Cash Leverage

In the comments on a recent blog someone asked why someone who pays cash has more negotiating leverage. I answered briefly in response, but thought it made sense to cover it in more detail in a blog post.

There are several reasons you're in a stronger negotiating position if you're buying with cash.

First of all, many deals never make it to closing. Even when there's a ratified contract, that's no guarantee that the deal settles. And, over 95% of the time, deals that fall apart do so because of issues related to the buyer's financing.

If you can remove that concern for the sellers, they are likely to take a lower offer, trading price for the certainty of a closed sale.

Another factor is time. Typically right now it's about 30 days in most cases from ratified contract to settlement. The majority of that time is spent on items required by the lender. Some of those things include getting a survey, having the property appraised, verifying credit and employment for the buyers and sending the deal through underwriting. It's possible, these days, for most lenders to close much faster, say in two weeks. But in most cases if they buyers are getting a mortgage the settlement date is probably about 30 days out.

With cash, on the other hand, settlement can happen as quickly as the buyer wants. I've seen cash settlements in less than 48 hours. Mind you, I wouldn't recommend that. I think the buyer should still do a title search and a home inspection at the very least. But it does happen.

Most sellers prefer money in their pocket sooner rather than later!

And, lastly, along with buyers getting a mortgage come several related contingencies. Contracts that involve a lender typically include a contingency to make sure that the buyer can actually qualify for a mortgage. (Certainly not a sure thing these days!) There's an appraisal contingency. If the property doesn't appraise for at least the sales price, the deal may be dead. And, depending on the type of financing, there may be other contingencies and/or conditions that make a timely settlement more uncertain.

All in all, if I'm selling, I'll give a little on the price to get a cash buyer!