Will All-Cash Offers Still Be King?

By David Hamerslough

September 20th, 2016

Many buyers of high-end properties submit offers on an all-cash basis because eliminating a financing contingency makes the offer a stronger one in the eyes of a seller. A percentage of these high-end cash buyers submit these offers in the name of a corporate entity, such as a limited liability company (LLC). They may do so for privacy reasons, to protect assets, or as part of a tax strategy.

Starting August 28th, sellers who receive an all-cash offer for $2 million or more on a residence in the counties of Santa Clara, San Mateo, or San Francisco will need to consider whether such an offer is as appealing as it once might have been because the federal government has now expanded a program designed to detect and trace money laundering. This program requires title insurance companies to, among other things, report the identity of the individual signing the deed and the identity of anyone who owns 25% or more of the corporate entity that is purchasing a residential property in these counties for $2 million or more on an all-cash basis. Not only that, but the information that must be provided includes certain information from the actual owner's passport or driver's license.

This government program began in January of 2016 for high-end properties in targeted geographic areas such as New York City and Miami-Dade County in Florida. The program proved so successful that the government has expanded it to our area and other portions of the state of California. The program is scheduled to run from August 28, 2016 through February 23, 2017, but indications are that it is likely to be extended and expanded.

The reporting requirements do not include transactions where the funding is made entirely via wire transfer, where title insurance is not obtained, or for purchasers who own less than 25% of the property. The program also does not apply to homes outside the specifically targeted counties or to commercial properties. Given the success that the program has achieved, however, it is likely that some of these exceptions will be closed off in the future.

The impact, if any, that this new program will have on the sale of high-end properties in these three counties or in other counties that fall within the program's purview remains to be seen. The program requires that the title company report the required information to various government agencies. The information is not provided to the seller. The question is whether these requirements will suppress the sale and prices of high-end homes in these areas or cause a delay, increased costs, or the potential cancellation of a transaction subject to this new program.

Buyers and sellers need to be aware of this new program and determine whether an offer that is going to be written or has been presented will be subject to the program. It makes sense for a buyer to decide prior to writing an offer whether they have any objections to providing the necessary information in a timely manner, whether the title insurance company has experienced any delays in receiving and/or reporting the required information, whether there will be any additional costs charged by the title insurance company for collecting and providing the information, and whether the seller will entertain a contingency for this information to be collected, provided, and reported by the title insurance company. The buyer should also consider the impact that any of the foregoing may have on a close of escrow date.

A seller who receives an offer that meets the criteria of this new program needs to consider these same issues, whether they have been confronted by the buyer, and what delays, if any, they may cause on the scheduled close of escrow. A seller should also consider the potential for a cancellation by the buyer if the buyer is not aware of or is not willing to comply with the reporting requirements of the program or there is a very short close of escrow that provides insufficient time for the requirements of the program to be met.

Unlike banks and other financial institutions, mortgage companies, mortgage brokers, and other financial entities that are required to know their clients, real estate brokers and agents are currently not under any mandatory reporting requirements regarding the identity of their clients. There is a mandatory form (Form 8300) that must be filled out by any business that receives more than $10,000 in cash in the course of a transaction or two or more related transaction. Form 8300 is not, however, used to report suspicious activity related to money laundering. Real estate professionals should still be sensitive to the potential for money laundering and be aware that suspicious activity in that regard can be reported to law enforcement.

The government's new program identifies some of the criteria for that risk based upon geographic area and price. Other circumstances that may cause an assessment of this issue are a buyer who writes an all-cash offer through an LLC for $1,999,999.00, a buyer who brings actual cash to the closing, a transaction where the overwhelming majority of the funds are in cash but a small percentage is by check or wire transfer, the purchase of a property without a mortgage where it does not match the characteristics of the buyer, the purchase of a property that is inconsistent with a buyer's occupation or income, the immediate resale of a property without some adequate explanation, unusual sources of funding, purchases made by a buyer who has no real interest in the features or characteristics of the property, or a seller who is selling a property for significantly less than the purchase price or one who is seemingly disinterested in obtaining a better price.

The foregoing criteria may or may not be earmarks of money laundering. A buyer or seller may have a valid explanation for their conduct. What is important is that all parties to the transaction, including brokers and agents, are aware of the potential for money laundering and, if they have suspicions, to not ignore those suspicions but obtain qualified assistance to address them.

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