A question that I am sometimes asked is ‘how much of a discount can I expect to get off a purchase price or off an asking price if I offer the agent cash?’. When I say offer the agent cash, I don’t mean offer the agent cash as in you’re giving them a bribe in a brown envelope, but I mean making a cash offer to buy the property.
It is a great question but there is no real answer to it. Let me give you an insight into my experience of using cash.
First of all, what is a cash buyer? Is it literally somebody who has got cash in the bank? Or is it somebody who is able to access funds quickly, should they wish to be able to buy?
The two terms are used very much interchangeably and one of the things that you might consider doing, particularly when you’re first starting out in property or when you are going off on a buying spree is to get in touch with a mortgage broker and ask if they will produce a decision in principle for you.
I spoke to my mortgage broker about this and I said “Is it better to have a decision in principle before you find a property or once you find a property. There is no real clear-cut answer on this, there is merits to both sides.
Having a decision in principle basically means that you can go to a bank, the bank will look at you as a person and they will say ‘yes we will lend to that person’. That means you can then go to an estate agent with your decision in principle to show them you’re lendable and to show them that you could do a deal potentially quickly because the bank are ready to process whatever mortgage application you then make, so that could be quite handy.
My mortgage broker’s view was that it can be easier when you’ve actually got the property because then the bank can look at you and they can look at the property. But if you are going out looking for property and you have not actually found the property then it can be useful to have one that just looks like you. So that can be good.
Some people will say that because they have got a dip, they’ve got a decision in principle, that they are essentially cash buyers as far as the agents are concerned because they are all ready to go. It may be that our understanding of being a cash buyer is somebody who has literally got the cash in the bank.
Does it have to be your cash? Not necessarily, I’ve used, for example, proof of funds because an estate agent will quite often ask for it, and that proof of funds can quite often be the decision of principle or it could be a bank statement showing that there is money in a bank account.
I’ve used proof of funds which haven’t actually been my money. Being completely transparent, the agent knew it wasn’t my money, but I explained the situation to the agent saying it was not my money but the backer’s money. My backer will back me and finance this deal when we agree the terms, and they have been happy with that. If it is your own money, even better, because then it is even more straight forward.
Crucial point though, if you actually have funds whether they are yours and you can prove to access them or whether they are not yours but you can still prove that you can access them, does it make any difference to the price that you pay? I would argue no, which may surprise you. There may be some people who take issue with that and they are going to reply to this post saying that they don’t agree, which is fine, but this is my experience.
It is all well and good to say that you can do a quick deal because you have got cash. The reason why it might be attractive to a seller is because if you’ve got cash you don’t have to apply for a mortgage, and it’s in applying for a mortgage when things can get slow.
But to me the most important thing in agreeing a discount isn’t necessarily the fact that I’ve got cash, the thing which is important is that in the first instance, I’ve been able to identify that the person who is selling the property is a motivated seller. Somebody who wants to sell and somebody who wants to sell quickly.
If they want to sell quickly, and they may have particular reasons why they want to sell the property quickly, then they’re more likely to be open to a lower offer. That to me is the important part of the equation. If you’ve got cash and you can show them ‘you want to sell quickly, I can buy quickly’ then that might make you a preferred buyer.
Would it affect the price? I suspect not, because the price is going to be much more affected by the fact that they want to sell quickly anyway, you just happened to be the sort of buyer that they want. I am not saying that in every instance that’s the case, I don’t think there are any hard and fast rules on this.
If you find somebody who is exceptionally motivated and they’ve got a choice between you, who’s got the cash, and another buyer, who hasn’t got the cash, then the fact that you’ve got the cash may add to their motivation to want to act with you and to sell to you, in which case you may be able to negotiate an even bigger discount off the price or off the value, whatever it is that you’re discounting against. So, all of that is good as well.
But I think the most important thing, in my experience, is the fact that the seller themselves are motivated, and that is the key thing. That is why I spend a lot of time looking for motivated sellers. When you find a motivated seller and you can do a deal with them. A win-win deal as we are not looking to rip anybody off or take advantage, we are trying to help them out of whatever problem it is they’ve found themselves in, but when you do that is when your deals get good.
Then you can start building your portfolio, and you’ll realise that you don’t need to do a dozen deals every year. Half a dozen deals with a motivated seller, or with half a dozen motivated sellers, is actually the best way to go.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
PS. By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same.
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