Over the last few years, we have seen a considerable increase in the number of companies looking to acquire properties for cash. When considering cash sale vs mortgage sale for your property, it is essential to consider all associated costs. This will give you a broader understanding of the relative price paid after taking everything into account. Aside from the traditional “normal chain sale”, there are many occasions where a cash buyer can lead to significant cost savings in other areas.
We will now look at a variety of scenarios where a cash sale will save you money once you take in the overall picture.
Normal chain sale – cash sale vs mortgage
As you can see from the information below, the average sale time for a traditional property transaction is around nine months. This means that you should expect to wait nine months from initial listing to settlement, receipt of cash, and exchange of contracts. There may be occasions where the average sale time is extended due to broken chains, delays, and an array of other potential issues. For example, on some occasions, despite the conditional agreement, your property sale may crash if just one person is removed from the chain.
While we will be looking at several different scenarios, the traditional sales method offers a basis for comparing and contrasting. In this scenario, a property that had undergone some refurbishment was priced at £100,000. This compared to an £80,000 cash sale without the refurbishment. Instead of making it their primary home, those looking to invest in property take a very pragmatic. There is no emotion, tears, and desperation; consequently, when offers are made, the funds would be in place, and execution would be reasonably quick.
Time is very much of the essence when it comes to cash buyers. Therefore they will take on board mortgage, legal and agency fees. Whether they undertake refurbishment further down the line is an option; they may have plans to use as a buy to let investment or resale.
Traditional sale
Advertised price: £100,000
Agreed sale: £95,000
Refurbishment costs: £8000
Mortgage and bills: £6300
Legal costs: £1200
Agency fees: £2500
Total expenses: £18,000
Net proceeds after costs: £77,000
Cash sale
Cash price: £80,000
Total expenses: £0
Net proceeds after costs: £80,000
Unless you consider the costs associated with a traditional property sale, it might appear that a cash purchase was not the best option for you. However, when this is put into context, cash sale vs mortgage funded transactions, the situation is very different.
Change in relationship status
The number of marriages that end in divorce stands at 42%, which is the lowest since the 1970s. The number of civil partners who go their separate ways is more challenging to monitor, and as such, there is no absolute number. However, it is likely to be at least the same as married people, although probably more.
It will depend upon the circumstances of the breakup, but many people will find it difficult to live together once the decision has been made. For the party moving out of the shared property, there will be several additional costs to consider, such as:-
- Rent
- Council tax
- Mortgage
If the mortgage is in joint names, both parties still have a legal obligation to contribute towards monthly repayments. This obligation will not consider any additional rental charges for the party moving out into another property. Where both parties have contributed to the mortgage, it is unlikely that one party could afford to buy out the other and take on the mortgage in its entirety.
Consequently, both parties will probably look for a quick sale to draw a line under their difficult situation and go their separate ways. An example of some of the additional costs incurred when selling properties, over and above the £18,000 in expenses listed earlier, include:-
Traditional sale (nine-month period)
Rent: 9 x £417 a month (nominal 5% rental yield on similar £100,000 property) = £3753
Council tax on new property: 9 x circa £100 a month = £900
Total additional costs: £4653
Cash sale (one month period)
Rent: 1 x £417 a month
Council tax: 1 x £100 a month
Total additional costs: £517
We have calculated the above figures assuming that the cash sale is settled after one month and the traditional sale after an average of nine months. There may well be other costs to consider, such as additional furniture, vehicles and the traditional sale may not take nine months. On the flip side, it is not uncommon for sales to collapse at the last minute, leaving the seller in a complicated situation. One drop in the transaction chain could lead to the property being relisted on the market. This highlights the benefits of a cash sale vs mortgage funded sale. Additional costs incurred could go on for more than 12 months!
Deceased estate
The latest figures suggest that around 65% of homes in the UK are owner-occupied, although there is also a healthy private rental market. Consequently, most deceased estates will include one or more properties. However, while every situation is different, on average, it takes around a year for an estate to be liquidated and assets distributed per the deceased’s instructions. Therefore, even the most straightforward estates will take at least six months to complete, and they are unlikely to include property.
Where there is more than one property, or perhaps the ownership or type of property is complicated, this 12-month timescale can be significantly extended. The trustees of an estate can sometimes be faced with a tricky situation. Do they look for a cash sale for the property, liquidating assets as soon as possible and distributing amongst benefactors, or do they go down the traditional sale route? When comparing the contrasting costs associated with a deceased estate, there are set fees no matter how properties are sold, which include:-
- Probate Registry (Court) fees
- Funeral expenses
- Professional valuation services
- Clearing and cleaning costs for a property
- Legal fees for selling a property
- Travel expenses
- Postage costs
- Settling Inheritance Tax with HMRC
- Legal fees
When it comes to additional costs incurred, if a property sale is prolonged and potentially complicated, they can soon add up. We are looking at:-
- Property management costs
- Mortgage costs
Many people seem to assume that mortgage costs immediately cease once a person has died. This is not the case. They will be taken out of savings, current accounts, and even the sale of other assets if no liquid funds are available. If we take the average 12 months estate distribution process, this is three months over and above the average nine-month period for a traditional property sale. Consequently, additional costs may include:-
Traditional property sale
Mortgage and bills: 3 x £700 = £2,100
Cash sale
No additional expenses
If the executors of an estate decided to go down the traditional sales route, hoping to maximise the sale price, the net proceeds could be decimated if the sale was delayed or fell through. The mortgage payments would continue to accumulate each month, and while a short-term let may be considered, there are expenses with this option. Also, even on a short-term let, a tenant might not be the ideal situation for potential buyers. Cash is very much King in this situation.
