Househunters making cash offers on properties despite borrowing money in tactic that risks hefty penalties

Househunters are making cash offers on properties despite needing to borrow most of the money to buy a place, in a growing tactic that risks hefty penalties. Agents claim the potentially risky strategy — sometimes used by first home buyers — came as house hunters tried to make their offers as attractive as those made by cashed-up investors. Agents claim sellers clearly favour cash offers, with many accepting these bids over other offers — even if it meant missing out on thousands, or even tens of thousands of dollars. The preference has led to a surge in cash offers, which have more than doubled since pre-COVID days, according to a survey of agents by The West Australian, and now account for 20 to 40 per cent of all offers. David Snell from One Agency said some buyers used cash offers appropriately, but some were embarking on a reckless guessing game. “Cash offers are supposedly cash, but it rarely is cash,” said Mr Snell. “Mostly it means a buyer has pre-approval for a bank loan, and then they take a punt that it will come through. “About 95 per cent of the time it works out and is all fine, but there are penalties if the finance falls through.” Contrary to popular belief, a regular cash offer can be made even when money is borrowed, with only unconditional cash offers requiring the buyer to have enough liquid assets to secure the property without a loan. Technically, a cash offer can involve a bank loan for up to 95 per cent of the property’s value. In this scenario, the bid is deemed a cash offer if the buyer does not invoke the clause that it is subject to getting finance or the sale of another home. Mr Snell said he was aware of one househunter who made a cash offer on a $1.1 million property, despite seeking to borrow 70 per cent of its value. He warned that failure to settle a cash offer by the due date can lead to penalties and the loss of the deposit. While cash offers involving bank finance have traditionally been made by buyers borrowing a relatively small proportion of the property’s total value, some first-home buyers borrowing at maximum capacity are getting in on the act too. Recent first-home buyer Kaitlyn Wade, 28, said some of her young friends were making cash offers as a way to compete with cashed-up investors. “There is so much frustration because it’s not an even playing field,” she said. “Entering the housing market ... in this environment is frustrating as you’re competing with investors who got their “start” in the market when houses were affordable, and buying an OK house in an OK area was actually achievable,” she said. “With rising house prices — particularly in comparison to average wages — this situation creates financial strain and stress as many first buyers are already at the absolute maximum of their borrowing capacity. “This is compounded by the disappointment of repeatedly losing out on potential homes.“ Ms Wade said she was relieved to recently buy in Scarborough after the rental market became too unpredictable, but had found the house-hunting journey a harrowing and stressful experience. She said cash offers made by her first-home buyer friends were either based on pre-approved bank mortgages, or loans from relatives. “Many friends have had to look at other creative options — such as making a cash offer and then borrowing the cash from family whilst waiting to see if the loan is approved,” she said. Experts are divided on the wisdom of making cash offers based on a pre-approved loan. Real estate agent Greg Cahill, from Lift Property Group in Applecross, said cash offers involving a loan could be an effective way to secure a property if used sensibly. “What it comes down to is, if you’ve got a good job, and you are borrowing 40 to 50 to 60 per cent of the value, and you’ve got a good credit rating, then finance is probably not going to be a problem.,” he said. “If a seller has two offers, and one is cash, the cash offer will be chosen.” Mr Cahill said he was aware of some cash offers which had fallen through when pre-approved finance fell over. In one case the seller let the matter go without any consequence for the buyer. In another case, the buyer had been forced to pay $15,000 in penalties. But mortgage broker Mark Wilkins of Mortgage Choice Wembley said his industry advised that any offer involving a loan should be made subject to finance. He said it was not wise to assume pre-approval would ultimately be successful as some lenders did not do a thorough assessment during the pre-approval stage, with some failing to even run a credit check on applicants. There was also the risk of unforeseen matters that could prevent a lender from going through with the loan, such as if the applicant was hit with a summons for more than $1000 after making the property offer but before final settlement. He said one of his clients had previously been forced to pay penalty rates for two years when finance fell through on a cash offer on a block of land in South Australia. Joe White, president of the Real Estate Institute of WA, said there were risks associated with both cash and financed offers. “In a market with high demand and fast turnover, cash offers can give buyers a significant edge,” he said. “While cash offers are generally more secure for sellers and have a lower fall-through rate compared to financed offers, there is no official data on this. “Issues including complications accessing funds or problems discovered during due diligence can lead to a cash offer falling through. “