Take a cue from creative buyers who flip the traditional home financing process by generating enough cash to purchase their home — and then going to a lender for a mortgage. Here’s how they do it.
In competitive markets, cash is king. But coming up with the full purchase price of a home for sale in Baltimore, MD, or anywhere else isn’t easy to do. That’s why some buyers are turning to a unique solution to better compete when multiple offers are on the table: paying with cash now, then getting a mortgage later. Sound complicated? It is. Here’s how it works and what you should consider.
Here’s the strategy: Buyers liquidate their assets, amass enough cash to purchase the home outright, and then put in an offer as an all-cash buyer. For sellers, all-cash offers are more attractive than ones from buyers who need to finance the purchase. Cash deals mean fewer contingencies — mainly, the sale of the home is contingent upon the buyer getting the mortgage, and there’s no guarantee that will happen. For instance, the sale could fall through if something goes wrong during the underwriting process. The sale is also contingent upon a home inspection and appraisal if the buyer finances the purchase, and again, a number of issues could come up that may make your lender (and you) pause. Plus, all-cash deals tend to close more quickly and with fewer overall complications than a sale that depends on financing.
Buyers are using the cash first, mortgage later strategy to circumvent these contingencies. They still finance their home with a mortgage, but they delay that process until after the sale is final. “With prior proper planning, a buyer could conceivably offer a 24-hour closing,” says Dennis Crowley, principal of Vitruvius Capital Consultants. Before opening his own firm, Crowley served as a private banker and helped buyers use this strategy to purchase homes.
There are downsides, however, to this tactic. “You’re using marketable securities as collateral,” Crowley warns. “This means that the buyer and lender have agreed that the collateral is worth a certain amount, and that amount can change without notice.”
This buying strategy isn’t right for everyone. “Use the same wisdom you’d apply to any other purchase,” Crowley advises. “Make decisions with facts and not emotions and understand your options thoroughly.” Instead of liquidating your assets and putting a lot of pressure on yourself to purchase a home, consider a new timeline for your homeownership goal — perhaps set a goal to buy in five years instead. By then, you’ll have saved up more cash and may not need to liquidate existing investments. Second, the real estate market could change during that time — making these extreme measures unnecessary.
But if you do your research and determine cash first, mortgage later is something you want to do, you need to know how it actually works. After all, not many buyers are trying the strategy, simply because they don’t know it’s an option.
Some buyers take money out of their retirement savings. Others liquidate other investment accounts and various assets like other property or use cash savings. Buyers also turn to (generous) relatives to help gather the amount needed to cover the purchase price. Once you have enough cash, you purchase the home (woohoo!). Then you get a mortgage, using that loan amount to refill the accounts you depleted and pay back anyone who helped you gather the cash you needed to buy.
Of course, you need to be careful when dipping into retirement savings, like 401(k) and IRA accounts — it’s not always a wise move. You’ll be penalized for withdrawing funds before retirement age, so include those fees in the total cost of your mortgage if you want to fully pay back those accounts. And an important note: Crowley points out that trying to use your existing assets this way is not for people who want to borrow money they don’t have. The cash first, mortgage later option is intended for people who want to employ capital that they already have in the most efficient way, he says.
Remember to evaluate your situation (and your assets) to determine whether buying this way is even an option. “A buyer with roughly 150% of their proposed purchase price in marketable securities brings these options into play,” Crowley says. “Failing that, a buyer who has at least 200% of a required down payment might consider these.”
An understanding of marketable securities is a prerequisite for this buying strategy. Crowley recommends finding the right lender too. Most mass-market lenders won’t be able to support the level of complexity required to help with the process from start to finish. “Most major brokerage firms offer these options. Some smaller firms do as well,” Crowley says. “Even some independent financial planners have access to such channels.”
The bottom line? Liquidating your assets to purchase a home with cash and delaying financing by taking out a mortgage after you buy is an interesting strategy — but not one that’s right for everyone. It can help keep your offer competitive when you’re trying to purchase a home, but you shouldn’t just liquidate all your assets to become a cash buyer. Use money you already have as leverage, and don’t try this strategy simply because you don’t currently have enough cash to put money down on a home or to buy a home outright.