Why would a bank take a lower all cash offer versus a higher offer via conventional lending?
There seems to be a a belief that a bank or individual will always take cash over conventional financing from a buyer, even if the buyer who is purchasing through conventional financing offers a greater amount.
If a home is on the market for US $120k and an investor offers US $100k cash versus another buyer offer US $130k via conventional financing; would a bank or individual go with the cash offer? Are there hidden fees that conventional financing imposes that cause this behavior or is this assumption in and of itself incorrect?
The hidden fee is time.
It has only been briefly mentioned, but an all cash buyer usually means a quick closing meaning the seller gets paid soon. With a financed deal, usually (at least frequently), the prospective buyer may have to sell or close on another property before being able to close on the sellers property. If they have trouble selling their property, or their contingent sale doesn’t go through, it could significantly delay the closing of the sellers property.
There is also one financing situation that has not been discussed. That is, where the buyer is using a “line of credit” to purchase the property. In that case, the buyer offers another property (or other asset) as collateral to a bank and gets a line of credit.
In this case, the loan is not secured by the property that’s for sale, it’s secured by the other asset. The new buyer doesn’t need to have the bank approve the purchase of the new property and (generally) the bank doesn’t know or care what they’re buying with the money.
In this case, a (savvy) seller would probably consider an offer with this sort of financing to be as good as a cash offer. It would then be a matter of the seller considering any contingencies of the offers.
@OP: It’s all about risk. With a cash buyer the decision is left up to one person. With a financed buyer it adds another approval process (the lender). It’s another opportunity for the deal to fall through. If the bank is the lender then there’s even more risk. They’ve already taken back the property once and incurred cost and they’re setting themselves up to do it all over again. The discount price can depend on a lot of factors. Maybe it’s a bad area and they need to get rid of it. Maybe the appraisals for the area are low because of foreclosures and they know it will be hard for a Buyer to get a loan. Lots of reasons as to what price they’d take.
@Shawn: Every deal has contingencies unless it’s a foreclosure bought at auction. Even if you are getting a steal from the bank in terms of price you’re always going to have an inspection period. If a Buyer doesn’t need an inspection then he will just go to an auction and buy a property for an even cheaper price.
One other point to consider is that cash offers often include no contingencies. That is, the offer comes in and if the seller signs then the deal is done, without any chance that the buyer backs out. As you can imagine, this is an attractive option in some situations.
A bank selling a foreclosed property would negotiate a lower cash deal, I doubt it would be that extreme, 130 vs 100.
An individual seller may give up $10K to save time and get his next home closed as well, but again, I suspect it would be rare to find that large a delta.
Often the counter-party has obligations with respect to timelines as well — if your buying a house, the seller probably is too, and may have a time-sensitive obligation to close on the deal. I’m that scenario, carrying the second mortgage may be enough to make that deal fall through or result in some other negative impact.
Note that “pre-approval” means very little, banks can and do pass on deals, even if the buyer has a good payment history. That’s especially true when the economy is not so hot — bankers in 2011 are worried about not losing money… In 2006, they were worried about not making enough!
It’s because financing can fall through, and then the time between offer and closing is wasted. Often buyers will include preapprovals and other evidence of financing eligibility with their offer for this reason.