What Is an All-Cash Deal?
An all-cash deal refers to any transaction where cash is exchanged for an asset. The buyer offers the seller cash and there is no use of financing to purchase the asset or any other means, such as an exchange of stock. An all-cash deal is usually completed through checks or wire transfers as opposed to an actual exchange of physical cash. An all-cash deal is primarily used in the purchase of real estate but can also occur in the purchase of a company.
- An all-cash deal is an exchange of an asset for cash without the use of any other monetary means, such as financing or exchange of stocks.
- A check or wire transfer is the most common way in which an all-cash deal occurs, as opposed to the exchange of physical cash.
- Real estate is the primary industry in which an all-cash deal takes place but it can also be used in the purchase of a company.
- An all-cash deal in a real estate purchase helps the seller through efficiency and certainty while it helps a buyer through price negotiation and no financing cost.
- In an acquisition, if the acquiring firm does not want the target firm to own stock or have voting rights, it can offer cash rather than an exchange of equity.
Understanding an All-Cash Deal
When an all-cash deal occurs in the purchase of a target firm by an acquiring company, there is usually a mix of funds that are used in making the purchase. This can involve cash as well as the combining of the stocks from both companies or a stock swap. It can also involve the use of debt financing.
When there is an exchange of stock there is also an exchange of ownership. The old owners receive stock and therefore have partial ownership of the new entity and therefore decision-making rights. If the acquiring firm wants to avoid this, the acquiring company would purchase a majority of the target company's common shares outstanding using only cash.
When the transfer of a real estate property without financing, such as a mortgage, occurs, the buyer would produce the appropriate funds at the time of closing via a check or wire transfer. Beforehand, they would have to show a proof of funds to facilitate the deal.
Advantages and Disadvantages of an All-Cash Deal
There are many advantages for both the buyer and the seller in an all-cash deal for a property. For a seller, the main advantages include the certainty of the deal going through. They do not have to wait for a buyer to be approved for a mortgage, which in general is a long process as it involves financing approval, an appraisal, and a possible outcome of the deal falling through by the lender. All of this uncertainty is removed for the seller, and as such, efficiency and speed are also benefits. Removing the entire financing process means that the deal can happen much faster. A standard mortgage approval process typically takes two months.
The benefit for a buyer in an all-cash purchase usually involves the ability to get a better deal on the price. Sellers are often open to negotiating a better price if they will receive cash upfront without any delays or possible financing issues. Furthermore, the buyer also does not have to be concerned with monthly mortgage payments or the extra cost of interest from borrowing.
In addition, if the housing market is extremely active, it may be difficult to obtain the property that a buyer is set on, as bidding wars may arise. Paying in cash often places a buyer in better footing in such a market, making it more likely that they will be able to acquire the property they desire. Also, paying for a home in all cash provides the buyer with 100% equity in their home and this places them in better financial standing should any financial issues arise in the future.
On the other side, however, for the buyer, there may be significant drawbacks to paying cash for real estate, including tax consequences resulting from no mortgage interest tax deductions or the loss of earning power on the money that is tied up in the purchase. However, sellers of real estate usually always prefer all-cash deals.