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There seems to be a a belief that a bank or individual will always take cash over conventional financing from a buyer, even if the buyer who is purchasing through conventional financing offers a greater amount.

If a home is on the market for US $120k and an investor offers US $100k cash versus another buyer offer US $130k via conventional financing; would a bank or individual go with the cash offer? Are there hidden fees that conventional financing imposes that cause this behavior or is this assumption in and of itself incorrect?

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It's because financing can fall through, and then the time between offer and closing is wasted. Often buyers will include preapprovals and other evidence of financing eligibility with their offer for this reason.

  • So if pre-approvals are in place (which I believe they always are now-a-days) there would be no other underlying reason to opt to go with the cash offer over the conventional lending offer? – Aaron McIver May 20 '11 at 16:22
  • I'm not a 100% sure about the US, but keep in mind once you are talking about mortgaging a property, the mortgage company will have a valuation done on the property you're buying. And if that doesn't work out, the deal will fall through unless the buyer finds more cash. – Timo Geusch May 20 '11 at 20:44
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    @Aaron Pre-approvals are meaningless, other than as a screen for people who are not serious buyers or are completely unqualified and as a way for banks to lock in prospects. The underwriting process doesn't start until you have a contract. – duffbeer703 May 21 '11 at 1:36
  • The bank doing my last loan asked for some info and pulled a credit report before preapproval I think. But as seller I guess you can't know what if anything the bank did. – Havoc P May 21 '11 at 1:57
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One other point to consider is that cash offers often include no contingencies. That is, the offer comes in and if the seller signs then the deal is done, without any chance that the buyer backs out. As you can imagine, this is an attractive option in some situations.

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    +1 This is a key point. Unethical buyers with cold feet can and do sabotage deals by finding ways to make financing fall through. – duffbeer703 May 21 '11 at 1:39
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Often the counter-party has obligations with respect to timelines as well -- if your buying a house, the seller probably is too, and may have a time-sensitive obligation to close on the deal. I'm that scenario, carrying the second mortgage may be enough to make that deal fall through or result in some other negative impact.

Note that "pre-approval" means very little, banks can and do pass on deals, even if the buyer has a good payment history. That's especially true when the economy is not so hot -- bankers in 2011 are worried about not losing money... In 2006, they were worried about not making enough!

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A bank selling a foreclosed property would negotiate a lower cash deal, I doubt it would be that extreme, 130 vs 100. An individual seller may give up $10K to save time and get his next home closed as well, but again, I suspect it would be rare to find that large a delta.

  • This is all in the interest of time? Nothing behind the scenes on why cash is preferred? – Aaron McIver May 20 '11 at 20:19
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    So long as your money is cash in my account for the sale, as a seller I see no other benefit. A bank would take cash over having to issue their own mortgage, I imagine, but foreclosures can be bought with traditional financing. The way you phrase the question you feel cash is worth a 25% discount. Why? – JoeTaxpayer May 20 '11 at 20:51
  • That was a somewhat random figure for the sake of discussion. I'm not saying that cash in away way warrants that type of reduction; unless there is something going on behind the scenes...hence my question. – Aaron McIver May 20 '11 at 21:58
  • Understood. My answer should probably be clarified. "Other than the time saved, the cash discount one might find would be minimal. An individual with strict timing may negotiate a bit lower for an all cash deal, but all in all, I see no other benefit." – JoeTaxpayer May 20 '11 at 22:07
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@OP: It's all about risk. With a cash buyer the decision is left up to one person. With a financed buyer it adds another approval process (the lender). It's another opportunity for the deal to fall through. If the bank is the lender then there's even more risk. They've already taken back the property once and incurred cost and they're setting themselves up to do it all over again. The discount price can depend on a lot of factors. Maybe it's a bad area and they need to get rid of it. Maybe the appraisals for the area are low because of foreclosures and they know it will be hard for a Buyer to get a loan. Lots of reasons as to what price they'd take.

@Shawn: Every deal has contingencies unless it's a foreclosure bought at auction. Even if you are getting a steal from the bank in terms of price you're always going to have an inspection period. If a Buyer doesn't need an inspection then he will just go to an auction and buy a property for an even cheaper price.

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It has only been briefly mentioned, but an all cash buyer usually means a quick closing meaning the seller gets paid soon. With a financed deal, usually (at least frequently), the prospective buyer may have to sell or close on another property before being able to close on the sellers property. If they have trouble selling their property, or their contingent sale doesn't go through, it could significantly delay the closing of the sellers property.

There is also one financing situation that has not been discussed. That is, where the buyer is using a "line of credit" to purchase the property. In that case, the buyer offers another property (or other asset) as collateral to a bank and gets a line of credit.

In this case, the loan is not secured by the property that's for sale, it's secured by the other asset. The new buyer doesn't need to have the bank approve the purchase of the new property and (generally) the bank doesn't know or care what they're buying with the money.

In this case, a (savvy) seller would probably consider an offer with this sort of financing to be as good as a cash offer. It would then be a matter of the seller considering any contingencies of the offers.

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Are there hidden fees that conventional financing imposes that cause this behavior or is this assumption in and of itself incorrect?

The hidden fee is time.

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