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?’.
By the way, just to be clear, 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 (DIP) 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 are merits to both sides.
Having a decision in principle basically means that you can go to a bank even before you find a property, the bank will look at you as a potential borrower and they will say ‘yes we will lend to you’ or ‘no we won’t lend to you’.
If they say “yes” 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 potentially do a deal quickly because the bank are ready to process whatever mortgage application you then make.
My mortgage broker’s view was that it can be easier to get a DIP when you’ve actually found a property because then the bank can look at you and they can look at the property.
This can also be helpful because a mortgage application can take weeks to process but you can get a DIP in advance in just a day or two, and that can give an estate agent or vendor comfort that you can perform.
But if you are going out looking for property and you have not actually found the property then it can be useful to have a DIP because an agent will know you are serious and ‘proceedable’.
Either way it can be helpful.
Why is this relevant? Well, some people will say that because they have got a DIP, 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.
But does it have to be your cash? Not necessarily. I’ve used, for example, a DIP as proof of funds because an estate agent will quite often ask for it, and that proof of funds can quite often be the DIP. 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 to the agent that it was my backer’s money. I told them that my backer will back me and finance the deal when we agree the terms, and estate agent was happy with that.
If it is your own money, though, that’s even better, because then it is even more straight forward.
Here’s a crucial point though. If you actually have funds whether they are yours, 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 the buying/selling process can get slow.
But to me the most important thing in agreeing a discounted price 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, and I can buy quickly’ then that might make you a preferred buyer.
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 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..
But I think the most important thing, in my experience, is the fact that the seller themselves are motivated. That is the key thing. That is why I spend a lot of time looking for motivated sellers so I can help them out of whatever problem it is they’ve found themselves in. In return, they’ll often discount the price.
Here’s to Successful Property investing
Peter
Peter Jones
(ex) 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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