By Craig Erwin, Ph.D.
My wife showed me a mailing from a local realtor. It had pictures of a few local houses that sold recently. What did the houses have in common? They sold above the listing price. Some sold well above the listing price.
In much of the country, the inventory of homes for sale is very low, so folks are using all sorts of tricks to try to buy a home. Some offer to pay cash. To scrounge up enough cash, some buyers convince friends and family to pool their money to enable them to make a cash offer.
If you can pay cash, it gives you an advantage over most home buyers because 87% of buyers require financing. An advantage of paying cash is that you may not need to offer as much as if you get a mortgage because sellers prefer cash offers. Why? Because cash offers are less risky and more expedient since there is no need to wait for a bank to approve a loan application and no need to worry that the application might be declined.
Even though most of us can’t imagine paying cash for a house, according to the National Association of Realtors, around 28% of the homes sold in March were paid for in cash. In a sign of how crazy the market is, some sellers won’t even consider offers that are not in cash.
Unfortunately, offering to pay cash does not guarantee that your offer will be accepted. In some cases all offers are cash offers. If that happens, your offer usually needs to be the highest offer. You may also be competing with investors who plan to re-sell or rent the house. They almost always pay cash and they tend to have far more cash than you do.
Are you in a rush to buy a house? Many buyers are afraid that, if they don’t buy a house soon, they may never get one. Many are also worried that interest rates and home prices will keep soaring, pricing them out of the market. Home prices have shot up in recent years. They are almost 40% higher than they were when the pandemic started. Mortgage rates have also soared this year. A 30-year fixed-mortgage jumped from 3.85% on January 10th to 5.58% today. It is no wonder that buyers are desperate to buy before it’s too late.
Although buying a house may seem like an emergency, it rarely is. I was desperate to buy a house when my older son was about to start school. I bought a house in an overheated market (like today’s) and I paid way too much for it. The housing market soon crashed, leaving me way underwater. It took fifteen years before my home’s market value got back to what I had paid for it. I wish I’d waited to buy until the housing market crashed. At least I didn’t pay cash.
For most of us, paying cash isn’t possible, so the only way we are likely to succeed at buying a home may be to win a bidding war, paying far more than the listing price. If you do, make certain that you really want to live in the house for well over a decade and that you will be willing to live underwater for a decade or two. Be ready to make mortgage payments for what seems like forever, too. Buying a house is a dead serious endeavor. Make sure you go in with your eyes wide open. There are no do-overs.
Have you bought a house recently? If so, do you feel you paid too much? Do you view a house as an investment?
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