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Disadvantages Of Buying A Home With Cash

Recently, sales of homes in all-cash purchases has reached a new high. If you're one of those with the ability to pay cash for a residential property, you probably know how advantageous that is, from a financial and emotional standpoint. You won't have the worry of keeping up with a mortgage and paying all that money in interest over the life of a 15 year or 30 year loan. What's more, you won't have the inconvenience of your original lender selling your note to another mortgage service company.

However, what might surprise you is the true cost and the risk associated with an all-cash purpose. Sure, you take immediate title to the property, as well as have 100 percent instant equity. What many people do not stop to consider is that there are many "safety" features which come with financing through a third party. Yes, that means paying thousands of dollars over the life of the loan, but there's nothing to stop unpleasant surprises from an outright cash transaction.

About All Cash Real Estate Purchases

So far, a whopping 64 percent of all homes sales in the Sunshine State were cash transactions. Other states have impressive numbers as well, and the trend is a continuing dynamic that began some years ago. One reason is investors are jumping back into the real estate market. The truly distressed properties, one which require more than a little TLC, are largely gone. Luxury homes have also begun to pick up their sales pace, as foreign buyers are finding the Sarasota area too attractive to pass-up.
Who has enough cash to forgo a mortgage? Analysts say many are baby boomers who have sold homes already paid off and now want to downsize. Retirees who can tap into their retirement accounts also are paying cash for second homes in places like Florida. Other cash-only buyers borrow money from friends and family to purchase a property, and then take advantage of a rising market to 'flip' the property, repay the loans with the proceeds of the sale, and pocket a profit. --USA Today

Across the country, 43 percent of all transactions are for cash, to-date this year. Some 54 percent of those sales were to people acquiring second homes, while others are those going into retirement and choosing to downsize from large family residents to smaller ones. Still others are those who are not buy and hold investors, but the return of flippers, or individuals or groups which make residential property cash purchases at discounted prices, makes needed safety and functional repairs, along with a little cosmetic makeover, then sell it for a profit.

These many cash transactions are healthy for the housing market, taking even more distressed homes, that is foreclosures, short sales, and bank owned properties, as well as non-distressed properties which are in a state of disrepair, helping to propel upward single family, luxury and other homes in value. In essence, cash transactions are increasing the price of more desirable properties, especially those in great locations.

The Problems of Buying a Home with Cash

An all-cash purchase seems to have no downside. No mortgage, no private mortgage insurance, no interest to pay for the privilege of borrowing, and instant, full value equity sounds as though it's completely without any downside. However, when you purchase a home for cash, you are without certain peremptory due diligence. Here's what you need to know before making an all-cash buy:

  • The listing price and the home's true market value. The asking or listing price isn't usually the same as the selling price. More than a majority of sellers push the envelope when it comes to pricing and without a lender conducting an appraisal, you'll have to take on that responsibility. At the very least, have your buyer's agent conduct a comparative market analysis and use the cash to leverage a discount.

  • Cost of repairs and improvements. Here again, the seller could easily assume that a cash buyer has the resources to make any needed repairs or any improvements. Even if the seller doesn't request to be let off the hook for repairs, your wallet will be substantially lighter and that could mean putting off any upgrades you want to make.

Lastly, paying cash means being left out of the mortgage deduction come tax time.