Why Cash is King
In today’s hot real estate market we continue to see a number of cash offers coming from local and foreign investors as well as owner occupied residential home buyers. When the market becomes competitive a seller can be more selective in the offers they accept, and a cash offer is hard to overlook. Often times a buyer needing to obtain mortgage financing will be passed over, even if they have offered a higher price.
Seller’s are more likely to accept a cash offer because the purchase & sale agreement (the purchase contract) will not be subject to a mortgage contingency provision. The mortgage contingency language in most standard form purchase & sale agreements will allow a buyer to cancel the transaction and obtain a refund of their deposit if they fail to obtain a commitment from a lender in a specific time period. Because a seller is generally not privy to an individual buyer’s financial standing or credit worthiness they must typically rely on the buyer’s pre-approval or pre-qualification letter from a Bank or Mortgage Lender. Most knowledgeable sellers know that these letters are not a commitment to lend and represent a limited inquiry into the buyer’s borrowing qualifications. This leaves the transaction with a level of uncertainty up to the moment the buyer obtains their commitment or rejection from a lender.
With a cash buyer a seller can eliminate most of the uncertainty surrounding the buyer’s financial strength. Because a cash offer will entail a waiver or deletion of the mortgage contingency, the buyer has less opportunity to back out or cancel the transaction. In addition to this benefit a transaction timeline can be greatly condensed with a cash buyer as there is no mortgage underwriting process, appraisal or other due diligence a lender must undertake to prepare for closing. As many in the market are aware, lenders are under immense regulatory pressure and the underwriting guidelines have become stringent for potential borrowers. This has translated into an increased strain on lender resources and in some cases an inability to process the volume of applications in a timely manner. The end result is that borrowers and sellers may be forced to deal with longer closing timelines and multiple time extensions for a transaction.
Not All Cash Offers are Cash!
If you are considering a cash offer on your property please be mindful of the fact that not all cash offers are in fact cash. Even though a buyer will waive a mortgage contingency and perhaps write “cash deal” or “cash offer” in the body of the offer, you should go one further and require that the seller provide proper proof of funds in the form of a recent bank statement showing that they have the funds on hand to perform at the time of the offer. Often times an experienced buyer will promise to pay cash in order to appeal to a seller and prevail in a bidding war, but they still intend to procure mortgage financing either through a conventional mortgage lender or a short term “hard money” lender.
If you are a cash buyer make sure that you are in a position to produce adequate proof of liquid funds. Even if you eventually intend to obtain mortgage financing, you would be wise to have the cash as a back up in case your loan falls through. Without a mortgage contingency a buyer may lose their deposit if they fail to perform at closing in accordance with the contract.
Do I need a lawyer for a cash purchase?
A cash purchase follows a similar procedure to a purchase with a mortgage, however there are some important aspects for a buyer to consider before entering into such a transaction.
Only an Attorney can conduct a Real Estate Closing
In a transaction with a mortgage, it is the lender’s settlement attorney who will conduct the closing. It is important for a buyer to remember that without a lender and a lender’s attorney, it is necessary for a buyer or seller to hire an attorney to complete the closing. Under Massachusetts Law, only an attorney can practice real estate. Specifically, only an attorney may;
Negotiate and draft a Purchase and Sale agreement
Examine and Issue an opinion as to the legal status of the title to the property
Prepare and execute a HUD settlement statement summarizing the financial transaction
- Issue Title Insurance on behalf of a Title Company
An Attorney Streamlines the Transaction
It is also important for a buyer to have an attorney who can advise them and prepare the documents necessary to complete a closing. Although some aspects may legally be completed by a non-lawyer, an attorney will provide many services that would be difficult for the buyer to perform on their own such as;
Prepare a HUD Settlement Statement,
Run Title Exams and Fix Title Problems
Receive and Distribute Funds at Closing
- draft and coordinate necessary extensions or modifications of the purchase agreement
- draft the necessary title documents and properly record the documents at closing
Hiring an attorney can help a purchaser avoid costly mistakes or delays in the transfer of title and disbursement of funds.
In addition, Owner’s title insurance is an important safeguard for anyone buying property, but is normally provided by the lender’s settlement attorney. It is important for a buyer to hire an attorney that is a title agent and can provide them with title insurance.
If you are considering buying a property for cash or selling to a cash buyer and you require legal counsel, please feel free to contact us to discuss your situation.