I was on the phone this week discussing deals with a real estate reporter and I asked him if he knew what an “all-cash deal” meant. His response was quick and efficient…"It's when the buyer closes with their own funds – all cash – and doesn’t use a loan to close.” Sounds like a reasonable answer; the only problem is that it is wrong. There are a lot of common misconceptions in real estate and I find the idea of an “all-cash deal” to be one of the biggest.
There are so many people in our industry who really don’t understand what an all-cash deal means. Surprisingly, despite numerous deals being all-cash, the majority of brokers who write the contracts don't even understand what it means.
In simplest terms, an “all-cash deal” means that the contract is not contingent on mortgage financing. While numerous deals are all-cash, 95 percent of them include the buyer closing with a loan. The “all-cash” designation simply means the buyer is taking the risk of getting the loan instead of the seller, since the buyer can't cancel the transaction because a loan is not approved by a lender.
All-cash offers are generally made to demonstrate buyer strength and credibility to a seller. A seller would usually prefer to work with a buyer who is confident enough in his/her ability to obtain financing that the deal isn't made conditional upon it. In an all-cash deal, the seller also knows he/she will not have to be concerned with an appraisal or a loan committee to approval.
In commercial real estate, financing is typically done through personal relationships. A buyer will make the offer, then call up their preferred lending source and let them know what they need. If they have a solid relationship and a proven track record of success, there are generally few questions asked. The lender is happy to provide the funds.
The additional risk upon the buyer making an all-cash offer is that the buyer is unable to get their earnest money back if for some reason he/she can't close the deal because a loan didn't come through. I have seen cases where buyers have had to sweat it out as market conditions changed during an escrow period and the deal no longer made sense to the lender. This usually means that the buyer will have to negotiate more seller-friendly terms (perhaps increasing the purchase price) and extend their closing period to locate a new source of funds.
Another common misperception is what an "As Is" transaction means. Guess I'll save that one for my next blog. So the next time you hear about an all-cash deal, don’t think a buyer is writing a personal check. Odds are the buyer is still closing with a loan.
-Lee Kiser