All-cash offers: You better have the $$$ to back it up!on September 29, 2015 3:59 pm under Real Estate Investment Tips
An all-cash offer means the buyer is paying in full with his own cash, not money borrowed from any source.
We are surprised how many agreements of sale come to Rehab Financial Group from borrowers who make cash offers and sign contracts without mortgage contingencies, when they have no ability to pay cash for the property. Many buyers are wrongfully persuaded by both buyers’ and sellers’ agents to write the offer as cash, as it has a better chance of being accepted than an offer with a mortgage contingency. There seems to be an attitude of “sign it now, we will fix it later.”
The problem is, sometimes it cannot be fixed, and the buyer can lose the deal AND their deposit over it. That can be very costly.
A buyer needs to remember that an Agreement of Sale to purchase a property is a binding contract. Once signed, neither party has the right to change the contract without the agreement of the other party.
A buyer who thinks he can get the contract signed under false pretenses, may be in for an unpleasant surprise when he tries to make the necessary changes to the contract. Many sellers will accept a lower offer from a cash buyer even when they have a higher offer from a buyer with a mortgage contingency because the odds of the cash offer closing are higher than an offer with a contingency. The seller is not going to be pleased when it finds out that the lower offer is, in reality, contingent on financing. If they refuse to make this change, you’ll be at their mercy.
At RFG we see this happen on a weekly basis. Sometimes the seller allows the change, sometimes they don’t. When they don’t, and the buyer cannot close, the seller usually gets to keep the buyer’s deposit.
We also frequently see cases where the buyer thinks that if they do not tell the seller, no one will notice and the deal will go through. In the alternative, they believe that if they wait until they receive a commitment from a lender, and then they advise the seller of the change, that they seller will not care, and they will allow the loan to close with financing. This tactic rarely works.
We have seen deals fall apart at the last minute, when the buyer has paid a deposit, had appraisals and inspections done, and made significant investments in preparation for owning the property — only to lose all of that when the seller will not allow a change to the method of payment for the property.
You might think that this is illogical and does not make business sense, but that does not matter. The rules are the rules. In this age of institutional sellers and off shore loan services and asset managers, the rules are rigid and inflexible and finding someone to bend a rule is an impossibility.
Buyers are warned that putting “cash” down as the method of payment for the property without the cash to do so, may end in financial disaster. Instead, research the right lending option for you and be honest with the seller.