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The All-Cash Offer Bait & Switch

In the competitive Los Angeles seller’s market, all-cash offers are being increasingly dangled then withdrwan

Compass broker Stephen Kaseno listed a home in Chatsworth last year and received a strong offer from a prospective buyer. The offer was for $2 million all-cash to purchase the property. Kaseno was hesitant as something just “didn’t feel right” to him. While looking into the buyer’s proof of funds document, he noticed that the margins weren’t aligned. A bank teller took a closer look at the document and advised Kaseno to trust his instinct. In the end, his suspicion paid off. The buyer had forged the document to make it appear as though his funds were available and ready when, in reality, they were not. The buyer was intending to secure a loan on the property once escrow opened.

In a desperate effort to compete in the Los Angeles seller’s market, buyers are enticing seller’s with all-cash offers to secure the deal, then pulling back upon closing. While this is not necessarily illegal, aside from the aforementioned proof of funds forgery, industry insiders say it could muddle the transaction if the loan gets delayed or denied. Some brokers say that due to certain legal loopholes, buyers have been promising all-cash offers despite having the intention of following through. Hilton & Hyland’s Zach Goldsmith describes this situation as cyclical. Recently, it has involved homes selling for $3 million or less, where supply continues to fall short of demand.

Sonya Coke, a broker at Compass, says that in this market “everyone is looking to one-up the other buyer [when there is] low inventory." She goes on to explain that when competing with 5, 10, or 15 other offers, buyers want to look as strong as possible. However, although the “all-cash” deal helps some lucky buyers obtain their dream home, it could also contribute to a “false bottom of the market” says Goldsmith. He adds that if this trend continues, people are not going to be able to keep up, which would result in the market falling a little bit.

Buyers who come in with all-cash offers tend to receive preferential treatment from sellers because the trades will often be quick, considering most do not include the loan or appraisal contingencies that are commonly used to protect the buyer. Brokers say that this in turn has caused some to get creative when bidding on a property. One of the popular loopholes resides in the proof of funds document. Some buyers may borrow money from a family member or friend to make it appear as though they have sufficient funds to support their all-cash offer. Then, once the deal enters escrow, they will seek to receive a hard-money loan on the property. Another potential loophole is securing a bridge loan. In this event, lenders will provide the necessary capital to obtain the home while the buyer looks for a mortgage on the property. In the end, the cost is greater for the buyer who will have to pay the lender back plus interest, according to Goldsmith.

So, what can the seller do if the buyer pulls this bait and switch by offering all-cash and then securing a loan? Some brokers say, not much. According to Julia Lee, an escrow officer at Hana Escrow, even if a buyer does not end up paying all-cash as had been originally offered, the obligation to purchase the property still remains as there is no loan contingency within the offer. Not following through with a cash offer is technically a breach of contract according to Kaseno. However, he states that “at the end of the day, the important thing is that the seller gets the escrow closed”. Ultimately, if the deal closes on time, there is not much the seller can do.

Mark Your Calanders 

May 1st - One Colorado Happy Hour - Participating Restaurants at 41 Hugus Alley @ 7:00pm 

May 1st - May 18th - Wild for the Planet - Los Angeles Zoo @ 10:00am - 4:00pm 

May 1st - 20th - Pasadena Showcase House of Design - Altadena

May 2nd - Altadena Farmers' Market - Loma Alta Park @ 4pm - 8pm

May 3rd - 2018 Monthly Wine Dinners Hoops Winery - The Royce at The Langham @ 6:00pm 

May 5th - Old Pasadena Historic Walking Tour - Old Town Pasadena @ 9:00am - 11:15am

May 5th - Children's Workshop Cactus Cupcakes - The Huntington Library, Art Collections, and Botanical Gardens @ 9:30am - 12:30pm 

May 5th - Flower Arranging with Peonies - The Huntington Library, Art Collections, and Botanical Gardens @ 10am - 12:00pm 

May 5th - 6th - Grand Butterfly Celebration - Kidspace Children's Museum Pasadena @ 2:00pm 

May 6th - Masters of Taste 2018 - Rose Bowl Stadium @ 3:00pm - 7:00pm

May 12th - 2018 Spring Ceramics Sale - Community Center of La Canada Flintridge @ 11:00am - 5:00pm

May 12th - BoldPas: An Art Takeover of Old Pasadena - Throughout Old Pasadena @ 12:00pm - 8:00pm

May 12th - 13th - Echo Park Craft Fair - Mack Sennett Studios, Los Feliz @ 10:00am

May 12th - 27th - Cinespia Cemetery Screenings - Hollywood Forever Cemetery @ 8:30pm

May 17th - Family Fun Films - Villa Park Community Branch Library @ 3:30pm-5:30pm

May 19th - Community Service Day - Descanso Gardens @ 8:00am

May 20th - Museums of the Arroyo Day - Multiple Locations @ 12:00pm - 5:00pm

May 26th - Mt. Wilson Trail Race - Mount Wilson @ 7:00am

May 26th - Eat Drink Vegan 2018 - Rose Bowl Stadium @ 2:00pm

Until May 31st - Rooftop Cinema Club Movie Viewing - Multiple Venues in Downtown LA 

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Contract Corner

Backup Offers

A backup offer comes into play when a seller has accepted an offer and additionally accepts a contract with a second potential buyer in the event that the initial accepted offer falls through. Backup offers protect the seller and provide a chance to the second-place buyer, should the sale fall out of escrow. In the event this happens, the second buyer becomes automatically under contract to purchase the property. In some cases a backup offer may exist without a formal Back-Up Offer contract. In that case, the seller and the buyer are not obligated to follow through unless a formal Back-Up Offer contract is created because it is an enforceable document and is often accompanied by a deposit. Therefore, the backup contract is immediately effective. 

At the end of last year, a new section was added to the Back-Up Offer for the seller to utilize in order to notify backup buyers if and when they have moved into first position resulting from the cancellation of contract with the previous buyer. The sellers notice is required to include a copy of the signed cancellation as stated in paragraph 1 of the Back-Up Offer. 

Navigating through the labyrinth of details and information of a transaction is exactly why you, savvy buyers and sellers, need an experienced team. The SARKISSIAN + PERERA GROUP is here to help guide you through this process and ensure that you achieve all of your real estate goals! 

© 2018 Berkshire Hathaway HomeServices California Properties (BHHSCP) is a member of the franchise system of BHH Affiliates LLC. Any unauthorized reproduction or use of this material is prohibited. This information is believed to be accurate as of May 1, 2018. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. BHH Affiliates LLC and BHHSCP do not guarantee accuracy of all data. Information has been obtained from various sources and will not be verified by broker or MLS. *Sources: TheRealDeal.com, Car.org, PasadenaNow.com, TimeOut.com

Rowland Partners & SARKISSIAN + PERERA GROUP

Jerry Rowland DRE: 02003589 Tia Rowland DRE: 00543041 Hazel Perera DRE: 01715728 Armen Sarkissian DRE: 01242603
HazelP@BHHSCal.com
626.676.9111 | 626.695.2808
www.spregroup.com

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