Estimates show that roughly one-third of homes sold this year have been purchased with cash — but how exactly are so many buyers completing real estate transactions with all cash? One such strategy for securing a home with cash is to use delayed financing to complete the transaction.
This tactic is commonly used by real estate investors hoping to make their offers stand out and speed up the closing process. When executed correctly, delayed financing allows buyers to take advantage of the perks of cash offers and traditional financing. Keep reading to learn how to utilize delayed financing during your next deal.
What Is Delayed Financing?
Delayed financing refers to the strategy of buying a house with cash and then securing a mortgage after closing. The purpose of this method is to stand out during the home-buying process and quickly secure the property. Cash buyers often have more negotiating power in a traditional real estate transaction because of the benefits they can provide sellers.
By incorporating a cash-out refinance after closing, buyers can free up the funds they used to purchase the home. At that point, buyers would then be able to make regular long-term payments on the house, similar to if they opted for a traditional mortgage from the start.
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Pros Of Delayed Financing
There are numerous benefits to using delayed financing when purchasing a house or investment property. Here are a few pros to consider as you review this strategy:
Stand Out In Competitive Markets: Cash offers are attractive to sellers because they can offer a simple, fast closing timeline. This can give delayed financing buyers the edge they need to stand out in today’s fast-moving real estate markets.
Buy A Fixer Upper: Buying a house with cash is one way to secure a property that may not pass a traditional home inspection. If you want to buy a property to fix up while you live in it, delayed financing is one way to do so.
Take Advantage Of Tax Deductions: Delayed financing can be a great strategy for real estate investors hoping to grow their portfolios, while also taking advantage of the tax perks associated with a mortgage.
Secure A Lower Purchase Price: Cash buyers typically have more room to negotiate because these offers stand out so much. If you opt for delayed financing, chances are you will be able to secure a lower purchase price than if you went with a traditional mortgage from the beginning.
Cons Of Delayed Financing
Like with any financing strategy, there are certain cons to consider about delayed financing. Review the following points before you attempt this method:
Cash Required Up Front: The most notable drawback to delayed financing is you need a lot of cash up front to pull this off. For this reason, delayed financing is most common among investors who can move their assets around to purchase a property.
Can Only Use A Conventional Loan: Delayed financing is not compatible with certain government-backed loans such as USAD, FHA, and VA loans. Buyers must use a conventional or jumbo loan when refinancing the property.
Additional Documentation Required: You will need to provide additional information to your lender when compared to a traditional transaction. For example, you will be required to show documents proving you paid in cash, where the cash was from, and proof that you are not connected to the seller in any way.
Who Are All-Cash Buyers In Real Estate?
It’s safe to say cash-buyers are not made up of typical first-time homeowners and instead are individuals with access to a large amount of capital. However, with cash transactions becoming increasingly more common, you may be wondering, “who are all-cash buyers?” Several situations could lead someone to buy a house with cash and ultimately use delayed financing:
Real Estate Investors: Delayed financing and all-cash real estate transactions are strategies most commonly employed by investors. Real estate investors are consistently looking to secure properties under market value, and cash-offers are an excellent way to do so. With delayed financing, investors can then put funds into another investment and so on.
Rehabbers: Cash offers give buyers the chance to purchase properties in need of repairs and for a much lower price. This is a strategy often used by rehabbers so they can flip the property for a profit.
Downsizing Homeowners: Homeowners who have completed paying off their mortgages may have the funds available for a cash offer, especially if they are downsizing. Many homeowners can execute this strategy by tapping into their investment portfolios and making use of existing equity.
Who Is Eligible For Delayed Financing?
There are certain rules in place regulating how and when delayed financing can be used in real estate. To start, buyers will need to prove they paid for the property in cash and provide documentation on where it came from. The purpose of this is to prevent buyers from using money generated by illegal sources. If the money came from a gift, buyers would need to prove this with documentation. The gift letter would need to specify that no repayment is expected for the funds. Further, you can not return any proceeds of the transaction to the gift donor.
The final mortgage cannot exceed the total cost of purchase, closing, fees, and other costs associated with the transaction. Applicants must also prove that the home was bought in an “arm’s length” transaction — meaning they do not have a personal relationship of any kind with the seller. Relationships include family members, friends, coworkers, etc. This is aimed at preventing tax avoidance schemes. Finally, the property must also be free of tax liens.
How Does Delayed Financing Work?
Delayed financing works by allowing buyers to purchase a home with cash and refinance immediately after closing. By using a cash-out refinance, buyers essentially free up a portion of the cash they used to buy the house. This money can then be used for property repairs, other investments, or more. A cash-out refinance can be used by homeowners as well and is a well-known way to tap into real estate equity.
Appraisals & Delayed Financing
After completing the real estate transaction, buyers must apply for the refinance through a conventional mortgage lender. The lender will require an appraisal, just like with a traditional mortgage. If the value of the home is lower than the purchase price, buyers will be required to absorb the difference (or go with a different lender). You can mitigate this risk by having the house appraised yourself before closing or researching comparable properties and negotiating the sale price.
Cash buyers have a leg up in the real estate industry because of their ability to provide a smooth closing timeline. However, submitting a cash offer is simply not feasible for everyone. With strategies like delayed financing, investors and buyers alike can take advantage of the many perks associated with a cash offer while still keeping money on hand afterward. Consider the pros and cons before deciding if this strategy is right for you, you never know how it might help you expand your investment portfolio.
Were you already familiar with delayed financing? Share your thoughts in the comments below.
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