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January 12, 2009

All Cash Offers - Prove You Have It or It is Assumed That You Don't

For the fifth post in my series on Getting Your Offer Accepted on a Bank Owned Home I will look at how to properly make a cash offer on a bank owned home to get the most bang for your buck.

Cash Offers Have Become More Common as Prices Have Come Down

The lower prices have gone, the more cash offers I have seen.

I have seen investors interested in buying affordable homes to repair and then sell for a profit, and I have seen investors interested in purchasing foreclosures with cash at a discount to keep as long term rentals.

It seems that investors have discovered that making an 11% gross, before taxes annual return on a duplex in Citrus Heights, is better than making a 3% annual return on a CD from Bank of America.

Granted, there is a risk that prices will continue to depreciate, but there is also the possibility that prices will rise.

Most of the cash buyers I have dealt with are concerned more about the potential cash flow of properties and less about the short term potential for principal gains or losses. And with prices where they are in comparison to rents, cash flows are looking better than they have in a long, long time.

There is a Right and a Wrong Way to Write an All Cash Offer

Writing an all cash offer properly can be a great way to improve your negotiating position when making an offer on a bank owned home.

You are more likely to get your offer accepted than a financed offer and you are more likely to be able to negotiate a discount.

I have seen all cash offers get accepted for as much as 10% less than financed offers on the same property.

I have also seen all cash offers get rejected when written incorrectly.

Prove You Have the Cash

The most common mistake made when making a cash offer is neglecting to provide proof of the cash.

Just as when you make a financed offer and provide a pre-approval from the bank, you must also provide documentation of the liquid cash you plan to use to make an all cash offer.

This does not mean you need provide a picture of you holding $200,000 in $20 bills. It just means you need to provide a bank or brokerage statement showing the funds are there.

You can mark out the account numbers if you are worried about security and move any excess funds into another account, if you want to protect your negotiating position with the bank.

So long as the full amount of your offer is on the statement and your name is clearly legible, the bank will accept the statement as proof of funds.

(This is also a way to strengthen a financed offer with a large down payment.)

Write the Offer With a Short Closing Period

It is completely possible to complete a cash transaction in 7 to 10 days, so you don't need to ask for a 30 to 45 day closing period. This is especially true with bank owned homes, because they are almost always vacant.

If you write a long closing period with your cash offer, you are likely to be disappointed with the outcome.

Write an Appropriately Large Deposit

Writing a cash offer with a small deposit is also a common mistake.

If you tell the bank you plan on using all cash and then provide a puny deposit, it sends the message that you have one foot out the door.

I typically suggest that cash offers be written with a 3 to 10% deposit.

Recently I have had cash offers counter offered by banks that had 3% deposits. They now seem to be demanding 10% deposits with cash offers.

The transaction should be nearly closed by the time your contingency periods expire, so it is not that risky to give them what they want, in order to get the deal or negotiate a solid discount.

Don't Write in a Bunch of Silly Contingencies

Your cash is not contingent upon an appraisal, so don't include an appraisal contingency in the offer. You can get an appraisal, if you like, but don't make the offer contingent upon it.

If you did your home shopping correctly, the home should be a great deal and obviously be below market value.

If you are going to have an inspection period, keep it short. You should be able to get all of your inspections done in under 5 to 7 days. If you ask for any longer, you will handicap your offer.

Don't ask for a bunch of repairs or for the seller to pay a bunch of miscellaneous closing costs.

It is illogical to make an offer for hundreds of thousands of dollars in cash and then demand that the bank make silly repairs and pay a few thousand dollars in fees. You are much better off paying for these costs and hitting them harder on the price.

Don't Write a Ridiculously Low Offer

I recently reported in my recap of the Placer County bank repo market between October and December 2008 that 94% of the bank owned homes sold for 90% or more of their asking price, only 1% sold for less than 80% of their asking price and 0 sold for less than 75% of their asking price.

These figures include all of the cash transactions, as well as those that were financed.

The bottom line is that while cash will improve the strength of your offer greatly, it will not create some miraculous reaction where banks will be compelled to just through away tens of thousands of dollars.

As I stated before, I have personally helped someone purchase a home with cash for 10% less than the highest financed offer on a property.

The interesting part was that the offer was only a few percent below the banks asking price. The high financed offer was well above it.

It is important to remember that the measure of a good deal is not the amount you are able to negotiate from the asking price, but rather the value of the home relative to what you eventually pay.

If getting a good value requires that you write a low offer or that you write an offer well over the asking price, it makes no difference, so long as you are getting a better value than you paid for in the end.

Do not expect to get cash offers accepted for less than 80% of the asking price on bank owned homes. You may eventually get one accepted, but it is likely to be on a property that was overpriced to begin with, or a property that no one else would want.

Writing an All Cash Offer is Good, but There are Still Other Things to Consider

While writing an offer financed by cash, with a strong price, a quick close, a large deposit and minimal contingencies will put you far ahead of most other offers, there are a number of other terms that need to be dialed in.

As this series continues, I will cover many of those other terms.

The next post in this series will be be titled "Closing Cost Credits - You can Ask, But You May Not Like the Answer"


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