The Myth of "Cash is King" in Real Estate Investing: A Veteran's Perspective
You hear it all the time on BiggerPockets Forums, podcasts, local meetups, from gurus, etc. It must be true if everyone says it is: “Cash is king.” The idea is if you buy with cash, you can get better deals, more deals, better terms, etc. But in 20 years of doing residential real estate investments, I’ve found that this is actually not true.
Don’t get me wrong: Cash is good. It gives you flexibility and peace of mind and creates better cash flow on your investments through return on equity. However, it is not the end-all, be-all when it comes to investing, and in many situations, you can beat cash offers with financed offers if you understand where you have leverage and how to construct an offer that mimics cash terms.
But What Is Cash?
Seems like a dumb question, right? When it comes to real estate transactions, cash means different things than just a pile of bills stuffed under your mattress. In my opinion, cash means you are making an offer that you do not need any third-party approval for any terms in your offer.
Ironically, many people think that hard money is cash, and they write offers as such. Many hard money lenders require some sort of appraisal or due diligence, especially for investors that they don’t have a relationship with. If you are writing cash offers with a hard money lender and no appraisal contingency, you might find yourself in a tough situation somewhere along the way, so be sure you know what the lender requires of you and your deal.
HELOCs: The Hidden Cash
HELOCs (Home Equity Lines of Credit) are absolutely cash. Once your HELOC is funded, the bank no longer has any say in what you do with that money. I find it funny—I have clients ask me all the time if they will get in trouble with their bank for buying real estate with their HELOC, but they don’t think twice about taking their family to Disneyland for a week with that same line of credit.
If you were to lend someone money, would you rather they blow it on a car or an experience or buy a hard asset with built-in equity and cash-on-cash returns? HELOCs are cash—if you don’t have one, get one. They’re the best way to leverage your equity.
How to Make Financed Offers as Appealing as Cash
As for the offer itself, cash buyers typically expect a discount for two pieces of leverage that cash provides: expediency and the lack of an appraisal requirement. As a conventional or even VA and FHA buyer, you can provide a version of those to your buyers that can make your offer very competitive against a cash offer.
Expediency
How fast can you close? You’ll need an excellent lender for this, so don’t try this using the lowest bidder that you find online—you’ll need a local relationship. Typically, the biggest time suckers in a transaction are the time it takes to get an appraisal ordered and a report supplied and underwritten.
You can cut one to two weeks out of your closing time frame by simply ordering an appraisal as soon as your offer is accepted—possibly more if you pay a rush fee. Write this term into your offer, and make sure the seller understands the purpose behind the term. I’ve closed conventional deals in two weeks, and you can do that, too.
Appraisal Contingency
This one can be a tough one to swallow if you don’t have much experience, especially if you don’t have any actual cash or a HELOC waiting for you. You can waive or modify the appraisal contingency for a conventional offer. Note that I didn’t say you can waive the actual appraisal, but you can waive that contingency around the appraisal.
Here’s how it works. If a property appraises for less than the contract amount, the buyer simply increases their down payment to make up that difference. If your contract says you’ll pay $200,000 for a property and the appraised value is $190,000, you’d need to pony up an extra $10,000 in your down payment in order to perform per your contract terms.
I can feel you rolling your eyes right now: “What kind of idiot would pay more than the appraised value for a property?” Lots of idiots. It’s not for every investor or any situation, but it happens all the time.
Maybe you own a lot on either side of the subject property and plan to develop it, so the overall ROI makes the deal worth it. Maybe you see the highest and best use for the property that makes the risk worth the reward. Or maybe it’s simply your dream house.
Keep in mind that an appraisal is literally an opinion of value, not actual market value. And think about this: Once you close on a property at the contract price, it becomes a new comp for that area, and your purchase has actually increased the value of the house you just bought, regardless of what an appraiser’s opinion is.
This concept of modifying your appraisal contingency can be a real rabbit hole. I could write 10 more articles about how to do it, what language to use, and the pros and cons of each. Just know that you can control that process and language. If you are working with a knowledgeable agent and fully understand what you are getting into, it can be a very valuable tool.
Final Thoughts
To use the methods I’ve described, you’ll most likely have to pay more for a property than a true cash offer. However, if you are using a Hard Money Loan (HML), paying a few thousand dollars more upfront on a conventional, VA, or FHA loan will absolutely result in significantly lower holding costs and closing costs. You’ll come out ahead for sure.
Give these methods a shot in competitive markets where you keep getting beat out. You might be surprised at how competitive your offers can be, even without that pile of cash.
Комментарии