Who pays cash for a house?
There are a few people who pay cash for a house:
- people who have the cash and do not want a mortgage on their personal residence so they have no required monthly payments
- investors who do not want a mortgage on the investment property to increase their return on investment and protect themselves from downturns in the market
- investors who are going to renovate and resell the house in a short period of time. These are generally the guys with the we buy houses signs.
And yes it is all very legal. We just don’t se it done as the norm in residential real estate where the private citizen gets a bank loan to buy the house.
Paying for property with cash won’t send you to jail, but even if it doesn’t, a mortgage might be a smarter financial move. When deciding whether to pay cash for a home, the opportunity cost of putting your funds in a home should be examined first. Opportunity cost is basically what could you do with that same money if it wasn’t tied up in a house. For example if the mortgage rate is 4% and you can make 8% on the same money it would be smarter to have a mortgage and let the secondary investment pay the mortgage interest if not the whole payment. You can enjoy your house and your other investment vs. just a house.
These are the companies with the we buy houses signs on the side of the road. There are two types of investors that would pay cash for a house. A landlord who can create a good return on his investment and doesn’t want to be concerned about making a mortgage payment. This is generally done to increase his cash flow – the cash he receives in rent less the cash paid out for taxes, insurance and maintenance. If you are headed to retirement you may opt for this arrangement to carry you through your senior years.
The investor who flips houses is the other type of investor who would pay cash. This investor is looking to get in and get out and make a profit quickly. This investor is looking to use that same money multiple times per year and make a profit each time. This is called the velocity of money. The more times can you turn over the same money per year the higher the velocity of that money and the more profitable the business will be.
When is it illegal?
Some fraudsters perpetrate a mortgage scam known as a “cash-out.” This happens when someone buys a home and then quickly resells it at an artificial higher value. This typically involves a phony appraisal that claims renovations that never happened or those that do not appreciably affect the value of the home. Illegal flipping usually involves a mortgage as well as cash money. Say a buyer agrees to purchase a home for $50,000 and has an agreement with another party to sell the property immediately for $110,000. The buyer can purchase the home for $50,000 in cash and then the second party in the crime takes out a loan $110,000 — approved because of the artificial increase in the value of the home. The original buyer receives his $50,000 back and the two parties split the balance. Criminal using this then let the home go into foreclosure.