Coming up with cash for an offer on a house

[Synergy]

I'm looking for a very specific type of real estate (a small house on 2 acres or less in an area where most of the lots are between 5 and 10 acres. To make it every harder the area I'm looking is a 7 mile long valley). When said property does come up for sale I would like to be able to pounce on it quickly with a cash offer. The property will cost about 400,000 or so. I receive a pension and social security that I'm able to live on (my current house is paid off). I currently have 200,000 cash in a Money market account, so I'll need another 200,000 or so in cash.
My options for getting the other 200,000 are:
1-Sell off some mutual funds in a brokerage account.
2- Close out an IRA that currently only holds low interest paying CD's
3- Pre-qualify for a short term loan (was told it would cost me about 5000,00).
4- Anything I might be overlooking?


I guess I could afford to approach this anyway I want, but being frugal has become a habit in my life and I'd like to do this in the smartest way possible.
Thanks very much

 

[JoeWras]

I'm looking for a very specific type of real estate (a small house on 2 acres or less in an area where most of the lots are between 5 and 10 acres. To make it every harder the area I'm looking is a 7 mile long valley). When said property does come up for sale I would like to be able to pounce on it quickly with a cash offer. The property will cost about 400,000 or so. I receive a pension and social security that I'm able to live on (my current house is paid off). I currently have 200,000 cash in a Money market account, so I'll need another 200,000 or so in cash.
My options for getting the other 200,000 are:
1-Sell off some mutual funds in a brokerage account.
2- Close out an IRA that currently only holds low interest paying CD's
3- Pre-qualify for a short term loan (was told it would cost me about 5000,00).
4- Anything I might be overlooking?


I guess I could afford to approach this anyway I want, but being frugal has become a habit in my life and I'd like to do this in the smartest way possible.
Thanks very much

Don't overlook the tax implications. The mutual funds may incur a cap gain hit, but man-o-man, that IRA (if traditional) could be a tax hit you cannot accept since you will be boosted into the higher brackets since it is regular income.

 

[Souschef]

I have to raise some short term cash to help a food bank. I have a margin line of credit established at my broker. That way I do not have to sell anything and worry about CG..

 

[davebarnes]

Bridge loan.
Does not mess with your tax situation.
$5K = 2.5% of $200K
Buy new house, sell current house, pay off bridge loan.

 

[OldShooter]

It really depends on how long you need the money. If it's just a bridge until you sell your current house or if you intend to add a $200K mortgage to your new house I would not do anything as drastic as messing with retirement funds.

For a short term loan to a good customer a $5K origination fee is ridiculous. A more realistic number is zero or close to it. Are you sure you asked the question correctly and understood the answer? Are there other lenders you could approach? What about a HELOC on your current house?

 

[COcheesehead]

The equity in your current house is probably tax free. If you have a short term living space available to you, you could consider selling your current house first.

 

[ivinsfan]

Your concern is being the best buyer and so you want an all cash quick closing? You are overlooking you don't actually have the cash. However you could get pre-approval for a 250-300K mortgage(in case you need more then 200) and say you have a 200K down payment.
That's still a very strong offer.

Don't prequalify for a short term loan pre-qualify for a regular mortgage. You are also overlooking that even with cash you might not be the best offer. Someone can always outbid you.

It doesn't matter fig that the IRA has CD's in it, the tax man doesn't care...

 

[Sunset]

I'd mortgage the new place , since you are putting down 50% it should be easy to pre-qualified now, for free, in advance. Mortgage rates are low.

Later once you sell your current place, you can decide to pay off the mortgage, or perhaps the market will have dropped 50% and you can buy stocks to catch the rebound. Point is you will have freedom of choice and no risk or pressure from bridge loans.

 

[euro]

Your concern is being the best buyer and so you want an all cash quick closing? You are overlooking you don't actually have the cash. However you could get pre-approval for a 250-300K mortgage(in case you need more then 200) and say you have a 200K down payment.
That's still a very strong offer.
\

You are right, it is still strong, but in this business, only the strongest one counts. Coming in second means nothing. I agree with the OP's approach: a cash offer is inherently superior. In fact, cash often beats otherwise stronger offers that come with financing condition.
True, there is no guarantee OP will win the deal but cash IS King, so he will maximize his chances.

As far as the original question, I agree with previous suggestions: 1. open a HELOC if you already own a property with equity, or, open a Margin line of credit at your broker. Both provide instant access to cash, but have little or no upfront costs. Especially true for Margin lines - those are free to establish at most larger brokers, albeit the rates tend to be a couple of % higher than HELOCs. But that doesn't matter so much since OP will refinance (HINT: explore: "delayed financing exemption"

 

[JoeWras]

And please don't do what a buyer did to our family. A "cash" offer, in which later they tried to finance while using delay tactics.

