A recent settlement faced delay after the buyer’s finances fell through, highlighting the risks associated with making cash offers – ie, an offer on a property that doesn’t depend on the buyer successfully getting approval for a home loan.

The buyer, a middle aged man purchasing his first investment property, was relying on a home loan from his bank to pay for the property.

But days before settlement, his bank declined his application for a loan. On a typical Offer and Acceptance with a finance clause, this would cancel the contract – but this buyer had written up a cash offer. Unfortunately, this is not an uncommon practice, as many buyers believe cash offers increase the likelihood of having their offer accepted.

The buyer’s only choice was to delay settlement while he struggled to find an alternate way of paying, forcing him to incur costly penalty interest fines.

This situation would have been avoided if the buyer had made his Offer conditional upon finance being approved – highlighting the importance of using the right contract for the job.

Advice for buyers

If you’re writing up an Offer and Acceptance and you’re depending on finance approval from a bank to pay for the property, include a clause that makes the offer conditional upon finance being approved.

It’s well worth it – if your finance falls through, you’ll have lost nothing. Fail to include it, and you may have to pay expensive penalty interest to the seller as compensation.

Advice for agents

If a buyer wants to write up a cash offer without having the appropriate funds on hand, make sure they understand the implications of a cash offer. Ensure they realise that:

  1. Cash offers are ideal if they have the funds available – not if they still need a home loan approved, and
  2. If their finance falls through, they will ultimately have to pay penalty interest for every day settlement is delayed past the due settlement date until they can obtain the necessary funds.

A contract with the right special conditions for the job will greatly aid in a property transaction occurring on time, leading to a more enjoyable settlement experience for all involved.

Image by Dan Moyle via Flickr.

About the Author

Residential Settlements

We provide real estate settlement services throughout Western Australia. In addition, we complete Related Party Transfers, Family Transfers, Private Sales and other title related services.