Why would a seller require a cash offer on a property?

Question

My partner and I are looking at a house in an area that would be interesting to us. It's a fixer-upper that would require quite a bit of work on the inside. She's previously owned a house and personally done renovations of that sort; I have not.

The interesting wrinkle here is that the seller requires a cash offer only. Reading up online about what that means, all the sites I find speak of that case in terms of an option that a buyer might put forth, that is somewhat less common (maybe a quarter of all sales), in order to stand out as a more attractive offer. This situation is the reverse: why would a seller require a cash offer? Is such a requirement fairly common, or a red flag?

Answer 1

This situation is the reverse: why would a seller require a cash offer? Is such a requirement fairly common, or a red flag?

I can think of several reasons they could only be interested in cash offers.

• They want to sell/close quickly.
• They've been burned in the past when selling to someone using financing that fell through, and therefore will never do it again (statistics be damned).
• The house might not qualify for financing due to unpermitted improvements or being uninhabitable.

It would only be a concern to me if they were also insisting that inspections be skipped. The only case in which I'd buy a home without an inspection is if I were planning to scrape/rebuild, and in that case there is other due-diligence to be done.

Ideally you could find out what the seller's reason is, if it's just fear about the deal falling through then perhaps you could convince them with a lender pre-qualification or more earnest money.

Answer 2

They want a cash offer because they don't want to wait for an appraisal for the lender. They also don't want to wait for the loan approval process.

It might be a red flag. Especially if you also skip the home inspection.

Answer 3

Mainly they just don't want to get into contract with someone who may fail to get a loan, and therefore not be able to close.

This is partly about you, but may also be partly about their house: some houses are hard to finance because they are in poor condition, and the seller may know this. Not necessarily a 'red flag' - it might just be that the seller is being up-front and realistic. They may have accordingly priced the house lower to account for its poor condition, but know that it still will be hard to finance and are gearing the sale towards a cash purchase, an investor, and/or a flipper.

Answer 4

It's a fixer-upper that would require quite a bit of work on the inside.

There's your answer. They want cash offers only because they know most banks would never agree to finance the property in its current condition.

Think about how a mortgage works: the bank puts up their money now for you to buy a property. In turn, you promise to pay them back later. If you become unable to pay them back, the bank's only way to recoup the money they gave you is to sell the property through foreclosure. If they can't sell it for at least as much as your outstanding debt, they lose money.

So, when a buyer makes a purchase offer backed by a bank loan, an appraisal is usually required to complete the loan. An appraisal is conducted by a certified professional to confirm that the property's market value is actually worth what you're offering. This helps the bank understand what kind of risk they are assuming by lending you money.

Therefore, it becomes a risk calculation. Most banks aren't in the business of rehabbing homes, or even selling them at all. If a property is in rough shape, they won't finance it, because it would be too hard to recover losses in the event you default on the loan. If you're asking for a $300,000 loan on a property only worth $100,000, the risk is just too big. The bank won't give you a loan.

Real estate transactions can take a month or more. If a seller accepts a bank-financed offer, the property is off the market while the deal is in process. During that period, the seller is still responsible for all the expenses of the property - mortgage, taxes, utilities, etc. They also can't accept another offer. If the appraisal comes in too low, there's a good chance the whole transaction could fall through. If that happens, the seller has wasted time and money, and also has to start the whole process over again.

In very competitive markets, it's common for homes, even ones in uninhabitable condition, to sell for above market price. That's where the cash offers come in. With a cash offer, there's no appraisal and no bank. If both parties agree to the price, nothing more is required. So, a cash offer gives the seller assurance of a fast transaction.

Answer 5

In addition to the information provided in the other answers, I'd add some other reasons.

Another factor is that you can list with a deadbeat realtor who doesn't show your property much. Then, you're tied to a realty agreement and stuck in limbo.

If you sell for cash, you eliminate the realtor's commission. I've sold a few homes for cash and with no realty cut and therefore I've been able to yield more on price, enabling faster sale.

I had one home that I listed for cash and a realtor had a buyer interested in that neighborhood and my house. They added the realtor's 3% commission to my price and it was done in less than 3 weeks.