When inventory is low and buyer demand is high, chances are you’ll receive at least one cash offer—a promise to purchase your property that doesn’t depend on the buyer acquiring a mortgage. Buyers figure paying cash might help them stand out among multiple offers, but what’s in it for you as the seller? Here’s what sellers need to know about all-cash offers.
What is a cash offer?
Most offers on residential homes typically include three conditions: financing, an inspection, and a review of documents. When an all-cash offer is submitted, the buyer is telling the seller they have enough cash and investments to purchase the property, says Rochelle Cantor, a REALTOR® and broker with Engel & Völkers in Montreal.
“A cash offer doesn’t mean someone is going to go to his bank and pull out a whole bunch of cash,” she says. “In the eyes of a vendor, the buyer is showing you they’re good for the money and they’re a very strong buyer.”
Cash buyers can be investors purchasing homes in poor condition that wouldn’t otherwise qualify for a mortgage, or buyers who don’t need financing because they’re wealthy or have lots of equity after selling their own home.
Sales may close faster with cash offers
To sellers looking for a quick transaction, an all-cash offer is especially enticing, says Cantor.
Before a buyer’s mortgage approval is finalized, lenders require an appraisal—banks need to ensure the property is worth the purchase price before securing the loan.
“In this market, even with a mortgage pre-approval letter, it can take 14 days to get financing approval, which locks up your house and can take away the momentum of the property being new on the market,” says Cantor.
However, with an all-cash offer, no appraisals are required, because the buyer isn’t borrowing money from the bank.
How buyers prove their all-cash offer is viable
With cash offers, the promise to purchase will include a clause noting the offer is conditional on providing proof of funds, notes Cantor.
“I suggest my buyer clients ask their bank or investment advisor for a signed letter on their letterhead, stating how long they’ve been a client of that institution, they’re in good financial standing, and they have cash and/or investments in excess of X amount of dollars for the purchase,” she explains.
Most sellers will give a buyer several days to obtain this proof, but savvy buyers show up with an offer and a proof-of-cash letter in hand in excess of the amount they’re initially offering.
“For example, if somebody’s buying a property for $1 million, we don’t know where we’re going to end up after negotiating, so it’s better if you provide a proof-of-funds letter exceeding what the actual offer is. Then, the seller knows you’re really good for the money. Proof of funds is a very powerful thing for a buyer and it’s a wonderful thing for a seller.”
Of course, just because buyers can show they have a lot of money doesn’t mean they’ll spend that much more on your property, she adds.
Should sellers ever refuse cash offers?
“Giving an all-cash offer doesn’t mean the buyer is a criminal trying to launder money,” says Cantor.
That said, FINTRAC’s Operational brief: Indicators of money laundering in financial transactions related to real estate does list “unusually large cash amounts used to fund any financial aspect of a real estate transaction” as a possible indicator of a suspicious transaction. If the offer doesn’t make sense in light of what you know about the client and the transaction, you may wish to file a suspicious transaction report.
Further, be aware buyers may come in with a lower offer, using the cash-only incentive as leverage.
“I recently gave an offer that had basically no conditions and proof of funds, and I told the broker, this may not be the price your client was hoping for, but it’s done, and the covenant of the buyer is as solid as you can get, which is really important.”
If you’re about to list your property on the market, it’s smart to work with a REALTOR® who understands how to navigate all-cash offers. Together, you can decide the best path to selling your home.