Study Says Cash Buyers Pay 10% Less

You’ve heard that old saying over and over again; “Cash is king”, but in case you had any doubts a recent study tells us that sellers would rather leave money on the table for an all-cash offer than risk a lost sale because a mortgage falls through.

The study from the University of California San Dieo Rady School of Management says sellers would rather trade cash for convenience when it comes to the sale of their property. Cash buyers often forego inspections and even appraisals - two of the most challenging aspects of getting a loan from a mortgage lender. Says Michael Reher, co-author of the study, “When sellers accept a mortgage offer, it comes with risk.” In fact, 10% of all transactions involving a mortgage fail. Sellers are often willing to accept less for their property to avoid that risk.

This doesn’t mean that all financed buyers pay 10% more. Those with a good borrowing profile pay about 6% more than cash buyers, especially in markets where most real estate transactions are successful, like here in Central Florida.

Low-income buyers pay the most as their mortgage transactions are considered riskier. On average these buyers pay up to 17% more if they have to compete against an all-cash offer. Per study co-author Rossen Valkanov, one third of home purchases are all-cash deals, making these differences extremely impactful.  Says Valkanov, “In policy terms, U.S. taxpayers subsidize $8 trillion of mortgages to promote homeownership. If policy makers made it easier for mortgage buyers to close escrow, it could be a more cost-effective route to promoting homeownership than subsidizing mortgages for first-time homebuyers.”

As more buyers with deep pockets enter the market paying cash to avoid high interest rates and to take advantage of the 10% “cash discount”, there are a number of implications for the real estate market. For one thing, the average age of first time home buyers is going up, meaning younger people can’t or are opting not to compete for homes to purchase. Secondly a market with more cash buyers may erode the value of real estate making it a less attractive savings option.

Valkanov goes on to say that one solution might be to educate sellers about the home buying process. Making sure that sellers are well-informed about the risks and rewards of cash versus a mortgaged offer could give mortgaged buyers a leg up in the competition. In markets where transactions have a high closing ratio, well-qualified loan applicants who can close quickly and can offer more than a cash buyer, may have a better shot of getting an offer accepted.

Source: https://www.floridarealtors.org/news-media/news-articles/2024/04/study-all-cash-buyers-pay-10-less