The bait ‘n’ switch: From an all-cash offer to not
Consider the following scenario: It’s a bidding war, and the seller of a property is choosing between multiple offers. It comes down to the two highest offers:
Offer A: $505,000, FINANCING of 20% down and 80% loan, $5,000 earnest money deposit, closing date 30 days, no home inspection contingency.
Offer B: $500,000, ALL CASH, $5,000 earnest money deposit, closing date 30 days, no home inspection contingency.
The seller chooses Offer B. To the seller, the fact that Offer B was all cash was the deciding factor, because of all of the uncertainties and possible delays that can come along with a buyer getting financing these days. In fact, the all cash aspect was so important that the seller was willing to take $5,000 less.
Then a few days go by, and the listing agent gets a call from the buyer’s agent asking to schedule an appraisal of the property, because the buyer is going to be financing the purchase with a loan, despite the fact that the offer had said all cash.
Can the buyer do that under the GCAAR contract?
Actually, no, not really.
In some of the deals we have heard about recently, the buyer’s explanation is that this is permitted under the GCAAR contract because the loan would be considered “Alternate Financing” under Paragraph 12.
That paragraph provides:
Paragraph 12, Alternate Financing “Purchaser may substitute alternative financing and/or an alternative lender for Specified Financing provided: (a) Purchaser is qualified for alternative financing; (b) there is no additional expense to Seller; (c) the Settlement Date is not delayed; and (d) if Purchaser fails to settle except due to any Default by Seller, then the provisions of the DEFAULT paragraph shall apply.”
So, under Paragraph 12, in order for the above explanation to fly, the loan must be substituted for “Specified Financing.” The problem is that “Specified Financing” means “the loan type(s) and amount(s), if any, specified in the PRICE AND FINANCING paragraph” (emphasis added). In an all cash offer, there are no loan types and amounts specified in that paragraph, so there is no Specified Financing, and a loan cannot be substituted as “alternate” financing.
The way the GCAAR Regional Sales contract is set up is further proof that cash is not considered financing under that contract. Paragraph 3, Price and Financing, has three blanks to fill in for “Financing” information in B:
- First Trust
- Second Trust
- Seller Held Trust
The cash information is put on a separate line called “Down Payment” in A.
The GCAAR Conventional Financing Addendum also does not consider cash to be “financing,” because it provides for a contingency wherein the buyer delivers to the seller a “firm written commitment(s) for financing from Lender” OR “Delivering evidence to Seller that Buyer has sufficient funds available to complete Settlement without obtaining financing” (emphasis added). In other words, there is lender financing, and then there is settling without lender financing, i.e., all cash.
All of this means that a buyer who wishes to get a loan to finance a purchase after making an all cash offer needs to get the seller to agree to amend the purchase and sale agreement to allow for that. A smart buyer would include in this proposed addendum that if the financing does not go through for some reason, then the buyer will close with cash.
Of course, the seller does not have to agree to such an amendment to the contract. What other rights does a seller have? In my above example, can the seller back out of the contract with Offer B, retain the earnest money deposit from Offer B, and enter into a contract with Offer A?
In the Default paragraph of the GCAAR Regional Contract (paragraph 23), the only buyer default that is specifically listed is the buyer’s failure to complete the settlement. This might lead a buyer to think that as long as he or she can meet the settlement date in the contract using the lender financing, that he or she is okay, but, in fact, that is not the case. The buyer is in default of a term of the agreement, which says that they are purchasing the property with cash.
The question is whether this default rises to such a level that it would allow the seller to rescind (i.e., back out of) the contract. Stay tuned for Part 2 where I look at this issue and what courts have said on the subject.