Should Your Next Home Be an “All-Cash” Deal?

By Matt Collins Should Your Next Home Be an “All-Cash” Deal? Custom Tag

As you’ve no doubt already heard, purchasing a home is generally the biggest investment an American family is ever going to make.

 
It’s so big, in fact, that we think nothing of taking out a 30-year mortgage on a home that’s worth five or six years of our take-home income. Thirty years—that’s almost forty percent of the average American’s life expectancy these days—to fully pay off your home.
 
So it strikes us as nothing less than surprising that Americans are increasingly purchasing their new homes in cash. They’re cutting out the interest and throwing thirty years of principal on the barrelhead all at once.
 
Studies show that just over the course of 2014, some 43% of all home purchases were made in cash—up over 10% from the same time last year. Leading the pack you’ll find Florida (one of the states hardest-hit by the real estate crash), where cities like Cape Coral reported an incredible 74% cash deals, and Sarasota clocked in at 65%. Las Vegas (with 52%) and Detroit (with 53%) also topped the list after years of rough going in their local markets.
 
This must be the hedge funds, though—our inner skeptic says—maybe Chinese buyers … but no. Most hedge funds have actually been pulling out of Real Estate over the last few years, on fears of rising interest rates.

So what gives?
 
Why are Americans suddenly willing and eager to plop down a quarter-million or a half-million and take the cash on the spot? And perhaps more importantly … should you be doing the same thing?
 
Today we’re going to take a quick look at why this is all happening; the key reasons driving the rise in cash buys on Real Estate … then we’re going to look at the advantages and disadvantages of potentially doing the same thing with your next home purchase … 

The “Why” 
 
Like most trends in Real Estate, we think the uptick in cash buying is really the result of several factors converging all at once. Some of these factors are demographic, some market-driven, and some perhaps even political …
 
First; the demographics. Baby Boomers are finally reaching retirement age, and as the sell out of their spacious old family homes, they’re going to be scaling down into townhomes, condos and small single family homes in nicer neighborhoods. They’re going to be doing so with a great big wad of cash in their pockets too, so what’s easier and more worry-free than just retiring into a home that’s already bought and paid for?
 
Additionally there are the market factors—namely years of distrust in the available alternatives. Real Estate isn’t always the best investment, but you can’t sleep in your stock portfolio. And after many investors spent years sitting in cash waiting for markets to finally calm down, they’re seeing Real Estate buys as a safe place and a good, hard asset to push their money into.
 
With tensions heating up in the Eurozone, too, there are plenty of Americans who might’ve wanted an offshore vacation home who are instead now buying American. Instead of the Costa del Sol or Dubai, they go for tropical havens like South Florida or domestic getaways like Las Vegas.
 
So are all these buyers making the right call? Should more people be buying with cash up-front or are they selling themselves short by not taking advantage of the best mortgage rates in ages?
 
The Advantages of Going All Cash 
 
In certain situations, offering to pay all cash will put you head and shoulders ahead of the competition.
 
If you’re an investor, for example, and you’re competing with other local investors for the best properties as soon as they come on the market. You almost have to be buying in cash at that point, because if you’re not, someone else will be … and they’ll snatch the deal up while you’re still on the phone with your banker.
 
Or, if you get into an indirect bidding war with another family over a house you like. They raise their bid, you offer all cash on the spot, and you’re quite likely to win the war before it’s even begun.
 
Most of the extra fees and the tedium that are associated with buying or selling a house—these things all come from the mortgage process. The origination fees, the appraisal fees and buyer assessment fees; going cash gets you around all those things without a second thought or a moment wasted. In some situations it’ll even get you a discount over list price from the seller.
 
On top of all that, you get the simple freedom from debt. No thirty-year obligation, no leverage. If you need to sell your home; even at a slight loss, it’s going to be a lot easier for you to stomach than someone who barely has a down payment’s worth of equity in their home. 
 
The Disadvantages of Going All Cash
You don’t buy a home all in cash for the same reason that Tiger Woods would never mow his own lawn. It’s called “opportunity cost.”
 
See, in his prime Tiger Woods’ yearly income worked out to about $171 per minute. So as long as he was doing his thing, making Buick commercials and whatnot, he made a fortune. So if Tiger spends an afternoon (let’s say 3 hours) mowing the lawn instead of doing his thing with the red shirt, it would cost him a little more than $30,000 against what he could have made by investing his time elsewhere.
 
Likewise when it comes to your home.
 
Right now, interest rates are as low as they’ve been in decades. So even if you have enough money to buy your home, it probably still makes sense to take out a mortgage on it. After all, if the mortgage only costs you about 5% … but your stock portfolio gains an average of 10% a year in the same time, then you’re still coming out ahead of the guy who decided to buy his home up front.
 
When we compared the 30-year mortgage at today’s rates with the seemingly clever idea of paying your mortgage off in half the time, we found that the guy with the 30-year mortgage and the healthy stock portfolio outperformed the other by over $170,000 during the full-term of his mortgage.
 
Aside from just making practical sense for most homeowners, there are the added legal benefits of having a mortgage. Namely the hefty tax deductions you can claim on your interest payments—often enough to help you get into a little more house for your money.
 
And there’s also the favorable Homestead laws which don’t necessarily apply to those who own their homes free and clear.
 
Author Bio:
 
Based in Miami, FL, Houses.com provides the world's largest online marketplace for homes and real estate. Showcasing over 4 million listings for sale, rent & vacation in over 70 countries, Houses.com is dedicated to helping buyers and sellers turn their House into a new Home.
By Matt Collins October 8, 2013 10:23 Custom Tag