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Weekly Q&As

Can a buyer do a cash/loan switch-er-oo?

Release Date: 07/18/2017

This email address is being protected from spambots. You need JavaScript enabled to view it., Martin & Gifford, PLLC

QUESTION: In the latest version of the Offer to Purchase and Contract (form 2-T; copyright 7/2017), there’s a change in paragraph 5(a) I don’t understand.  Before the change, the buyer had to check whether they did or did not have to obtain a loan in order to purchase the property. Now the buyer has to check whether or not they “intend” to obtain a loan to purchase the property.  Why the change in wording?  Why does it matter whether the buyer says they don’t “have” to obtain a loan or they don’t “intend” to obtain a loan?  If they demonstrate they can pay cash, what business is it of the seller if the buyer ends up getting a loan?

ANSWER: First of all, we disagree that it doesn’t necessarily matter to the seller if a “cash” buyer ultimately gets a loan to pay for the property.  For example, assume a seller is evaluating two offers.  The first one is a “cash” offer and the second one involves financing.  The second offer is for more money, but the seller decides to accept the first offer because the first buyer demonstrates that they can pay cash for the property.  After the contract is signed, the buyer announces that they will be obtaining financing.  Although it’s true that the seller knows the buyer will be able to pay cash if there’s a problem with the loan, it’s also possible that had the seller known the first buyer would be seeking financing, they may have accepted the second offer for more money. 

The change will NOT prohibit a “cash” buyer from deciding to finance their purchase after contract formation, but it will prohibit a buyer who is acting in good faith from leading the seller to believe that they are going to pay cash when in fact they intend to get a loan. In our view, a buyer who misrepresents their intent to pay cash is arguably in breach of contract and subject to losing their earnest money deposit.  Of course, the buyer’s true intent may be difficult to prove, but it is hoped that the new wording will deter a conscientious buyer from using the loan representation in a way that is potentially misleading to the seller. 

 

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