What is a cash offer on a house, and should you make one?

With housing inventory still scarce, homebuyers in hot markets are still experiencing intense competition. To make themselves more attractive to sellers, many buyers with deep enough pockets aren’t bothering to finance the purchase — instead, they’re making all-cash offers. Here’s everything you need to know about making a cash offer on a house.

What is a cash offer on a house?

All-cash offers don’t involve a briefcase full of unmarked bills, but otherwise they are just as they sound. With a cash offer, the buyer intends to pay for the home in full, out-of-pocket, with no outside funding. This takes the need for securing a mortgage out of the homebuying equation, thus expediting the sale by eliminating the potential challenges of working with a bank or lender.

Who makes cash offers?

Many all-cash homebuyers are investors or house flippers, which allows them to avoid interest payments while earning rental income. In Q3 2023, all-cash purchases made up 36.6% of U.S. home sales, with a 29% share of existing-home sales in October. Older, repeat buyers typically have substantial equity in their homes, facilitating cash purchases, while younger generations struggle to do the same. This trend helps buyers avoid the challenges of high mortgage rates

Pros and cons of an all-cash offer

If you can afford to buy a house without a mortgage, you’re likely in a good spot with your bank account. However, make sure you weigh the potential upsides and downsides first:

Pros

You’ll save a lot of money in the long run. The biggest upside for having no mortgage is paying no interest, which can add up to big savings — especially considering how high mortgage rates have been lately.

You’ll have a more attractive offer. A buyer paying cash looks especially appealing to sellers, since hiccups can happen with securing financing from a lender — for example, the appraisal can come back too low, or the buyer’s application can be denied. And when your offer is more attractive, you have more negotiating power.

You’ll lower your closing costs. Since you won’t be getting a loan, you won’t have to pay a lender to review your application, check your credit or any of the many loan-related fees often due at closing. This can translate to significant savings.

You’ll speed up the closing process. With no lender holdups or underwriting process to wait on, your path to the closing table will proceed much more quickly.

Cons

You could stretch yourself too thin by tying up all your cash in the property and not having enough liquid assets remaining. If you find yourself house poor, with little money available for repairs or other life expenses, you may wish you’d held onto some of that cash. Make sure you have a solid emergency fund for “just in case” scenarios, and consider how stable your employment and income might be in the event of a recession.

You might wind up skipping some important steps in the process. For example, when you get a mortgage, your lender will require an appraisal. With no lender to require it, you might be tempted to sidestep it, leaving you susceptible to paying a lot more than the property’s value.

You’ll pass up some potential tax perks. When tax time arrives, homeowners with mortgages can benefit from writing off the interest on their home loan. If you pay in all cash, you won’t get that deduction.

Preparing to make an all-cash offer

Not sure if you can afford a cash offer on your own? Consider hiring a company that can facilitate one. Outfits like Flyhomes and Homelight will pre-underwrite your loan and set you up with a short-term loan that allows you to make an all-cash offer. Knock and Orchard can also help buyers make cash offers.

Budget for both the property and extra expenses. In addition to having enough money for the purchase itself, you’ll need to make sure that you can cover other costs such as property taxes, homeowners insurance and moving expenses.

Make sure you can prove your personal finances. A seller isn’t going to simply take your word that you have the money: Get proof of funds from your bank in the form of documentation that shows you have the means to pay.

Be ready to be more earnest. With no lender involved, the seller might ask to see a larger earnest money deposit when you sign the contract.

Before finalizing a cash purchase, hire a professional to conduct a home inspection to check for major flaws. Consider bringing a contractor to evaluate potential projects and their costs. This extra step ensures you're making a sound investment with your cash.

Next steps

Paying cash for a property can reduce homebuying stress but consider how it may impact your financial goals, like retirement savings or funding college for your children. Evaluate the pros and cons of cash versus mortgage options to find what works best for your finances. It's also crucial to have an experienced local real estate agent to assist you throughout the process.