Buying and selling homes is a big business. One of the most common ways to buy a home is by using cash. This can be an attractive option for many buyers, because they don't have to worry about financing, qualifying for loans, or making down payments. But what does it mean when someone says they are a "cash buyer?" This blog post will answer, what is a cash buyer and more! It will discuss who typically buys with cash, why some people prefer this method over traditional mortgages.
What Does It Really Mean, Cash Offer Or Cash Buyer?
When people hear of a cash offer or cash buyer they automatically think of someone who can write them a check for the house right away, but this is not necessarily the case. The term cash buyer is used to describe a person who either has the money to purchase a home outright or someone who has already lined up financing from another source.
Cash buyers can be individuals, couples, or families. They may also be investors looking for a property to invest in. There are many reasons why people might choose to buy a home with cash. The most common reasons are that they don't want to deal with qualifying for a loan or making a down payment. Cash buyers typically don't have as many restrictions when it comes to buying a home since they aren't relying on loans. This gives them more freedom when it comes time to make an offer on a property.
Essentially, a cash buyer is someone who is buying the house with no mortgage contingency. If they are using an unconstitutional lender often the lending criteria are relaxed and quick. Now let's discuss some of the different types of cash buyers in today's market. That's the quick answer for what is a cash buyer.
The first type of cash buyer is an actual cash buyer, someone who has the funds in the bank ready to go. These buyers are usually investors or people who have sold a previous property and have the money from that sale to use as a down payment on their next home. These buyers can often close the quickest since there is no approval they require.
Many cash offers from homeowners will still come with a mortgage or appraisal contingency, however. They still want to make sure they are buying a house that is worth what they paid for it.
When people ask, "what is a cash buyer" this is the person they always think of. It is however rare to find these types of cash home buyers. There are very few homeowners who have the cash to buy an expensive house and even if they did they may want to invest it elsewhere and use a traditional mortgage. Investor cash buyers are also rare. Most investors use the types of funding we discuss below. If a buyer is buying on scale it's difficult to have that much cash on hand when they buy houses as-is. The investors who do buy with cash are often smaller cash buyers who will buy a house every now and then. Since they are using cash that they could have invested elsewhere and are in high demand, they make ask for a better deal.
Hard money is very standard for large investment companies who are buying a high volume of properties. Hard money is a loan that is backed by the property being purchased instead of by the person taking out the loan.
The advantage to using hard money is that it is much faster and easier to get approved for than a traditional mortgage. This is because the lender is only interested in whether or not the property being purchased will be able to cover the cost of the loan. They are not concerned with things like credit score, income, or job history.
This makes it a popular choice for investors who are looking to buy multiple properties at once. It also means that there are no restrictions on who can use hard money as long as they have enough equity in the property they are buying. The underwriting process will take 2-3 weeks and a loan can get denied. That's one reason we at Illinois Real Estate Buyers do not use hard money. It can take longer to close and nothing is promised. When a homeowner wants to sell their house in a week, hard money will often not be able to do that.
One disadvantage of using hard money, however, is that it is often very expensive. This is because the lender is making a high-risk investment and so they want to be compensated for it. Additionally, hard money lenders typically charge points which means that you will pay more in interest than with traditional mortgages.
Next, we have private money as cash buyers. Private money is very similar to hard money except that it comes from an individual instead of an institution. Many people love becoming private lenders since it is an easy investment with high returns, albeit risky. We love using private lenders since they are fast, easy, and flexible.
Often times we can get a private money loan with a simple text, phone call, or email. If you have a good enough relationship and/or experience the lender knows they will get their money back and they just want to quickly look at the deal.
Some lenders have done this so often they won't even look into the deal! They know their money is safe with us.
Since we can skip out on the underwriting process all we have to do is sign the usual lending documents and get the wire. This can often be done within hours but will usually take 1-2 days.
As stated above private lenders work with cash home buyers they like, know and trust. You don't have to deal with large companies and multiple different departments, just a nice friendly handshake.
Hard money lenders often have rigid rules, private lenders not so much. Need to close in a week? Not a problem. Tennant occupied? No problem. As an added bonus they are often only working with a handful of local home buyers, or even just one, so they are not backed up with requests.
Who are private lenders?
Friends and Family
These are people you know who may have some extra money laying around and would like a better return than the stock market.
Retired business owners
They often have some extra money lying around and still have an itch for investing and making money.
Sometimes sellers have an unwanted house and want to make some extra money on the sale. Oftentimes sellers will become the lenders (referred to as seller carry-back or seller financing). This helps them make some extra money above and beyond what they sell the house for, often for many years to come! If this is something you would like to discuss please contact us.
Roth IRA or 401k
Some cash home buyers use their Roth IRA or 401k to buy houses directly. They do this with the purpose of having tax-free gains and can even get an exemption on the early withdrawal penalty if they meet certain criteria (e.g., buying your primary home, medical expenses, or paying for college). Please talk to your accountant or financial advisor before doing this.
Some private lenders also use their retirement funds to lend to cash home buyers.
Some cash buyers use a fund to buy their houses. A fund is, simply put, a group of people who pool their money together to invest in different things. There are many different types of funds, but for the sake of this blog post, we will focus on real estate investment funds.
Real Estate Investment Funds (REITs)
A REIT is a company that owns, operates, or finances income-producing real estate. REITs are bought and traded on major exchanges just like stocks and offer investors shares in a portfolio of properties.
There are two main benefits to investing in a REIT: liquidity and diversification. Liquidity means you can get your money out whenever you want. Diversification means that you are not putting all your eggs in one basket; if the housing market tanks, the price of REITs will not go down as far and they can be a safer investment than individual properties.
Syndication is, put simply, a group of people who put their money together to invest in something. In the case of real estate, syndication is a group of people who come together to invest in an individual property.
There are two types of syndications: debt and equity. Debt syndications provide short-term financing for real estate projects (usually 12 months or less). Equity syndications give investors ownership in the project and are usually long-term (more than 12 months).
Both have their benefits and drawbacks, which we will not get into detail here.
What Is A Cash Buyer, In Conclusion
Finding a buyer for your home quickly can be tough. There are many people who need to sell their homes and they don't have the time or money to wait on traditional loans from banks. Fortunately, there is another option in cash buyers who make offers based only on the house's value without any of the conditions that come with bank-issued mortgages. Hopefully, this helped answer your question of, what is a cash buyer? If you want a free cash offer contact us today! We're here to help homeowners get out of their properties faster than ever before by providing them with an all-cash solution that requires no credit check and takes less than two weeks to close.
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