The real estate industry has gone through a strange cycle since the housing crash. Home prices have rebounded due to a high volume of cash buyers. Historically, all cash buyers have accounted for only a small fraction of home sales but in 2014 this percentage has jumped from 19 to 42 percent, according to RealtyTrac.
What kinds of people have that much cash? Many of these cash buyers are institutional investors who plan on flipping the homes for profit in the future but some of them are simply professionals looking to protect their wealth.
The following pros and cons examine All-Cash transactions in the housing market:
Pros of Paying All-Cash:
- A cash buyer speeds up the entire home buying process since cash speaks louder than credit in today’s real estate market.
- Since cash is more attractive to sellers than mortgage applications, the buyer is in a better position to negotiate a better deal than the asking price.
- Buying a home with all cash sidesteps the hassle of the time-consuming and credit-checking mortgage process which also means tacking on interest payments.
- One of the biggest advantages to cash is that the buyer owns the home free and clear, without worrying about making monthly payments, which is ideal for retirees.
- If the housing market continues to recover, the owner can get a fast return on investment without investing much in renovation.
- Owning a home outright and earning income from renters makes an emergency cash advance a simple solution for paying unforeseen bills.
Cons of Paying All-Cash:
- If the cash represents a majority of the buyer’s assets, it can be risky since there is no guarantee the housing market will keep rebounding.
- Cash purchases for homes eliminate the borrowing and return percentage advantages provided by a mortgage.
- Even though real estate is traditionally one of the safest investments for growing equity, it can also tie up cash at the expense of liquidity, which is the ability to convert an asset back into cash.
- If the market does go down and the buyer is merely trying to flip the home at a higher value, it can take years before breaking even since the longer the investor is trapped in the asset, the more dollar devaluation or cost of living inflation can also work against value.
- An emergency cash advance may be denied if the investor relies on flipping for income but is trapped in a down market.