Cash Offer vs “Cash Offer” – Explained

Here’s one we’ve been getting a lot – “How do SO MANY people have the liquidity to make a cash offer to buy a house?”. Short answer – few actually do. Longer answer – it’s complicated. Here’s how to make a cash offer to buy a house, even if you don’t have (all) the cash.

As your agent may have already explained, a “cash offer” is industry shorthand for “not contingent upon financing” (or some variation of this wording based upon your local standardized contract). In essence, this means you won’t be able to back out on the basis of failing to obtain a mortgage at affordable terms. It does NOT mean that you promise to pay in cash: you may still use a mortgage to fund the transaction.

Cash Offer Buyers

Many cash offer (not “cash offer”) buyers are either A) using legitimate liquid savings, often combined with the equity proceeds of selling another home; or B) borrowing against a big 401(k) or other retirement account to fund the initial purchase. In either scenario, the new homeowner can then repay themselves or their savings using the “delayed financing” exception for conventional loans that allows for a “cash out” refinance within 6 months of the purchase.

“Cash Offer” Buyers

By contrast, many “cash offer” (not cash offer) buyers are simply crossing their fingers that their mortgage closes without a hitch, often calculating that the most they stand to lose is an earnest money deposit, and that most sellers won’t bring a lawsuit for breach of contract. The advice you get may vary as many agents have (and many others haven’t) found themselves in a scenario where the buyer’s failure to honor the contract means the seller winds up losing the home they were scheduled to purchase. We’ve seen a lot, and heartily recommend first talking to your agent specifically about the risk of a vindictive, litigious homeowner in full-on “Mother of Dragons” mode.

Turning a “Cash Offer” into a Cash Offer

Seems like a quandary for those of us who don’t normally sport a top hat and monocle. If you are determined to purchase in a hard sellers market that highly favors cash (and “cash”) contracts, the fintech world has a solution but it comes at a premium of 1-3% of the purchase price. Ribbon has several programs available in limited states (including MO, but not yet in CA as of the time of this post) to enable a buyer to write a cash offer that will close and fund even if the buyer’s mortgage plans go off the rails.

Why does cash matter? What is the difference to the seller?

Simply put, a cash offer implies (but doesn’t always deliver) a quicker closing with fewer potential points of failure. While we can boast that nearly all of our purchase financings close as planned, there exists the rare buyer that gets laid off or decides to buy an RV (against specific advice – you know who you are) a week before they close, and this puts their mortgage in jeopardy or sometimes disqualifies them for the program for which they were approved.

Disclaimer: We’re speaking anecdotally from a lot of experience here: we enthusiastically recommend consulting a licensed real estate agent or attorney for professional advice before entering into any real estate transaction. Not sure who to trust? Drop us a note below for our recommendations in your area.