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A sartorial, stiff man walks into a home carrying a briefcase and says to the owner, “My client would like to buy your home.” The owner chuckles, flattered, and replies, “I’m sorry, it’s not for sale.” The man opens the briefcase, revealing millions of dollars in cleanly stacked hundreds and says, “How about now?”
You may have seen this play out in movies. But does this actually happen in the real world of real estate? Can you buy a house with physical cash like a Hollywood gangster?
Short answer: Technically, yes, but it’s a little more complicated than that. The median home sale price in the United States is $374,900 as of Q2 2021. Most people don’t have that much cash lying around, and would face a serious inquiry from their bank if they withdrew it all at once. Today, 87% of recent home buyers finance their purchase, including 97% of buyers 40 years old or younger.
Although it’s uncommon, buyers do sometimes prefer to buy a house with cash. In that case, they make what’s called a cash offer. So, what is a cash offer and how does it work? In this piece, we’ll explain how cash offers work and why — and why not — they can be a smart move for buyers with significant liquid capital.
What is a cash offer?
Most of the time a cash offer does not mean literally showing up to the home you want with a briefcase full of Benjamins.
Rather, a cash buyer is someone who will use their own money to cover the full purchase of the price of the home rather than take out a loan. The funds could come from savings, investments, the sale of another property, or other sources.
Can you buy a house with physical cash?
But, the money question. Yes, technically, you can bring a briefcase full of cash to the closing table and use it to buy a home. There are no laws prohibiting a physical cash real estate transaction, just a few hurdles.
First, you’d need a seller who would like to receive physical cash. They’d have to count the cash at closing and then leave the closing table with a ton of money burning a hole through their pocket. It may sound cool but in practice, it’s not exactly wise to walk around town with a small fortune in cash. Moreover, some sellers will not be able to show up to their bank with $450,000 in cash without raising eyebrows.
Whenever someone deposits an amount exceeding $10,000 into an account, the bank must alert the IRS. Even if the seller doesn’t deposit the money, the law also requires banks to report any cash transaction of more than $10,000. A deposit that equals the value of a home — unless you frequently deposit hundreds of thousands of dollars to your account at a time — draws the attention of the IRS and may result in the funds being frozen for a time while the IRS looks into the transaction. It will all be fine, there’s nothing illegal about paying for a house in cash, but it may be an inconvenience for sellers.
That’s why we usually conduct “cash transactions” through electronic bank-to-bank transfers. It simply makes more sense to the authorities and raises fewer red flags as to how someone acquired so much physical cash. Writing a personal check is fine, just so long as you have enough money to pay for the home as well as any additional closing costs. If you’d prefer some more insurance, consider using a cashier’s check instead.
Pros of buying a house with cash
All of that said, buying a house with cash can be a smart financial and personal move for a number of reasons.
You’re in charge
When you go through a lender to buy a home, you’re mostly using the lender’s money. That means they have a lot of say in what the home purchasing process looks like. They will likely order you to get an inspection and appraisal on the home. Those are smart protections for both the lender and you but if you’re trying to move fast, they can be handcuffs.
When you buy in cash, you’ll still go through the standard negotiation, signing, and closing process, but there will be much less paperwork at closing and there is no lender dictating the steps you need to take..
That said, it’s good to have a Realtor to guide you through the process to ensure you don’t miss any major details.
Cash offers are often more attractive to sellers
Financing falls through sometimes, becoming a pain for sellers who have to go back to the starting gate with another buyer. In a competitive market, cash buyers may have a leg up on buyers financing their purchase. When you come with cash, you and the seller won’t have to worry about a lender dropping their loan approval at the last minute.
Plus, because cash transactions tend to happen faster than working with a bank, sellers may be more open to negotiating with cash buyers.
The biggest perk of paying with cash? You don’t have a monthly mortgage payment! But beyond that, you also won’t have to pay all the fees and costs that accompany a mortgage.
Say you took a 30-year loan for $300,000 to buy a home with a 3.5% interest rate. Across 30 years, you’ll spend an additional $184,968 on interest. When you pay in cash, you won’t have to pay any of that interest. Likewise, you won’t pay private mortgage insurance or other fees instituted by the lender to protect their investment.
It’s especially smart to use cash to buy a second home or investment property so you can rent out the property without a monthly mortgage payment. That increases your profit margin considerably.
Lower closing costs
When you finance a home purchase, your lender charges you for services that add to the total amount you pay at closing. Things like lender fees, application fees, loan origination fees, and discount points all combine to add potentially tens of thousands of dollars to your closing costs. When you pay with cash, you won’t have to deal with any of these lender-related closing costs.
Faster and simpler closing
Lower closing costs is a great benefit, but you’ll also enjoy a much faster and easier closing process when paying with cash. The closing process when using a mortgage typically takes between 30 and 45 days. When you buy with cash, it could take as little as one week.
When you pay with cash, you don’t have to wait for the lender to approve, underwrite, and process your loan, and you won’t be responsible for keeping track of all the documentation you would otherwise have to send to your lender.
Your home is yours
Finally, buying a home with cash means the home is yours, not just 10% yours. Monthly mortgage payments build equity in the home over time but if you ever get into a tight financial spot, you may risk losing a house. Owning your home outright gives you the peace of mind that you won’t lose your home to foreclosure so long as you make payments on your property taxes.
Cons of buying a house with cash
It’s not all sunshine and rainbows when it comes to paying with cash, however. As we touched on at the beginning of this piece, carrying so much physical cash is dangerous and counting it all at the closing table takes a long time, with a large margin of error. Large cash withdrawals or deposits — both physical and electronic — often signal potentially nefarious activities to the government. That means you or your accountant will have to do some paperwork to report the transaction and share some information with the government.
That’s not the only pitfall, however.
Your money is tied up in the house
Homes are fairly illiquid assets, so if you spend a large proportion of your liquid assets into the house, it’s not easy to find cash for other things in your life. If you purchase a home with a mortgage, you put less money down upfront and, as you build equity, you may be able to refinance your mortgage to access cash in the event of a financial emergency. That’s not the case when you’ve already paid for the house in full.
Moreover, what if the house isn’t quite what you expected? If you want to make changes or even just keep up with maintenance, you’ll need cash. If you spent almost all of your money on the house, that’s an issue.
If you have enough cash to purchase a home without a mortgage, take the time to think if it’s really the best use of your money. It may make sense to still buy the home with a mortgage but make a large down payment to keep your monthly payment low.
No mortgage tax deductions
Paying your mortgage every month is a pain, but it comes with a benefit. Homeowners with a mortgage can deduct interest paid on the first $750,000 of their mortgage, reducing their taxable income. Cash buyers do not get this benefit.
Additional expenses still apply
Just because you don’t have a monthly mortgage payment doesn’t mean you won’t pay anything on your house. You’ll still have property taxes, homeowners insurance, utility bills and, if applicable, homeowners association fees. Plus, home maintenance costs add up fast!
Again, if you have just enough liquid cash to buy a house, don’t make the mistake of thinking you won’t have to pay any more on the house in the future.
Yes, you can buy a house with physical cash just like in the movies. Is it advisable? Not really. If you do have the money to responsibly buy a house outright, it’s a great idea! But make sure you don’t overextend your finances and conduct the process with your checkbook or electronic bank account.