Bridging loan
It is fair to say that bridging loans can be a valuable means of acquiring a new property while your old home is being sold. The idea is simple, buy the new property using:-
- A bridging loan
- Deposit
The term of bridging loans tends to be relatively short, anything from just a few days/weeks to 12 months. However, there may well be occasions where the initial property has not yet been sold, and the 12 month period may need to be extended. This is where you would need to discuss either fixed-term or open-ended bridging loans, which are self-explanatory.
Using the original example above, let us assume that you are moving from a £100,000 home to one worth £80,000. The situation is as follows:-
Value property one: £100,000
Sale price: £95,000
Outstanding mortgage: £8,400
Value property two: £80,000
Bridging loan: £64,000
Deposit: £16,000
If we take a relatively average bridging loan interest rate of 0.69% per month, the cost over nine months is as follows:-
Bridging loan: £64,000
Lender facility fee: £1280
Gross bridging loan: £65,280
Interest paid: £4168
Redemption amount: £69,448
When going down the traditional property sales route, which takes on average nine months, the additional costs are as follows:-
Interest on bridging loan: £4168
If we subtract the interest on the bridging loan from the original £77,000 net proceeds, this equates to £72,832. If we then deduct the £8,400 outstanding mortgage, the proceeds received by the seller are reduced to £64,432. The buyer would need to find an additional £15,568
Alternatively, if we look at a cash sale vs mortgage funded sale, the situation is different with a cash sale. This would have delivered £80,000, with no bridging loan costs, less the outstanding mortgage of £8400. This equates to £71,600 compared to the £64,432 received after additional bridging loan costs.
Behind with mortgage payments
Unfortunately, those who fall behind with their mortgage payments often find themselves between a rock and a hard place. While the regulator affords some protections, this can be a dire situation that needs to be addressed as soon as possible. The longer the situation drags on, the more mortgage debt accumulated and the more complex the problem.
If you are struggling with your mortgage, you must inform your mortgage provider as soon as possible. The general guidelines for those struggling to maintain their repayments are as follows:-
- Only when mortgage arrears reach three months can your mortgage provider consider action
- Many mortgage providers will look beyond three months arrears before taking action
- The courts will give the homeowner time to sell the property to address whole/partial mortgage debt
If we assume that the property is put up for sale after three months of mortgage arrears, looking for a non-corporate cash buyer, it will take a minimum of one month to complete. If we take the £80,000 cash sale price, there would be a further deduction of:-
Mortgage and bills: 4 x £700 = £2800
This equates to proceeds of £77,200, although in reality, there would be additional mortgage charges due to the default. In addition, a forced seller looking for a cash buyer may need to reduce their asking price even further in challenging market conditions. This would add to their financial woes, and the net proceeds received.
If we compare this with a sale to www.cashhouse.co.uk before mortgage repayment difficulties, this could potentially save £2800 in additional charges. Not an insignificant amount of money!
Summary of calculations
The summary of the above calculations is as follows:-
Property valuation: £95,000
Traditional sale expenses: £18,000
Net proceeds: £77,000
Property valuation: £95,000
Property investor cash sale discount: £15,000 (15.8%)
Net proceeds: £80,000
Change in relationship status
Traditional sale expenses: £18,000
Additional expenses: £4653
Accumulated expenses: £22,653
Property investor cash sale discount: £15,000
Additional expenses: £517
Accumulated expenses: £15,517
Deceased estate
Traditional sale expenses: £18,000
Additional mortgage/bill payments: £2,100
Accumulated expenses: £20,100
Property investor cash sale discount: £15,000
Additional expenses: £0
Accumulated expenses: £15,000
Bridging loan
Traditional sale expenses: £18,000
Bridging loan interest: £4168
Accumulated expenses: £22,168
Property investor cash sale discount: £15,000
Additional expenses: £0
Accumulated expenses: £15,000
Mortgage arrears
Traditional cash sale discount: £15,000
Additional expenses: £2800
Accumulated expenses: £17,800
Property investor cash sale discount: £15,000
Additional expenses: £0
Accumulated expenses: £15,000
Are you overlooking inflation?
Many people seem to discount the potentially huge impact of inflation on funds delivered some months down the line. In terms of relative spending, a cash payment will be available from day one and therefore retain its spending power on receipt. As funds delivered, for example, nine months down the line will have fallen in relative value before receipt, there is a further relative financial loss to consider.
If we assume that inflation is running at 5% per annum, this equates to 3.75% for nine months. So if you agreed to sell your property for £95,000 and payment was not received until nine months down the line, it should have been worth £98,562 after taking into account inflation. As you are only receiving £95,000, there is a relative loss in spending power of £3562.
Conclusion – cash sale vs mortgage funded sale
Many people look at the traditional selling process, which takes on average nine months to complete, and compare this with a cash sale price without delving deeper. However, as we have shown above, if you consider the additional costs incurred when going down the traditional route, they can be significant. Here at www.cashhouse.co.uk, we offer incredibly competitive rates for cash purchases with settlement in just over one month.
We cover legal costs, agency fees, and we have a team of advisers on call ready to begin the process once an agreement has been reached. You must look at the broader picture instead of focusing on the headline numbers, which can, in many cases, be misleading.
