real estate in the last few years has produced one of the hottest markets — if not the hottest — in the last quarter-century. With a limited number of houses for sale, competition is fierce and bidding wars abound.
To compete, many homebuyers offered all-cash offers to win over sellers—they comprised 25% of all market offers in February 2022. Real estate platform ZeroDown researched the popularity of cash offers in the current housing market and their appeal to homebuyers and sellers, as well as how the rise of cash offers affected competition in the market.
What do all-cash offers mean for traditional homebuyers who’ve pushed hard just to come up with a 20% deposit? Likely, a financed offer will need to be at least 1% higher than the all-cash offer to win in a bidding war. So, are white picket fence dreams only that: fantasies?
Whether a buyer or seller in today’s market, here are some things you should know about all-cash offers.
Cash offers aren’t actually all-cash
When purchasing a house, there are various financing options to consider for covering the cost, including but not limited to conventional loans and FHA loans.
Some buyers opt for an all-cash offer. Despite how it sounds, actual cash isn’t what’s exchanged. Instead, an all-cash offer means the buyer doesn’t need to borrow money from a lender or take out a mortgage in order to purchase the house. There are a lot of reasons this is attractive to a buyer, including expediting the sale by saving time and money on paperwork processing and lender approvals.
Housing demand is still outpacing housing supply
As buyers and sellers consider entering the real estate market, many share the same question. Is the market finally flattening out?
The Realtors Confidence Index survey put forth by the National Association of Realtors Research Group in February 2022 provides some answers about how tumultuous the real estate market has been in the last few years. Compared to one year ago, the study found fewer listings coming into the market. With demand for housing outstripping supply, competition has been fierce. The study found that 84% of listed homes are snapped up in less than one month, with most properties averaging just 18 days on the market. Sellers receive an average of 5 offers for their homes and nearly half of the offers are above asking price.
25% of home offers in February 2022 were cash offers
Another stat from the Realtors Buyer Traffic Index to pay attention to: In February 2022, 25% of offers were all-cash. In 2021, all-cash offers were more than four times as likely to win a bidding war. They also improved a competitive offer’s success rate by 334%.
The study also found that more than 23% of buyers were using other strategies to successfully close bids, including waiving financing contingencies and property pre-inspections.
The appeal of cash offers in 2022
Why might a seller prefer a cash offer over a financed one?
Cash offers offer verified proof of funds, which ensures the close of a sale without delays or the risk of the buyer losing funding midway. And with no need for mortgage approval, the underwriting process—which can take up to 60 days—can be as fast as two weeks with cash.
No lender means significant time savings during the paperwork and approval process. And lastly, an all-cash purchase alleviates a potential appraisal gap, or the difference between how much a buyer is willing to pay versus what a lender agrees to finance. If a property appraisal report finds the home is worth less than the seller’s price, lenders may offer potential buyers less than what the seller is asking for. But with no appraisal needed in all-cash offers, this means a property’s value is based on whatever the buyer is willing to pay.
This story originally appeared on ZeroDown and was produced and distributed in partnership with Stacker Studio.