A highly competitive housing market over the last two years has forced desperate buyers to look for faster ways to close on deals. Buyers able to sell one home are turning around and making a cash offer on another. Those without enough cash, but a considerable amount of equity, might turn to hard money or bridge loans. As a seller, is hard money or a cash offer better than going the traditional mortgage lending route?
The main advantage of hard money and cash is speed. When a buyer purchases with a traditional mortgage, you are looking at at least three months to close the deal. Banks need that amount of time to approve and underwrite a mortgage. With a cash offer, you can close as quickly as you and the buyer can come to terms. As for hard money, loans can usually be arranged in a matter of days.
For the purposes of this post, hard money and bridge loans are virtually the same thing. According to Salt Lake City’s Actium Partners, the only notable difference between them is that a bridge loan is utilized only long enough for the buyer to arrange traditional financing. But in terms of actually completing the sale, both types of loans accomplish the same thing.
Verification of Funds
Whether a buyer entertains a cash offer or a hard money deal, the need to verify funds remains in force. In the case of a cash offer, a buyer would typically ask for bank statements proving that the money is in the bank and has been there for a while. It is a good idea to stay away from literal cash – as in paper bills – because there is no way for the seller to verify payment will actually be forthcoming at closing.
Verifying funds from a hard money lender is as simple as asking for a copy of the loan contract. Above and beyond that, hard money lenders go through title complies to make sure they are not financing the purchase of a property with liens attached to it. That relationship adds a bit more security to the transaction.
Property Appraisals
Appraising the property being purchased is a normal part of the traditional mortgage process. Hard money lenders, even though they tend to require substantially higher down payments, still require appraisals, too. They need to know that the value of the targeted property is high enough to cover the loan.
Cash buyers do not have to appraise properties. They may decide to do so for their own peace of mind. In such cases, it is not uncommon for buyers to put language in the sales contract to protect themselves against a bad appraisal. In other words, they put language in the contract that allows them to back out if an appraisal values the house below a certain threshold.
There Is a Trade-Off
Sellers may prefer all cash and hard money offers because both types of transactions are comparatively quick. But there is a trade-off here. Though there are exceptions to the rule, most all-cash and hard money offers come in at a lower price. Buyers know they are doing sellers a favor by paying with cash or hard money, and they want something in return. A lower sale price is almost always what they want.
Accepting a cash or hard money offer definitely has its benefits. But it also has its downsides. Sellers would do well to thoroughly investigate any offer before accepting. That is the only way to know for sure whether an offer is both a good deal and a safe