Last month, I wrote about the “Bait and Switch tactic” sometimes used by lenders to earn a customer’s business. If you would like to re-read that column, go to www.coloradodreamhouse.com and click “blog.”
Today, I would like to follow up last month’s blog with part two of the “Bait and Switch” tactic that is used this time by buyers.
Sometimes, a seller will receive an offer on their home and the buyer’s contract says that it’s a cash offer. Cash offers tend to be more appealing to sellers since they know that the deal won’t crash because of a lender, it usually won’t require an appraisal of their home, and it can close pretty quickly. Buyers know that this is appealing to sellers so they’ll make a lower-priced offer, hoping that the terms of the “cash deal” will offset the lower offer.
Let’s say that the seller accepts a cash deal over a competing offer from another buyer who was getting a loan. The home goes under contract, but then shortly after inspection, the seller gets a notice from the buyer that they are going to change the terms of the contract and get a loan after all. Can the buyers do that? The short answer is yes, they can. The Colorado real estate contract is heavily favored towards buyers, not sellers. There is a provision in there stating that the buyer has the right to change the terms of the financing as long it does not negatively affect the transaction. So does switching from cash to a loan negatively affects the transaction? Maybe or maybe not, but here is what needs to happen before the buyer can make the change:
1) If I were representing the seller, I would ask the buyer’s agent for the name and phone number of the lender whom the buyer intends to use. I would then have a long conversation with the lender about the buyer’s qualifying for the loan and the lender’s ability to still close the transaction on time. If they can’t close on time, then the financing is negatively impacting the transaction.
2) I would insist that if my seller allowed the change in financing that the contract still continue to NOT BE contingent on appraisal. Meaning, the lender will want an appraisal and they can have one, but if it doesn’t appraise for purchase price, the buyer still needs to go through with the transaction or lose their earnest money.
3) Given that all of the above proved to be satisfactory to the seller, the seller still has the right to say “no.” If the buyer wants to switch from a cash offer to a loan, the buyer’s agent would need to send over an amendment to the contract, asking the seller to agree. The seller can say no. At which time the buyer has a choice to stay in the deal as “cash” or find a way to terminate the contract.
One of the tell-tale signs that a buyer is going to pull the bait and switch on you is when you see a contract with a cash offer, but has a closing date of 30 days or more. In this case, the first thing I ask on behalf of my seller to the buyer’s agent is, “Why does the buyer need 30 days on a cash deal?” Sometimes the buyer’s agent has a good answer while sometimes they don’t. Remember the reason why a buyer would do a bait and switch is that they want the seller to fall for the lower price based on a cash deal, but they never really intended on paying cash. The seller’s agent can ask for a proof of funds that the buyer can pay cash. The buyers may even have the cash to pay in full, but that does not mean that they wouldn’t switch to a loan.
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