There is a persistent myth in the real estate sector that says sellers will always choose a cash deal over one requiring financing. It is not true. Some sellers will zero in on a cash transaction to the exclusion of all other options. But many others, particularly those in commercial real estate, are very open to offers that include financing.
Investors looking to purchase lucrative commercial real estate have an advantage over cash buyers when they can secure hard money loans. In fact, a 5-day hard money closure will beat a cash offer more often than not. Let’s dig into why that is.
It’s Not Just Speed They Are After
Speed is definitely important in commercial real estate. And in fact, Salt Lake City’s Actium Lending says the need for speed is one of the main factors that drive real estate investors to hard money. But there is more to it. Speed isn’t the only thing sellers are after. Sellers also want certainty.
In other words, sellers are not interested in accepting an offer, waiting around for a week or two, and then having the deal fall apart because the buyer couldn’t get it done. It happens all the time with traditional financing. But it also happens with cash deals.
Cash buyers must still do their due diligence. They still need to appraise the property, get title work taken care of, and so forth. Things can fall through at any point along the way.
On the other hand, an investor is likely to do his due diligence before he ever approaches a hard money lender. The only thing the lender needs to do before approving the loan is determine the value of the property. That can be done through what is known as the Broker’s Price Opinion (BPO) or by looking at sales of comparable properties. Either strategy is significantly faster than a standard appraisal.
How Long It Takes to Get to Closing
A seller appreciates the certainty of a hard money deal because he knows the buyer already has a loan commitment in place when the initial offer is made. That buyer already has an advantage over others looking to pay cash or secure traditional funding. That leads us to the question of speed. How long does it take each buyer to get to closing?
1. The Hard Money Buyer
On average, hard money lenders can be ready to close within 5-10 days of receiving a loan application. It rarely takes 10 days. Closing is usually within a week. But it could be faster.
Actium Lending has been known to close in as little as one business day when extreme circumstances dictate. They once got a call from a desperate investor whose bank backed out of the deal on a Friday morning. The deal was set to close the following Monday. Actium got it done despite not working over the weekend.
2. The Cash Buyer
On average, cash deals take from 10 to 14 days to complete. Cash buyers need time to do their due diligence. They may need time to get the cash together as well, especially if they are liquidating other assets for that purpose.
3. The Conventional Buyer
On average, buyers relying on conventional loans need 45-60 days to get to closing. That’s mostly because of the bank’s needs. Banks are bound to slow processes. There’s nothing a buyer can do about it.
The persistent myth suggesting cash offers always win out simply isn’t true. At least when it comes to commercial real estate transactions, a hard money deal wins the day more often than not.
