A cash offer for a home means a buyer either has the money in the bank or the buyers offer to purchase isn’t contingent on getting financing. You won’t actually see bags of cash at the closing or settlement.
Q: I plan on accepting an all cash offer on sale of my home. Is a certified bank check really the most secure means of payment other than a bag full of cash?
A: We chuckled at the idea of someone walking into a closing with a bag full of cash. Maybe they’re paying for their million dollar property in singles?
Seriously, you’ve posed an interesting question, and our answer might surprise you. Let’s start with an explanation of what makes a cash offer for a home, also called an “all cash offer.”
The risk of an all cash offer to buy a home
Sellers want to know that when they sign a contract with a buyer, the buyer will close on the purchase of the home. Buyers use the phrase “all cash offer” to indicate that they don’t need to borrow money from a lender to close on the purchase. (It doesn’t mean that the buyer is coming with a bag of cash or even a bank certified check.)
Most borrowers go to a bank, mortgage banker or mortgage broker, apply for a loan to cover a portion of the purchase price, and then pay the rest (minus the good faith deposit) that’s owed with a wire transfer. Typically, the lender supplies most of the funds for the purchase of the home.
But because most buyers use lender financing, most purchase agreements include a financing contingency. This contingency states that if the buyer fails to get financing for the purchase of the home by a certain date, the buyer can cancel the deal and the seller will return any money the buyer put down.
Well, right now, we’re in one of the hottest sellers markets we’ve seen in 25+ years. There are many more buyers than there are properties for sale. Most homes are being sold in bidding wars, and buyers are doing what they can to make their offers stand out in what is often a sea of bids. So, they tell the sellers that they will buy in an “all cash” transaction. This means the buyer is willing to walk away from the deal, including any cash put down for the good faith deposit, if the deal doesn’t go through for some reason, like they can’t get financing.
Brokers ask for proof of funds with an all cash offer
In some real estate markets, listing agents will ask the buyer to provide proof of funds that they can close on the purchase with the cash the buyers have in the bank. This would be a true cash offer for a home. These agents are trying to make sure the buyers will, in fact, close on the home and have the cash to do it.
But you need to remember that most buyers don’t have that much cash to close without a lender. In the end, what really matters is how much earnest money the buyer puts down as a show of good faith. If the buyer puts in an all cash offer but only puts down $1000 in earnest money, the buyer isn’t risking much – and the seller knows that. But if the buyer puts down $25,000 or $100,000, the seller knows the buyer is serious and is more likely to close. The strongest offer a buyer can make is an all cash offer with a sizable down payment.
Mythical bags of cash
Let’s go back to the mythical bag of cash. Typically, buyers will come to the closing with a bank check or they have already wired funds to the settlement agent or office. Whether they have a bank check or the cash has been wired ahead of time, the settlement agent takes these funds and disburses them to the seller, the attorney (if there is one), and anyone else who needs to get paid from the closing.
As an aside, fraud is rampant in the wire transfer world. You must make sure wire transfer information is accurate, because once the funds leave your account, they end up in the recipient’s account. And, if you click on the wrong link, or send the funds to the wrong place, you could lose all of your cash.
Avoid wire fraud scams – never send wire without verifying information
Don’t set up a wire transfer without first double checking the account information with the settlement company. If you get an email that purports to be from the settlement or title company, call them directly to make sure you’re getting the right account number. It’s difficult to know how scammers and bad actors are able to send phishing emails to buyers who are within days of a closing, but it’s happening more frequently. Beware of any email you get that purports to give you wire transfer information for your transaction.
So, don’t plan on bringing that bag of cash to the closing. Instead, plan to wire transfer the funds and be sure to let the professionals on your team guide you appropriately. At the end of the day, what you want are the title and the keys to your new home, not a conversation with the FBI.
©2021 by Ilyce Glink and Samuel J. Tamkin