The board's most naive question.... - Posted by Julia

Posted by JohnBoy on July 19, 2001 at 17:15:32:

Exactly. You need to focus on looking for MOTIVATED sellers.

The board’s most naive question… - Posted by Julia

Posted by Julia on July 19, 2001 at 13:09:43:

I know this is going to make most of you on the board laugh, but I am having trouble wrapping my mind around a very simple concept: why does it matter how much cash a buyer can bring to the closing table? I have heard that if you can buy a property all cash, you should expect a significant discount, and that sellers are more receptive to someone who can put down a large chunk of cash. Yet, if I am seller, isn?t my equity cashed out at closing, whether the buyer has cash himself or has borrowed the cost of the house? If I have a house on the market for $200K, and I owe $130K, I will get $70K at closing (minus costs, of course), whether it is the buyer?s money or the bank?s.

Thanks for not laughing too hard?

(feeling silly)

Re: The board’s most naive question… - Posted by eric-fl

Posted by eric-fl on July 20, 2001 at 24:37:56:

Your question applies more to “retail” real estate, and in that case, you would be correct. In that arena, a seller might still care though for qualification purposes. The lower the LTV (loan-to-value ratio) that a lender is being asked to fund, due to a larger buyer down payment, the better chance a buyer has of qualifying, and thus the deal is less likely to fall through.

However, most of us around here are not looking to go out and qualify for new financing so that we can pay retail price. That’s for people who are going to live in the house, not buy it as an investment. As an investor, we need to make a profit on it as a business asset. Thus, we need to either buy it at less than retail (cash) or with flexible terms (no new financing), or a mixture of both. That involves us dealing directly with the seller regarding their equity, rather than a bank. The reason a seller would deal with us directly rather than going the traditional route is, there is usually something that keeps it from being a traditional situation. Either they can’t wait 30 days to sell, while all the bank paperwork goes through, or the property is too distressed to sell at market value, or any other variety of situations. That is the space we fill in the marketplace, the space of non-traditional real estate transactions.

another consideration… - Posted by Ben (NJ)

Posted by Ben (NJ) on July 19, 2001 at 14:29:23:

seasoning problems. I am dealing with this right now. I took title through foreclosure on a property on April 30,2001. I know just from reading this board that
when a potential buyer’s mortgage company sees that I got this property for $30,000 and am selling it 3 months later for $ 199,000 they will reject the applicant in a heartbeat because it smells of one of those dastardly “flips”! Therefore if I had nine offers for asking price which required mortgage approval and one cash offer for less, I would take the cash offer in a minute (and I did!).

Good question - Posted by Ron (MD)

Posted by Ron (MD) on July 19, 2001 at 13:30:48:


Sometimes (but not often) a buyer asks if I will lower my price because he’s paying cash or making a substantial down payment. My answer is essentially what you said…when we get to the settlement table, I get all cash for my equity whether it’s coming out of your bank account or from your new mortgage loan.

If I really had an all cash buyer, I might lower the price a small amount because, with no lender involved, settlement would be sooner and less uncertain (i.e., not depending on bank approval).

So, what you said is true for most retail deals. However, in some cases cash makes a big difference. Sometimes a seller is in a big hurry and really doesn’t want the wait or uncertainty involved with the mortgage approval process.

Sometimes a seller has a house that is in poor condition and a conventional lender is unlikely to lend money for it. I do rehabs and the houses I buy would not qualify for most mortgage lenders. Sometimes investors do borrow money for these fixers (e.g., hard money loans or specialty lenders) and they do want a financing contingency. These sellers (who are often banks trying to unload foreclosed properties) will often take a lower price from me because I can show I have the cash available, rather than from another investor who is borrowing the money and may not be able to close. My deal is essentially a sure thing, the other investor may not get his loan and the seller has had the house off the market for a month.

Bottom line, in most, retail sales you are absolutely right. In some cases, being able to pay all cash is important.

Ron Guy

Replace ‘naive’ with ‘astute’! - Posted by J. CA

Posted by J. CA on July 19, 2001 at 13:29:27:

Why indeed. Why should it matter if I have any cash at all? The answer is, it shouldn’t, if solving the seller’s problem doesn’t require cash (regardless of where that cash comes from.)

If you have your house listed for $200k and owe $130k how do you know you ‘will’ get $70k at closing? Unless your market is booming, Good Luck!

It is true that if you pay cash you would be crazy not to get a discount, the problem is most people shop retail when they buy houses and so will do well to get even 10% below market value, unless the market is depressed.

Julia, you’ve got to think ‘wholesale’ if you want to make money, and wholesale means at least 40% off (if you’re paying cash) even if the house is in move-in condition.

Re: The board’s most naive question… - Posted by JohnBoy

Posted by JohnBoy on July 19, 2001 at 13:20:05:

If I were the buyer using my cash, you wouldn’t be getting $70k for your equity at closing. You might get $20k for it. There would be NO other money coming from me or a lender, because the most I would pay you for the house is $150k. Since you owe $130k, that would only leave you with $20k minus any cost, of course.

Now If I were the typical retail buyer and was willing to pay the $200k either by using all my cash, some of my cash, and the rest from a lender by getting a new loan, then yes, you would get the $70k cash at closing, minus any costs to you.

If I were buying your home as an investor where I was willing to give you closer to your $200k price, then you still wouldn’t get all your equity in cash at closing. You “might” get some of it, but in order for me to give you your price, you would have to give me my TERMS. That means you won’t get all your equity now, but some time in the future after I resell the property to my buyer and they get a new loan and cash me out.

So to answer your question…it all depends on how the deal will be structured to get you as much as possible from the sale or whether you are selling to the traditional buyer.

Re: another consideration… - Posted by julia

Posted by julia on July 19, 2001 at 17:02:25:

Thanks for this information! This is one scenario I had not considered…

Re: Replace ‘naive’ with ‘astute’! - Posted by Julia

Posted by Julia on July 19, 2001 at 14:19:13:

You wrote:
“If you have your house listed for $200k and owe $130k how do you know you ‘will’ get $70k at closing? Unless your market is booming, Good Luck!”

Actually, in this area, that’s pretty accurate. Here we are in a seller’s market- not as good as 6 months ago maybe, but still pretty good. Bought my house for $170K 4 years ago- put $40K down. On-line “comp” sources tell me the house is worth $225K now, based on the rise in prices over the last few years.

I was just trying to figure out what situations, as an investor, it would make sense to offer a seller all cash. I see from other posters that it only makes sense if the seller needs to move a house very fast, and can’t wait for a buyer to go through the loan process.

Re: The board’s most naive question… - Posted by rkosonom

Posted by rkosonom on July 19, 2001 at 15:58:26:

I don’t know about your area but at least in mine (northern virginia), I think it will be difficult that someone would give you a huge discount unless that person is going through a personal problem and they need to sell their homes very quickly or a foreclosure. Here it is not uncommon that you get offers for more money than what you listed your property for

Re: The board’s most naive question… - Posted by Julia

Posted by Julia on July 19, 2001 at 14:25:33:

Thanks for your response, John. I am in a seller’s market, and I can see there is no incentive for a seller to go for an all cash/deep discount deal, unless they need to move the house very fast (such as a foreclosure where they stand to lose all of their equity).

In this area, perhaps the better strategy is to go for sellers who have no little or no equity, and do subject to’s or L/O’s.

Re: The board’s most naive question… - Posted by JohnBoy

Posted by JohnBoy on July 19, 2001 at 17:14:05:

That would be pretty much anywhere. That is why we look for MOTIVATED SELLERS. If the seller isn’t MOTIVATED then it will be unlikely to get them to take a steep discount.