Paying all cash for a property is strategically one of the best ways to win a bidding war or get a lower price. When you pay all cash, you help put the seller's mind at ease because you won't have a financing contingency. This post will look at the closing costs for an all-cash offer.
The financing contingency and the inspection contingency are the two things that make sellers the most worried. With the financing contingency, the seller has to trust that your finances are in good enough shape to get a loan from the bank.
With the inspection contingency, who knows what an aggressive inspector might discover that could cause the buyer to walk away or aggressively ask for a lower price.
If you have the cash, make an all-cash offer to get the best terms. If you decide you need some liquidity, you can always take out a Home Equity Line Of Credit or do a cash-out refinance. This should be easy given you have 100% equity in the home versus most home buyers who initially put down 20%.
Closing Costs For An All-Cash Real Estate Offer
Below is an example of all the closing costs related to a cash purchase of a $1,750,000 home in San Francisco, California. Each state has slightly different fees, but the main costs are the same.
The costs are listed under the Debit column.
The $52,500 credit is the 3% earnest money deposit that is standard for most residential real estate transactions. Some buyers opt to put more down to make their offer look more attractive. However, 3% is usually good enough for most buyers.
Once the earnest deposit money is sent to the Title & Escrow company, the contract is usually considered Contingent or Pending in the Multiple Listing Service. The general amount of time offer by the buyer to close is 30 – 45 days. However, with an all-cash offer, the closing time can be 14 – 21 days.
A cash buyer still needs time to liquidate any assets, transfer funds, and take one or two last looks on the property before closing.
Below are the following closing costs in an all-cash offer.
County Taxes: $322.46. This is the pro-rated amount of taxes the buyer must pay that the seller no longer has to pay.
Owner's Title Insurance (optional): $3,347. Although owner's title insurance is optional, it is highly recommend all buyers get owner's title insurance to protect their purchase from any title defects, such as liens on the property or wrong names. The older the property, the more potential defects to the title. We'll go into detail on why owner's title insurance is important below.
Escrow Fee: $1,570. This fee is paid to the escrow company handling the transaction. The escrow company is usually picked by the seller because the seller initially pays a fee to analyze the title of the property before selling. For the buyer to insist on a different escrow company would be a waste of money since analyzing the initial title costs money (~$500).
More Closing Costs In An All-Cash Offer
Title Notary: $15. The notary takes your signatures and thumbprints and makes sure all the documents are official.
Title Record Processing Fee: $25. Another fee the Escrow company charges to make sure the documents are filed and official.
Record Of Grant Deed To San Francisco County Assessor: $36. This is the cost to get the grant deed, the official document that says you are the owner of the property according to your city.
Total Cost To Buyer: $5,315.46. The buyer must write a cashier's check for $5,315.56 plus the remaining purchase price balance after Credit of $1,697,500 = $1,702,815.46. The buyer closing cost of $5,315.56 equals 0.3% the cost of the home ($1,750,000), which is not bad.
If the buyer were to get a mortgage with a lender, s/he would have to pay a lender title fee, mortgage origination fee, and more. The total buyer cost would be closer to $8,500 instead of $5,315.56.
Therefore, by paying all cash, this buyer was able to save about $3,200 in closing costs.
Biggest Closing Cost: Title Insurance
By far, the largest closing cost is the Owner's Title Insurance of $3,347 out of $5,315.56 in total costs. As a result, you may be tempted to skip Owner's Title Insurance, which you can. After all, the seller should have also gotten Owner's Title Insurance to make the property free and clear of any easements or claims.
Unfortunately, Owner's Title Insurance is a necessary expense. An owner’s title insurance policy will protect the home buyer’s financial investment in the home. In general, owner’s title insurance protects home owners from someone, at some point, contesting their ownership in the property.
An example of a very common title issue is one that occurs during a refinance. Often times during a refinance, the new lender pays off the current lender’s loan with the proceeds from the refinance. When this happens, a Discharge of the paid off loan is to be recorded at the Registry of Deeds either by the new lender, the closing attorney or the borrower.
But what happens if a Discharge is never recorded? And what happens if there is another refinance a few years down the road and yet another Discharge is not recorded? A problem will arise when the home owner attempts to sell the property and a title search of the property is conducted.
Title Insurance Protects The Buyer
The title examination will reveal that there are several outstanding mortgage liens on the property and the property will not be able to be conveyed to a buyer until this title defect is cleared.
Owner’s title insurance will not only protect the seller from this kind of loss but the title insurance company will also defend the seller and pay for the cost in clearing the title.
A costlier title issue to clear would be one involving a discrepancy with land ownership. When my parents tried to sell their parent's farm, they had a difficult time because there was an easement in the entranceway claimed by a neighboring property. Lucky, the neighbor had no problems and the property was sold without any issue.
You just never know. Paying $3,347 for Owner's Title Insurance on a $1,750,000 property seems like good insurance given the insurance policy is for as long as you own the property. However, Owner's Title Insurance sure seems like a waste of money if the property keeps changing hands every several years.
Therefore, if you want value out of the Owner's Title Insurance, own your property forever!
Closing Costs For An All-Cash Offer Are Inevitable
The percentage of homebuyers paying all cash to buy a home is increasing. Saving money on closing costs is one of the main benefits of paying all cash for a home. However, there are also several downsides of paying all cash for a home too.
Always calculate the estimated closing costs before making an all-cash offer. Some homebuyers mistakenly believe that their cash offer is all they've got to come up with.
Closing costs are somewhat negotiable if it is a buyer's market. In other words, you may be able to get your seller to pitch in to cover some of the costs. But this negotiation might also backfire and cause you to lose the property. Therefore, you've got to decide how much you really want to negotiate.
If you really want the property, it's better to have a clean offer that bakes in closing costs in your transaction. That way, everybody feels better if the offer is accepted.
Real Estate Recommendations
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Fundrise allows investors to invest as little as $10 into commercial real estate funds across the country where cap rates can be higher and valuations can be much lower.
For example, I sold a SF rental home for 30X earnings and reinvested $550,000 of the proceeds in real estate crowdfunding that pays a ~10% cap rate versus a 2.5% cap rate.
CrowdStreet is my favorite real estate platform for accredited investors because they are focused on sponsors with commercial real estate projects in secondary cities.
18-hour cities like Memphis and Austin have lower valuations, higher cap rates, and potentially faster growth rates compared to the expensive coastal cities. Due to technology and the rise of remote work, there is a multi-decade demographic shift towards the heartland of America.
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About the Author
Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income.
He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month. Sam is the author of the new bestselling book, Buy This, Not That: How to Spend Your Way To Wealth And Freedom.