Buyer’s Stated Financing: Issues In Today’s Market
By David Hamerslough
March 8, 2022
“Buyer’s stated financing” refers to the specific financing terms that are included in a buyer’s offer to purchase. In today’s market, these terms often are on an all-cash basis or include a waiver of the financing contingency; the motivation is to write as clean an offer as possible to create a competitive edge. While there is nothing wrong with seeking financing other than the stated financing, deposit disputes and other breach of contract claims continue to arise when buyers seek those alternative forms of financing. The claims that I am seeing are a result of escrow not closing on the date specified in the contract or when the buyer mistakenly believes that they can justify their failure to close because the alternative financing does not meet their needs.
Both the PRDS purchase contract (Paragraphs 2(I) and 4) and the C.A.R. purchase agreement (Paragraph 3(A), 3(H)(1), 3(L)(1), and 6(C)) address the issue of stated and alternative financing. Both contracts state that the buyer may attempt to obtain alternative financing but that the inability to do so is not an excuse for the buyer to not complete the purchase of the property on the terms specified in the contract/purchase agreement.
In spite of the foregoing, I continue to handle deposit-dispute and/or breach-of-contract claims involving alternative financing issues. Many buyers believe that if the buyers’ desire to obtain alternative financing was known to the seller or if loan terms were included in the contract in spite of there being no loan contingency, the seller does not have the right to object to any delays or changes in the stated financing. In other cases, buyers who state that they are paying “all cash” but are really relying on proceeds from the sale of stocks or a gift of funds often mistakenly believe they are entitled to cancel a transaction if they elect not to sell the stock because of a decline in value or if the gift is withdrawn. Unfortunately, these beliefs are contrary to the language in both purchase contracts.
An understanding of some of the following issues and principles will hopefully assist buyers, sellers, and real estate licensees in avoiding claims regarding alternative financing:
- “All cash” means that the buyer has good funds available to close the escrow on the date agreed to by the parties; it does not justify a buyer’s failure to close because they elected not to sell their stock because of a decline in its value or because gift money has been withdrawn. If a buyer wants to condition their performance on selling stock at an acceptable price or wants to condition their performance on receipt of gift money, then a specially drafted, separate contingency to that effect should be included in the buyer’s offer. If the buyer is concerned that including that contingency will negatively impact their ability to be the “prevailing buyer,” then the agent should document the broker file with an email to the client that the buyer is assuming the risk of any problem if those funds are not be available.
- Verification of funds documentation should be reviewed by all parties and real estate licensees to evaluate whether the buyer has the necessary funds to close escrow on the date specified and whether there are any express or implied conditions with regard to its availability. The best practice is to attach the buyer’s verification documentation with the buyer’s offer.
- If the contract specifies that there is no loan contingency and/or states that the purchase is “all cash,” then the buyer’s contractual obligations are not changed by including loan terms in the financing portion of the contract and/or by documenting that the seller knows that the buyer is seeking alternative financing. It is a myth that including this alternative financing information in an “all cash” or no loan contingency contract creates a viable basis for the buyer to cancel the contract if the buyer is unable to secure that alternative financing.
- Any delay in funding or any change in the loan terms that buyer may be relying upon to obtain alternative financing does not justify buyer’s failure to close on the terms agreed to between the parties.
- The failure of the property to appraise (in the absence of an appraisal contingency) and the buyer’s resulting inability to obtain their alternative financing do not justify cancellation of the contract by the buyer. Those issues do not require the seller to renegotiate the purchase price; however, the seller may want to consider that option to keep the transaction continuing forward, depending upon the seller’s needs, motivations, market conditions, and other factors.
- The seller does not have to cooperate with the buyer’s attempt to obtain alternative financing; however, the PRDS contract (Paragraph 16(B)) and the C.A.R. purchase agreement (Paragraph 3(L)(3)) provide that a buyer has a right to access the property for purposes of, among other reasons, obtaining an appraisal for alternative financing on the terms set forth in these two contracts. The PRDS contract specifies that this must be done “within a reasonable time after acceptance.” The CAR agreement specifies that this must be done within “seventeen days” (the default timeframe).
- A seller does not have the right to cancel or refuse to close escrow in the event that the buyer is able to close with alternative financing.
- Any attempt to cancel the contract will require compliance on the part of all parties with all other contractual terms and conditions, including Notices To Perform, Demands To Close Escrow, or an appropriate tender under the PRDS contract. Under most circumstances and regardless of which contract form was used, the seller will also need to sign escrow instructions and any grant deed and perform any other contractual obligations. Under the C.A.R. purchase agreement, if the seller issues a Demand To Close Escrow (“DCE”), please remember that the seller must still cancel the contract if the buyer does not close. The DCE does not, in and of itself, constitute a cancellation. The best practice is for agents to recommend that their clients consult with a qualified California real estate attorney prior to cancelling. It is also recommended that agents provide their clients with the new PRDS Cancellation Advisory before the client makes any attempt to cancel.
Disputes regarding a buyer’s stated financing often result from a buyer’s lack of understanding of what contractual obligations they have agreed to on this subject and the failure of the seller to understand the full scope of the buyer’s options under the “stated financing” provision. The best practice is for agents to discuss the stated financing provision with their clients before the contract is presented to avoid these misunderstandings and misguided expectations.