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.