The Process for Purchasing a House With Cash

by Xin Lu on 30 January 2012 10 comments

Several years ago I wrote an article about the pros and cons of paying cash for a house. Some readers asked me how this can be done and what the procedures are. Last year my husband and I actually did purchase a property with cash, and here is our experience. (See also: How to Live a (Nearly) Cash-Only Life)

The property we bought was listed on the public multiple listing service. It was bank owned, so I called the listing agent and asked for an appointment. The listing agent immediately told us that the bank could only accept cash offers at this point because the property already has another cash offer on it. After seeing it and finding that it was in great condition, I made a pretty fair offer that was about 95% of the listing price. I also had to submit evidence of my funds along with my offer. The bank gladly accepted, and I sent in an earnest deposit check for $5,000. This check was then put into escrow towards the purchase of the house.

Next, we hired an inspector to look at the property to see if there are any defects. Unfortunately, the air conditioning system was broken, but the bank refused to pay for it, and we agreed to fix it out of pocket. The bank did agree to pay for title insurance, half of the escrow fee, and clear all liens from the property. So I made sure that all the unpaid bills and taxes on the property were paid before closing.

Meanwhile, I was gathering my funds all into one account so that I could send it into escrow before closing. We were able to choose our closing date to be the end of June, since we didn't have to deal with a loan. This was advantageous to us, since the bank had to pay all the property taxes for the first half year. I asked for the HUD closing statement about three days before closing and made sure that everything looked correct.

On the day before closing, I made sure all the funds were in my account and then sent the money to escrow. Everything went fairly smoothly, and the whole process took about three weeks from looking at the property to getting the keys. The closing costs were less than 1% of the price of the property because we didn't have to deal with a loan.

We were able to fix the air conditioner for a very fair price, and we rented the property out after several weeks of open houses. Now that we've owned the property for more than six months, we are actually eligible to take money out via a cash out refinance, but we don't need the money right now. The point is that if we didn't make a cash offer, then we would not have been able to procure this property at all. Basically, the process to buying a house with a cash on the open market is pretty much the same as buying a house with a loan, but you have more flexibility on the closing date, and that is a competitive advantage over offers with a loan contingency. You don't have to sign as many papers, but you still have to do your due diligence and make sure that you have a bit of cash buffer left over after the purchase for possible repairs and improvements.  

What do you think? Are you thinking of buying a house with cash?

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Guest's picture
Guest

Why bypass free money? 30 year fixed mortgages are just under 4%, a low-risk investment (AT&T) is yielding 6%, both are tax-advantaged. Not to mention the loss of liquidity if you want -or suddenly need - to use the 80% of the cash left after down payment for something else.

Guest's picture

I would love to buy a house with cash one day -- kudos!

Guest's picture

I just can not wrap my head around a word that has "death" in its meaning as it relates to my money, so, I will be looking to buy my first house in cash. I'm keeping my eye on Homepath.com listings, where I may consider a fixer-upper since I don't need to move right away.

Guest's picture

Not sure it makes sense. You can secure a 15 year fixed loan at 3.3%, and if you're in the highest tax bracket, you're only paying 2.3% or so. I'd rather invest the cash somewhere else that earns more than 2.3%

Guest's picture

Well i already have an experience of purchasing a house with cash therefore many of them i know already but those people never buy house or first time home buyer may face various troubles while purchasing a house on cash, but if they collect some appropriate information then they can avoid these troubles easily.

Guest's picture
Jasmine

Please explain the issues you had with buying a house with cash. I'm in the process of doing this and I will appreciate the heads up.

Guest's picture

Very interesting idea and I wish I had the cash to do it! However i note that more and more people seem to be doing it this way and why not?

Guest's picture
sofie

When you pay cash, that will automatically become your Asset. You own it. But if you get a mortgage to buy your house, you can never say its yours. That's not yours yet. The Bank owns it....you can only say its yours when you are fully paid with your mortgage.

So if you can afford to pay cash, why don't you? It is always advisable to pay cash I tell you.

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Guest

Under the current very low interest rates (less than 1%), and a somewhat inflated stock market, is there a better safe place to put your funds than into your own home? When we sell our present house, I see us putting much of the money right back into our new home. It's never guaranteed that your house will appreciate in value, but at least you've got a place free-and-clear to live in should the market turn bad. That's more than I can say for anything other than an FDIC account paying 0.02% interest!

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Guest

I am close to purchasing a house with cash - partially with stock I have sold at record highs. I certainly see the argument that can be made for obtaining a mortgage at a low interest rate. This rate is further extended when considering the tax write offs. The extra funds placed in a house could easily be utilized to purchase other investments.

I see few great investments options at this time. A security with a good dividend can produce a solid return (my retirement accounts are filled with them), but they can quickly sink. Domestic index funds are wonderful when the market is down - as of this writing I think the market is overly inflated (Dow ~16500). Forget the bond market. International - risky and potent (I would feel better about an India Index fund -filled with companies I don't know- after I own a home).

The factors that motivate me to a cash purchase for a house are: improved closing speed, negotiation strategy, low closing cost, and better piece of mind for increasing one's risk tolerance for future investing. Home ownership will likely allow improved sleeping habits when making more volatile investments to reduce the correlation coefficient in a diversified asset allocation strategy.

A disclaimer: I would not pay cash for a house if I was unable to max out every tax advantage retirement account/Health Saving account option I have available. I would also not pay cash for a house if the price-to-rent ratio was unfavorable or if I did not plan to own the house for at least 15 years.
Good luck!