Most people buying real estate to live in or for investment will use a mortgage to complete their purchase. However, some people buying a home or investment property will have the resources to make a cash offer based on the equity they have in their current home or other assets in their name.
A cash offer often looks very attractive to someone with a property for sale. They don’t have to worry about financing falling through or other complications that might derail the closing. Buyers can often leverage that complication-free closing to their advantage, possibly by standing out from a large crowd of potential buyers or having a seller accept their offer despite it being lower than the best offer.
Making a cash offer for real estate does come with certain risks that a buyer needs to know about if they want to protect themselves.
The temptation of a low-cost closing
One of the most common ways that real estate buyers increase their risk is by deviating from the standards in most real estate closings. They waive the inspection and potentially move forward without any buyer’s title insurance. Since there is no lender involved to demand otherwise, the buyer can make choices that potentially benefit them in the short term financially but may open them up to a lot of risk in the long term.
We regularly represent buyers who have waived inspections in Seller Disclosure litigation over defects buyers found only after closing. The Seller Disclosure law does not allow you as a buyer to undo your transaction but only allows you to sue for the extra costs you incurred due to issues hidden by sellers. We also handle quiet title actions to clear clouds on your title that you discover after closing, and which can affect your ability to sell or finance the property later.
In either case, an ounce of prevention is worth a pound of cure. Home Inspections and title searches with title insurance are those ounces of prevention, which we recommend every time.
The elevated threat of fraud
Making a cash purchase doesn’t mean that you will show up to the title company with a quarter of a million dollars in clean $100 bills. Instead, unless the property was exceptionally low-priced because of its location or condition, a cash purchase would still involve a wire transfer or certified funds.
Unfortunately, anyone aware of a large cash purchase might try to trick or manipulate the buyer or even their real estate agent. For example, someone might contact you with wiring instructions that send the funds to some unknown persons, not to the seller or their financial institution. Great care is needed to protect yourself from the possibility of fraud when making a cash purchase. We monitor and carefully scrutinize every wire transaction in which we send money by wire to others, but we can’t prevent a fraudster from having you as a buyer send your money elsewhere, and if we don’t receive your wire, we do not have your money for closing.
The possibility of overpaying
Often, sellers choose cash buyers because they have a property that may not pass inspection or they asked a price that an appraiser would never agree was appropriate. They know that securing a mortgage for the property might be a challenge, but they know a cash closing won’t have the same challenges. You can and should get an appraisal of the property and make your cash offer contingent on that appraisal if you have any questions about the value of the property.
Not only are you at risk of having a seller potentially take advantage of you on price, but you are also at risk of missing crucial factors during the walkthrough if you don’t hire a home inspector to confirm the condition of the property as mentioned above. You could end up paying far more than the property is worth and not having the resources you need to fix it appropriately.
Identifying and addressing issues that could complicate a real estate purchase will help you protect yourself in this massive upcoming transaction.