A recent settlement case has shown just how risky it can be to make a cash offer when cash is not available.
Our client, a buyer, signed a contract to buy a deceased estate with a deposit of around $25,000. He signed a cash offer – ie. the contract was not conditional upon finance being approved by a lender.
However, the buyer did require finance. He was using a broker from the eastern states to obtain finance, and the application dragged on for two months before he was finally told that the bank won’t lend on this particular type of loan.
Confused and stressed, the buyer stayed with the same broker. Given the buyer’s circumstance and the time already lost, the broker suggested a private lender who required a non-refundable upfront payment of about $5,000, and total setup fees of about $12,000. Things didn’t get any better for the buyer from here, and they were given incorrect information from the broker regarding the time frame of the loan and the preparation of the mortgage document.
Tiring of the delays, the sellers issued a default notice informing the buyer that he had 14 days to settle, or they would terminate the contract and keep his deposit.
Despite this, the buyer decided that the terms of the private lender’s loan posed too much of a risk to his family, and the contract was terminated.
Rather than abandon the deal completely, the sellers struck a deal for the buyer to move in and rent the property while he sorted out his financial position. Fortunately, they allowed the buyer’s $25,000 forfeited deposit to form the deposit in the new contract. This new contract is currently active and finance is overdue, threatening to push settlement date back even further.
This messy situation, in which the buyer lost $5,000 in setup fees for a loan they didn’t use, and the sellers experienced long delays in the settlement of their property, highlights the importance of using the right clauses for the job.
Advice for agents
If a buyer wants to write up a cash offer without having the appropriate funds available, ensure they understand the implications of a cash offer. Make sure they realise that:
- Cash offers are ideal if they have the funds on hand – not if they still need a home loan approval;
- If their finance falls through and the contract is terminated, they will lose their deposit. If the contract is not terminated but settlement is delayed, they will ultimately have to pay penalty interest for every day settlement is delayed past the due settlement date; and
- If the contract is not terminated but a default notice is issued, the legal fees for the preparation of the default notice may fall to them, because they are payable by the defaulting party.
A contract with the right special conditions for the job will greatly aid in creating a smooth property transaction, leading to a more enjoyable settlement experience for all involved.
Image by Great Beyond via Flickr.