What is an “All Cash” Deal
There seems to be a great deal of confusion and misunderstanding as to what an “all cash” offer means. Sellers often feel misled when after signing a Contract, they learn that their “all cash” Purchaser is procuring financing. It is important, as a Seller, to understand what an “all cash” offer really is. Quite simply, an “all cash” offer, is an offer which is not subject to or contingent upon the Purchaser obtaining financing for the purchase proceeds. It does not mean that the Purchaser will not be procuring financing, nor does it mean that the transaction will necessarily move along any faster than a transaction subject to financing.
When an “all cash” offer is made, a Seller should ask the real estate agent to ascertain whether the Purchaser intends to obtain financing. If the Purchaser does intend to obtain financing, the Lender, whether conventional or private, will need to perform an appraisal, in addition to all other normal lender due diligence involved in approving a mortgage loan. This, of course, takes some time. When a Purchaser is obtaining mortgage financing, each side should expect the closing date will occur 40-50 days from the complete execution of the Contract of Sale, whether or not the transaction is subject to financing. A Purchaser should make sure that his attorney includes in the Contract a disclosure that the Purchaser may be procuring financing with “cooperation language” to insure that the Seller will permit an appraisal and sign documents which the lender will reasonably require to be signed by the Seller at closing, such as a Closing Disclosure Form (CD). Additionally, all parties should understand that in the event that the Purchaser is unable to close title because of lack of financing, the down payment will be forfeited.
A reasonable concern for all parties to consider is the possibility that the Lender’s appraisal comes in below the contract purchase price. If the appraisal is slightly below the Contract price, most lenders will permit the Purchaser to close on the loan, as long as the lender is comfortable with the Loan to Value Ratio (LTV). The LTV is the percentage of the purchase price which the Lender is financing. For example, a property being sold for $1,000,000.00 with an $800,000.00 loan has an 80 percent LTV. If the appraisal comes in significantly below the purchase price then the Lender may simply refuse to approve the loan. In this event, the Purchaser may have to request that a second appraisal be performed in hopes that the second appraisal is higher, or the Purchaser may have to either apply to another lender or use his own proceeds to close. In any of these events, the Purchaser is at risk, because whether or not he is able to procure financing, he is required to purchase the property or forfeit his down payment.
When a transaction is “subject to financing”, typically the Purchaser is afforded 30-45 days to receive a written Mortgage Commitment from a lender. In the event that a Commitment is issued in this period, the process is exactly the same as when an “all cash” Purchaser is obtaining financing. The only difference, of course, is that in the event that a “non-cash” buyer is unable to procure financing his down payment will be refunded.