Re:How Cash Sent the Portland Home Market Spinning
by zaroth on Thursday May 14, 2015 @03:25AM
(#9543849)
When you make an offer, it comes with "earnest money" which is a deposit on the purchase. There are usually some "contingency clauses" which allow the buyer to back out and get their deposit back. Backing out for any other reason means the seller is entitled to keep the deposit. Typically 1 - 3% of the purchase price is included with the initial offer which increases to about 5% by the time you get to "Purchase & Sale". The money is kept in escrow until the deal closes, but it does prove the buyer at least has some cash on hand they are willing to park in a separate account while the deal goes through or falls apart, so the amount of the deposit and the number of contingencies is a signal to the seller of the buyer's seriousness and also gives some assurances that the buyer will make it to closing.
Typical contingency clauses include a home inspection revealing substantial unknown issues, an appraisal coming in below the sales price, and a mortgage contingency saying the buyer will make reasonable effort to obtain a mortgage but can back out (and get their deposit back) if they are unable to obtain a mortgage.
What the term "all cash offer" means is simply that there is no mortgage contingency in the offer. So if the buyer does need a mortgage to complete the purchase, but they cannot get one, then the seller is entitled to keep the deposit.
It is poor terminology because cash has nothing to do with it. The seller gets cash either way, and the buyer may be obtaining financing before closing either way. It simply has to do with the seller's legal right to keep the deposit under the specific case of a buyer failing to obtain financing.
Buying without a mortgage contingency isn't really a big deal if you actually know how much money you can afford to borrow, and give yourself enough time to actually close on some financing. Buying without an appraisal is a slightly bigger deal, because the LTV (loan-to-value) ratio of the mortgage is calculated based on the appraised or purchase price, whichever is lower. If it appraises low and you are at the maximum LTV already, you will need to increase the down payment to cover the difference in order to close.
Finally, the inspection contingency: Sellers don't want the buyer coming back and saying, "hey I inspected the property and it needs new paint in the 2nd bedrooms closet, we need to reduce the price by $1,000..." so the clause typically says something about "significant undisclosed structural, mechanical, electrical, blah blah". When you see buyers dropping this clause it definitely raises an eyebrow, because, what exactly are you buying if you don't get the chance to even properly have some-one look it over? On the other hand, the typical inspection is made to look "comprehensive" with big long checklists but most of the items are complete nonsense, and no real invasive inspection of the property is typically taking place, so I can see why some people just dispose with the ritual.
Typical contingency clauses include a home inspection revealing substantial unknown issues, an appraisal coming in below the sales price, and a mortgage contingency saying the buyer will make reasonable effort to obtain a mortgage but can back out (and get their deposit back) if they are unable to obtain a mortgage.
What the term "all cash offer" means is simply that there is no mortgage contingency in the offer. So if the buyer does need a mortgage to complete the purchase, but they cannot get one, then the seller is entitled to keep the deposit.
It is poor terminology because cash has nothing to do with it. The seller gets cash either way, and the buyer may be obtaining financing before closing either way. It simply has to do with the seller's legal right to keep the deposit under the specific case of a buyer failing to obtain financing.
Buying without a mortgage contingency isn't really a big deal if you actually know how much money you can afford to borrow, and give yourself enough time to actually close on some financing. Buying without an appraisal is a slightly bigger deal, because the LTV (loan-to-value) ratio of the mortgage is calculated based on the appraised or purchase price, whichever is lower. If it appraises low and you are at the maximum LTV already, you will need to increase the down payment to cover the difference in order to close.
Finally, the inspection contingency: Sellers don't want the buyer coming back and saying, "hey I inspected the property and it needs new paint in the 2nd bedrooms closet, we need to reduce the price by $1,000..." so the clause typically says something about "significant undisclosed structural, mechanical, electrical, blah blah". When you see buyers dropping this clause it definitely raises an eyebrow, because, what exactly are you buying if you don't get the chance to even properly have some-one look it over? On the other hand, the typical inspection is made to look "comprehensive" with big long checklists but most of the items are complete nonsense, and no real invasive inspection of the property is typically taking place, so I can see why some people just dispose with the ritual.