Buying a House With Cold, Hard Cash
Not many of us will find ourselves in the position of buying a house with cash. But it’s not outside the realm of possibility. Whether you’ve saved up money in a bank account or actual, physical cash to buy a home, though, things can get complicated.
For instance, here’s one reader question we’re pulling from the archives:
I read your article on how to buy a house with cash. I will be in that situation in another year or two, moving out of state. But my question is, how do you buy a house using actual cash money and not checks or wire transfers? All the cash was obtained legally, but if I deposit it all at the same time into a financial institution, then write a check at closing, would that not sound all kinds of bells and whistles at the bank and IRS?
I understand that any transaction of ten thousand dollars or more and the bank is obligated to contact the IRS. I’ve already paid tax on this money and don’t want or need the IRS hounding me. So, what are your thoughts and ideas?
This is an interesting question, in particular, because this person is talking about buying a home with actual, physical cash. Most of the time when we talk about buying something with cash, we’re still talking about a digital transaction. Or, at least, we’re talking about handing over a regular check or cashier’s check.
Carrying a ton of cash around is risky and inconvenient. And the logistics of paying for a large purchase with physical cash can also be touchy, as the reader notes above.
First, we’ll talk about the more typical situation of paying for a home–or another large purchase–with a digital or check transfer of cash. Then we’ll talk about some of the caveats involved if you literally bring a suitcase of $100 bills to closing.
Buying a Home with a Cash Transfer
We’ve talked elsewhere on this blog about the process of saving up for a home and buying one in cash. But now let’s look at the actual process of purchasing a home without a mortgage.
More Decisions Fall to You
When you buy a home with a lender, that lender gets a lot of say in what the home purchasing process looks like. For instance, they’ll typically order you to get an inspection on the home. This is often a great idea and can turn up potentially serious problems you wouldn’t have seen otherwise.
When you’re buying in cash, though, you don’t have to follow these rules. You still have to go through the standard process of negotiating the buying price, signing agreements to buy the home, and setting a closing date where you’ll sign a bunch of paperwork. But you won’t have to sign as much paperwork at closing. And no lender will dictate to you the other steps you’ll need to take.
This is where it can help to have a very good realtor on your side, though. They’ll be able to guide you through the process and ensure you don’t miss any potentially large details, like major issues with the home that need to be fixed. Still, though, you get to decide which of these steps you’ll follow and which you will not follow.
Personal Checks are Fine
You can use a personal check if you decide to pay cash for your home out of your checking account. Just be sure there’s enough money in the account to pay for all the costs.
In case you do write a personal check, don’t just bring one check to closing. You’ll likely need to put in an earnest deposit during the negotiation process. And then you may need to write checks for things like inspections and title searches. And then at closing, you’ll write a check for the purchase price and one for the closing costs.
If you do write a check, you might call your bank to give them a heads up that you will be withdrawing a big chunk of change from your checking account. And if you want a check with a little bit more insurance involved, consider using a cashier’s check, instead.
What About Using Actual Cash?
The reader quoted above points out some of the potential pitfalls of paying for a home in actual cash. Because large cash withdrawals or deposits can signal bad things to the government, they do require some reporting around large cash transactions.
The Financial Crimes Enforcement Network (FinCEN) has some regulatory requirements around large cash transactions. This applies, according to US Bank, to cash deposits, coin or currency orders, cash payments, and check cashing.
This reporting is done through Currency Transaction Reports (CTRs). These go to FinCEN any time you request a currency-based transaction of more than $10,000. Even if you make multiple transactions in one business day that add up to this amount, the report is required. In fact, US Bank notes that intentionally breaking up your transactions into smaller ones just to avoid reporting this information is illegal.
This report includes a variety of personal information, including your current tax identification number, such as your Social Security number. You’ll also need to provide a valid form of government-issued identification, such as a driver’s license, state ID, passport, or military ID.
Since both withdrawals and payments of $10,000+ of cash require FinCEN reporting, there’s not a good chance that the above-listed reader will be able to stay completely off the government’s radar.
So the bottom line here is that trying to come to closing with a suitcase full of cash–a la an old mafia movie–won’t do you much good, anyway. And it could, in fact, do you a lot of harm.
Problems with Paying for a Home with Cold, Hard Cash
The most obvious problem with this approach is just having this much cash sitting around in the first place. What happens if your house burns down or you get into a car accident on the way to closing? Yikes! It’s really easy to lose cash, and there’s not much you can do about it. If you’re dealing with a cashier’s check or a money order, you at least have some insurance that all this money won’t just disappear.
Another somewhat obvious problem is just counting the cash. You’d have to go through it all at least a couple of times to ensure that everything was in order. That could make a long closing process take much longer still.
Back when we first published this article, we talked with a professional about this question. Barbara Friedberg, a real estate professional and investment expert and the writer of Barbara Friedberg Personal Finance, says,
Yikes, a suitcase full of cash, I assume you mean “real money.” The reader needs to deposit the cash in a bank. Then she needs to check with the bank to find out how long they need to hold it before she can withdraw it. At the real estate closing she needs to bring a cashiers check or arrange with the bank for a wire transfer. I suppose bringing cash to a closing is possible, but… I checked with my real estate experts, and my own experience suggests that this is infrequent at best and at worst, quite dangerous.
There is the problem of malfeasance on several fronts without using the security of a cashier’s check or wire transfer. The realtors and closing agents are given free reign with tens of thousands of dollars. Your proof of ever paying the cash is limited to a flimsy receipt.
My advice, deposit the cash, and schedule the closing for a date when the reader is certain she can have full access to the cash.
The Bottom Line
So what’s the bottom line on bringing actual cash to a closing when you’re buying a house? Generally, it’s not a great idea. The reader’s questions above about getting the IRS potentially involved may be somewhat overblown. Large cash deposits aren’t that unusual for banks, and as long as you can document how you got the money, you should be fine.
The larger problem is with trying to pay for a home in actual cash. There are lots of potential pitfalls with this approach. And it doesn’t actually save you from having to deal with financial and governmental institutions, anyway. So, is cash really king? Yes, as long as it’s in a bank.