Selling real estate in Tamarac? Get a cash offer for your house! Learn how “financing contingencies” delay your home sale, waste your time, and protect the buyer at your expense.
Home sellers must assess all incoming offers. Financing makes the sale happen, so you need to understand how the prospective buyer plans to pay for your house. Common ways to finance are cash, mortgages, and seller-financing. If you’re selling my Tamarac house, you need to understand the advantages of a cash offer.
Cash Offer: The Easiest Way to Close!
“Cash offers” occur when the buyer pays directly from a cash account, as opposed to bank or government mortgage. Cash offers, all else being equally, are the best offer because there is minimal risk of the buyer backing out. In the mortgage scenario, there is a plethora of bureaucratic guidelines for approval, approval can take months, and lenders may refuse to under-write the mortgage at the last minute due to low appraisal, new job or an unexpected loss of buyer income, inability to document income or verify assets, failure to meet debt-to-income ratios, poor property condition, non-permitted work, title issues, buyer attempting to use property as a “second home” or “investment property”, low credit score, no credit history, troublesome credit history, prior foreclosures or short sales, failure to make downpayment, outstanding debt or liabilities, unpaid taxes, changing guidelines. The reasons a lender may deny a mortgage are endless. 18% of mortgage applicants were rejected in Florida in 2016.
Cash is different. Cash buyers (when legitimate) maintain funding in the bank that is available to purchase your house. The money is under the control of the buyer and thus there is no “red tape” to frustrate the home sale. Cash is the only solution for ugly houses, because no mortgage lender will lend on property that is in poor condition.
When reviewing the Purchase and Sale Agreement, there are “contingency clauses.” A contingency clause defines a condition or action that must be met for a real estate contract to become binding. To understand why cash is definitively the best offer one of the common contingency clauses: the financing contingency.
“The Financing Contingency”: The Buyer’s Way Out
A financing contingency (also known as a “mortgage contingency”) grants a prospective home buyer a fixed time period to secure the financing necessary to buy your houses. Financing contingencies typically have several provisions: the time period the buyer has to apply for a mortgage (typically 5-days), the time period the buyer has to secure financing (typically 45-days), and that the buyer use “good faith and diligent efforts to obtain a written loan commitment.” Universally, financing contingencies state the buyer may cancel the contract, not be in default, and be refunded his deposit if the buyer fails to secure financing.
The financing contingency, by design, protects the buyer. If the buyer backs out because he fails to secure financing, the buyer gets the earnest deposit back. No sweat off his back. Indeed, buyers with poor credit history have little incentive to take a “college try” at getting financing knowing there is no financial repercussion for them. Meanwhile, you wasted 45+ days paying taxes, insurance, maintenance, and now you’re back at the starting line. If the next buyer also is using mortgage financing, it could be rinse-and-repeat.
Cash buyers, on the other hand, do not use financing contingencies. Financing contingencies are irrelevant for cash buyers because they have the cash in the bank and they are person making the decision to spend the cash. Not only is the cash buyer more likely to close since there is no bureaucratic red-tape standing in the way, but they are incentivized to close because they won’t get their deposit for failure to secure financing.
Of course, not every cash buyer is created equally. It’s easy to make a cash offer: having actual cash in the bank to close is a different matter. Make sure to request a bank statement proof of funds before accepting any cash offer. It is common knowledge the unscrupouls and unethical “cash buyers” manipulate the inspection contingency to secure financing (i.e. they just cancel at the end of inspection – not because of anything learned during inspection – but because they could not actually get cash to close). Proof of funds is not a “letter of credit” from a lender. A “letter of credit” from a lender is a fancy way of saying that the proposed cash buyer is, just like in the mortgage scenario, at the mercy of some other person’s decisionmaking.
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