Some buyers pay cash for their homes. It doesn’t happen in our area as much as the Silicon Valley, but it still happens enough to talk about it. Some buyers pay cash and never intend to get a loan on the property. But other buyers pay cash just for negotiating purposes, and then they’ll take a loan out after close of escrow. They think they can get a better deal by paying cash, and for the most part they are right.
Most sellers will prefer a cash offer over a financed offer and many will give a cash buyer a bit of a discount. There is less uncertainty regarding the buyer’s loan, the appraisal (although a cash buyer CAN still retain an appraisal contingency, but few of them actually pay for an appraisal) and usually fewer delays at closing.
So if you have the cash, this strategy is sound as far as increasing your negotiating power at the time of hammering out a deal with the seller. However, there is a drawback to this approach that you may not have thought of. By taking a loan out AFTER close of escrow, the IRS will likely consider that loan a “home equity” loan, and therefore you could be limited to only writing off the interest on the first $100,000 of the balance. In addition, this loan will likely be considered a “recourse” loan, which means your lender may be able to pursue you personally if you aren’t able to make your payments. If you get a loan to purchase the property, it’s considered a “purchase-money” loan which may provide you some superior legal protection in the event you default. So be sure to consult with your legal and tax experts before employing this strategy!
I AM NOT A TAX OR LEGAL EXPERT AND THIS ARTICLE IS GENERAL IN NATURE.