One of the first steps in buying real estate is to determine how much you can afford and how you are going to pay for it. When in the market for recreational property, many people do finance their purchase with a lender (see this article on financing hunting land) however a sizable portion of buyers choose to pay cash. This is in large part because recreational properties are generally priced lower than residential real estate and therefore many buyers can readily save up for the full purchase price.
What Does “Cash” Mean
When a buyer makes a cash offer it simply means that they are not taking out a loan to pay for the property and that they are going to pay with funds they have in the bank (or some other liquid financial institution, instrument). Notice that the funds should be “liquid”, meaning that the dollars are readily converted into actual money and can be transferred easily. Money in a checking or savings account can generally be considered liquid since in most cases the buyer can access and use that money without delay. Money in stocks or in a retirement account could be considered less liquid since the stocks would need to be sold first before those dollars could be used or in the case of a retirement account, the money would have to be moved from that account. In both those cases the money can sometimes take a few hours to days before it can be used. Last, money tied up in items that need to be sold should not be considered liquid. For example, if you need to sell a motorcycle to raise funds to buy land then you should sell the motorcycle before making an offer to ensure you have the funds available.
A buyer should also understand that paying in cash does not mean that you bring actual cash with you to closing. Title companies that handle the closings aren’t equipped to handle large amounts of cash and will not facilitate a transaction in actual coin or bills. Instead these transactions are facilitated by wire transfer or cashiers check. Check with your closing professional as to your payment options and what will work best for you.
Why Use Cash?
For a buyer, the financial reasons to pay for a property in cash tend to be clear cut. The buyer doesn’t have to go through a lending and underwriting process, the buyer won’t pay any interest or financing charges or have to pay for origination fees, appraisal fees, and other related loan costs. A little less well known, is that there won’t be any mortgage registration/tax charges paid at closing either.
Aside from saving money, there are several other reasons to pay cash. Transactions tend to be more simple when paid for in cash versus financing. This is primarily because there is no lender and lending process to go through. For example, there is no underwriting to wait for and there is no lender required appraisal or inspection to wait for. Cash vacant land transactions can be very streamlined and typically can close in thirty days or less whereas financed transactions often close in 45 days.
“Cash is King”
One last, but not least, pro to cash transactions is that all things being equal, sellers will usually prefer a cash offer to a financed offer. For many of the same reasons buyers make cash offers, sellers also see advantages. Since the transaction is more simple, sellers see protection in a cash offer since there is less to go wrong. The last thing a seller wants to have happen is to have their buyer’s financing fall through causing the seller to lose time on the market and other potential buyers passing them over. The near “sure thing” of a cash offer can be very reassuring to a seller. When buyers submit a cash offer, their Realtor can usually present it as a very compact and strong offer with few strings attached. This can place the buyer in a favorable position, especially when competing with multiple offers.
Cash offers have significant advantages for both buyers and sellers. Even so, every transaction is unique and buyers and sellers need to evaluate their positions on an individual basis. When considering making a cash offer, buyers should take into account their personal financial situation carefully and consult a professional financial advisor and/or attorney when necessary.
Are you considering buying land, a lake cabin, or country home in Minnesota or Western Wisconsin? The Town & Country Team have the Realtors that understand recreational property. Give us a call at 651-362-0123.