Q: If I pay cash for a home, should I expect a discount?
A: You might be able to negotiate one, but don’t expect it. It all depends on the sellers’ motivation.
If the sellers want or need to close quickly—to close on their dream house, for instance, or to relocate because of a job transfer—then cash can be a very appealing lure. After all, cash is a sure thing. A financed deal isn’t, since it is subject to lenders’ increasingly stringent underwriting standards and paperwork backlogs, as well as the vagaries of the buyers’ credit histories.
Moreover, if you pay with cash, you’re offering a “cleaner” deal that eliminates the contract’s financing contingency. Knowing that you have a little less room to wiggle out of the deal is attractive to many sellers, who don’t want to go through the hassle of remarketing their homes and worry about having a deal fall through at a time when prices are weak.
But keep in mind that at the closing table, the sellers will walk away with a check—and whether the money comes from you or the lender doesn’t matter. So if the sellers aren’t time pressed, you might not be able to wrangle a deal at all. In fact, especially if they have minimal equity, they may prefer someone who makes a more generous offer and fewer demands, as long as that person can come up with a large down payment and has a pre-approval letter from a bank.
And speaking of banks, having a fistful of cash isn’t likely to get you a bargain for a foreclosed home, either. Although it behooves banks to get such deadweight off their books as quickly as possible, lenders are beholden to their stockholders to get the highest possible price for their properties. So being able to pay cash won’t impress banks; in fact, it undercuts their reason for being.
You’re also likely to find that many builders will balk at discounting their homes for cash. That’s because many own their own financing companies, or have arrangements with affiliated lenders. As a result, these builders can make more profit over time through financing than they do from the sale of property. To them, your cash offer eliminates a potential profit center and can even be seen as a drawback. Indeed, they may even offer you a discount if you don’t pay cash and finance with them instead.
Despite these drawbacks, it’s undeniable that a cash offer will get a seller’s attention and mark your intentions as serious. If you do decide to go the all-cash route, make sure your offer asks for everything a lender normally would require—namely an appraisal, a home inspection, a wood-boring insect inspection and title insurance. Lenders typically insist on these items because they help determine the price, condition and ownership status and lineage of a home. For your own protection, you should, too.
Source: http://online.wsj.com 11/9/10