We let it linger a bit, but after the 3rd excuse, we caught wind they were trying to finance. Our lawyer did his thing and scared them straight to the closing table.

 

[RunningBum]

Not clear if the OP will sell the current house or not.

If so, it's temporary, so I'd get a HELOC, or possibly go on margin in my taxable account (but only if I had plenty of room and no risk of a margin call). HELOC seems best, just pay it off when you close on your current house. Margin would be simpler.

If not, I'd sell from taxable. I'd probably sell now to lock in the money needed. If you don't like being that much in cash, but stocks in the IRA. But don't cash in the IRA, the tax hit would be too much.

 

[travelover]

When I bought my house last year, I was able to outbid other buyers by offering cash, even though one bid was higher, but with a mortgage. The seller was concerned that the highest bidder might not get it appraised at the offered price. So, a cash offer can indeed be advantageous.


One thing you could do is take the money out of your IRA, then replace it within 60 days using money from a loan. That way it would not be taxable.

 

[H2ODude]

Not sure if this would work for you but we're in middle of this. DS bought house and put his on market (moving ~100 miles). Needed a short term bridge that we agreed to do. Didn't want to pay CG taxes on what I needed from brokerage, so Fidelity rep suggested use take from tIRA and replace within 60 days, no tax consequence. Only needed for about 40 days so no problem, will close his place in a week. Only can do this once a year, but works well for us. He made his offer as cash and showed us as bridge mortgager, all on the first day on the market in which he was first looker. We all felt under priced and made it cash, gave them only 24 hours to decide. He got a great deal. Sold his first day on market, 4 offers all above asking. Kinda sad, agent asked the four if anyone wanted to increase their offer (can't tell them what the other offers were) and 2 or 3 did, including two with letters about how meaningful THIS house would be to their families. Now that's a hot market (Raleigh NC).

 

[H2ODude]

Just saw Tavelovers post, beat me to it! It was interesting that the winning bid on DS house agreed that they would still buy it if appraisal was up to $5k less than the bid price. I don't recall, but I guess it must have been cash since I don't think a mortgage co. would participate in a deal over appraisal. Maybe if strong down payment?

 

[Synergy]

Thanks everyone for some great suggestions. I am going to mull them over and I'm sure one of them will work out well.
This website is an excellent resource to pick the brains of a lot of financially Savvy individuals.
Thanks again

 

[friar1610]

In a somewhat similar situation, I got a HELOC on home A (the fully paid off one I was living in). I used the HELOC money, along with other cash, to buy home B (no mortgage) and moved into it. I continued to make monthly payments on home A (which was now empty) until it sold. At closing, the HELOC was paid off. I was out the payments I had to make on the HELOC but, to me, it was less hassle than taking out a conventional mortgage on home B.

If you go this route:
- Be absolutely sure to apply for and get the HELOC before you list home A for sale. A bank won't give you a loan on a house that's on the market.
- See if you can find a bank that has an interest-only HELOC with a balloon payment at the end. This will keep your monthly payments lower. Mine, with USAA Bank, had one with a balloon at 5 years. I only needed it for a matter of months (although if it hadn't sold for 5 years I would have had to go to my fallback plan which I didn't want to have to do.) This particular loan also offered no closing costs.

Good luck in whichever route you go!

 

[HI Bill]

Since you're able to live off pension and SS, I'd look at the tax implication of selling the taxable equities vs. selling the IRA assets. A one-time distribution this large might up your tax bracket, affect your ACA costs (if applicable), and impact taxes on SS and pension earnings. I agree with others, if you're buying this property then selling another, a bridge loan or HELOC makes more sense.

Alternatively, if you're going to sell your current house later, you could consider selling it now, then renting to free up the cash. Of course, how long you'll have to rent impacts your costs, so this may not be a viable option.

 

[ivinsfan]

Since you're able to live off pension and SS, I'd look at the tax implication of selling the taxable equities vs. selling the IRA assets. A one-time distribution this large might up your tax bracket, affect your ACA costs (if applicable), and impact taxes on SS and pension earnings. I agree with others, if you're buying this property then selling another, a bridge loan or HELOC makes more sense.

Alternatively, if you're going to sell your current house later, you could consider selling it now, then renting to free up the cash. Of course, how long you'll have to rent impacts your costs, so this may not be a viable option.

A couple people have suggested this but the OP says it could take a long time. What if they are in a hot market and after he sells it stays hot? I think they are better off staying in the housing market...