ALL CASH VS. LOAN: WHAT A CHANGE IN FINANCING MEANS.

March 8th, 2013 at 7:38 pm

As we have discussed in the past, we are seeing significant multiple offer activity in our markets which have made it difficult and frustrating for your buyers. After all, they often make offers on multiple properties, and lose out to other buyers on each occasion. As a result, you are being asked to help make their offers more attractive and, in some instances, are suggesting that they make an all cash offer even if they want to get a loan. From experience, we know that this can cause problems with the seller, who accepted your offer, in part, because they thought there was no loan. So, the question becomes what happens when you actually apply for the loan? What rights do the buyer and seller each have in this scenario?

First, you need to recall that the RPA specifically deals with this situation. In paragraph 3K, “Buyer Stated Financing,” the contract provides that, if the buyer seeks alternate financing, the seller does not have to cooperate and the buyer “shall” also pursue the financing identified in the contract. Notice that the contract does not say that the buyer cannot seek alternate financing. It just says that if she does, the seller will be uninvolved and the buyer should “also” pursue the financing promised. As a result, if my offer and contract are for all cash, while I can apply for a loan, that fact does not change my contractual obligations and I need to be prepared to pay all cash if the loan does not come through or is late. I cannot cancel the deal if my loan is denied. This fact is emphasized by the contract when it says that the “failure to secure alternate financing does not excuse Buyer from the obligation to purchase the Property…” (Emphasis added.)

With this in mind, how should you handle this situation if you represent the buyer. First, if suggesting this type of offer, make sure your buyer actually has the cash to close. If they don’t, their deposit would be at risk if the loan falls through. Next, because the seller does not have to cooperate with the loan, you need to make sure that the appraiser gets into the property as part of your investigations, before you remove your contingency. If you still have that contingency, you have every right to appraise the property even when there is no loan. Once that contingency is gone, however, the seller does not have to let an appraiser in because the contract says he doesn’t have to cooperate. So do your appraisal as early as possible and hold your investigation contingency until it is done. Of course, the safest thing to do is let the listing agent know your plan up front. I know that would be a problem in many instances, but if it would not, disclosing the plan up front avoids the risk of any problem. Of course, I leave that decision to your discretion.

So, if your buyer wants to get a loan after making an all cash offer, make sure they know that their obligations don’t change and they still need the cash as a backup. Also, make sure they get the appraiser in the property quickly. If you do those things, everyone is protected.

As always, contact your manager with any questions you may have and they will get the Legal Department involved if necessary. Thanks.

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