Cash Buyers Beware!

Food For Thought For Cash Buyers

Are you aware of the key points that cash buyers should be aware of when purchasing a home in today’s market? Just because you are paying cash doesn’t mean that you shouldn’t perform your due diligence.

Cash Buyers Purchasing HomeThere are a lot of cash buyers that will not get an appraisal or dig deeper because they are not going through a lender but an appraisal and/or additional research can tell you a lot about the property and help you determine if it is a good deal.

Avoid Overpriced Homes

The current market can best be described as a seller’s market because of the limited inventory and increased demand for single-family homes. One consequence of this is that sellers sometimes have the mentality that they can price their home for as high as they want, but this is not always the best tactic.

Recently I have seen some negative issues with cash sales, but it doesn’t have to be this way. Today I’m going to share with you 3 things cash buyers should be aware of and what they can do to avoid a bad deal.

Appraisal Contingency

Some cash buyers may think that with it being a seller’s market that they have no choice except to pay whatever the seller asks but this is not always the case. Even cash buyers can utilize the appraisal contingency in their sales contract.

I recently wrote about why an appraisal contingency is so important today. An appraisal contingency basically states that the home must appraise for the contract amount or the buyer can withdraw from the deal.

The contingency is extremely important whether you are financing or paying cash. The contingency may be overlooked when paying cash because some may not want to spend the money on an appraisal but this would be wrong.

Previously Paid Too Much

Another situation that can occur is when a seller paid too much for their home when they purchased it. If they paid cash when they bought it and did not get an appraisal, they may have no idea what the true value of their home is.

By relying on the previous sale as a benchmark for their current list price, they may inadvertently overprice it. The only way this will be revealed is if their real estate agent performs a CMA to price it, however, this does not always deter sellers from pricing their home higher than it should be.

If you are currently in a situation like this don’t let anyone tell you that buyers can ask what they want. It is true that inventory is limited but that does not mean the property is priced correctly. A purchase appraisal will give you the true market value of the home so you can make an informed decision.

Incorrect Square Footage

Depending on the amount of due diligence you are willing to perform, you could uncover more inaccuracies with the property you want to purchase. This is true with the square footage and price per square foot of the home as well.

Price per square foot is not the holy grail of property value, however, some agents and many sellers still don’t understand this. They will base a list price on an arbitrary price per square foot and then multiply it by the square footage of their home.

This is really two separate issues, however, the one that I am concerned with here is the accuracy of the square footage of the subject home. It is critical that the correct square footage of the home be known because if a house is priced based on the square footage, the price will not be accurate if the square footage is wrong.

Closing Thoughts

If you are involved in a cash sale, where you may not normally consider getting an appraisal, you may want to reconsider this. At the very least you may want to get the house measured to make sure it is the size the seller says it is.

If the square footage is overstated then the list price could be too high and this may result in paying more than it is worth. As I noted previously an appraisal contingency would allow a buyer to get out of the contract if the home was overpriced due to the inaccurate square footage.

Questions?

Cash buyers are presented with multiple issues that could result in a bad deal unless you perform your due diligence. Do you have any other questions about buying a home for cash? If so please leave a comment below and I’d be glad to answer it for you. As always, thanks for reading.

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Comments

  1. Great post!! As an agent I see homes with inaccurate looking square footage totals pretty often. Not as much as when we first started using square feet in listings a few years ago, though still a lot more often than I think we should be seeing inaccuracies in the listings. Cash or not, our job as Agents is to look out for our buyer’s best interests and that means insuring the information they have is accurate, and in most cases it means getting an appraisal to back up the home value. On a more curious note, when financed an appraiser has guidelines/conditions that the home must meet in order to be eligible for specific loan type(VA, FHA, etc). For a cash deal I am guessing you just take the condition of the home more into play to create the value and there would be no “subject to”. Would the appraisal list any items that may be limiting value?
    Thanks!

    • Thanks, Aaron. I think the accurate square footage is vital for agents as well. It helps with the accuracy of the MLS statistics which agents use to price homes. When we do appraisals for cash sales we still look for condition items that can influence the value but the appraisal is typically an “as is” appraisal. The buyer could then use the information for negotiation purposes if the repairs are significant. Appreciate your input, Aaron.

  2. Incorrect square footage really can make a difference. In my area the square footage is fairly accurate in many cases, though certainly not in every case. It sounds like in your market there is definitely more room for errors with square footage. That’s such a big factor, especially if a cash buyer was buying based on price per sq ft (which I don’t recommend).

    • Yes, it can, Ryan. I write about incorrect square footage quite a bit because I see the problems it creates. I’ve done several appraisals recently where the square footage was overstated, which resulted in the home being listed too high. If a buyer is using financing then this will most likely be discovered when the appraisal is done but not everyone uses financing. If a buyer is paying cash they may not get an appraisal which would be a mistake in my mind. Since a home is usually the largest asset many people have it is important you know its accurate market value.

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