NEW YORK (MainStreet) — As the housing market rebounds in many areas across the country, more consumers and investors are purchasing homes with cash, rather than obtaining a traditional mortgage.
Data from RealtyTrac suggests cash purchases made up 45% of home purchases in August, a 30% year-over-year increase.
While a cash home purchase may seem easier and less bureaucratic than dealing with banks, there are a few things you need to know before you shell out cash for a home.
1. Have your documents ready
For cash offers, especially in a competitive seller's market, not only do you need to prove that you have the money, but it's also important to show your money is liquid enough to complete the transaction in a timely manner. Presenting a proof of funds statement adds credibility to your cause.
"Don't make an offer that says you're able to gather the cash within seven days if you can't realistically make that happen," says Dani Babb, founder and CEO of The Babb Group. "Even if you're using money from liquid stocks, bonds or annuities, it can still take a few weeks to get the cash."
2. Title insurance is a must
Title insurance protects buyers from any potential liens against the property from previous owners. Don't purchase a home that you can't get title insurance for, since you'll be responsible for paying off someone else's debts if the house has liens.
"If someone doesn't want to give you a title policy, there's a reason," Babb suggests. "You want to make sure the property has a clean bill of health and the only way to do that is to have title insurance."
3. Hire an appraiser and inspector
While cash home purchases might buy you speed, don't skimp on due diligence. When buying a home with a mortgage, a bank will send an appraiser to value the property.
As a cash buyer, you're on your own, so it's up to you to make sure the property is valued properly. "Make your cash offer appraisal and inspection contingent to ensure you don't get into a property that's a mess," Babb says.
Ask for multiple referrals from real estate agents for appraisers and inspectors.
4. Buying with cash gives you a negotiating advantage
Even as the housing market rebounds, the financial standards needed for a mortgage remain stringent, as one of the major causes of the 2008 recession was the ease at which consumers could obtain a loan.
In a traditional real estate transaction with a mortgage, the seller knows there is risk the bank may not approve the prospective buyer for a mortgage, which would kill the deal. A cash buyer absolves this risk and the deal can be completed faster.
As a cash buyer, use this to your advantage when negotiating your offer on the property.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE