When Cash Isn’t Really Cash

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Written By Courtney Newton

 

The best type of funds for anything is always cash. We all get that warm and fuzzy feeling inside when something is cash money—even though you aren’t really getting cash money at the closing table you just have more confidence when someone can offer you cash for your property. Right? Well cash isnt’ always everything it is cracked up to be.

Many times I will receive an offer stating that the funds are all cash when they really aren’t. There are layers to where the cash is coming from, how the money will get transferred and the property requirements to release the funds. So let’s peel back the layers on what real cash versus fake cash looks like.

First to understand what is fake you must understand the standard by which cash is held to. For me and the clients I represent for me to call money cash it is quite simply this: You can walk into the bank tomorrow and wire the funds directly from your account to the account of the closing attorney and pay for the property at closing. There is nothing else to do. As the purchaser, you can show me a bank statement or letter from the bank stating that these funds are liquid and in your account. If the answer is yes but or not exactly you are not cash.

So what could the conditions of cash be. First many folks put the money in a money market account that requires a draw that can take up to 3 days to move the money from that account to your personal account. Also it could require a signature/permission from another party.

Another form of cash some purchasers have is through an equity line. An equity line is tied to a property’s equity. Typically a homeowner sets this up through their bank. Think of it like a credit card that can be used to pull cash on that is based on the equity position in the property. The challenge with this is the bank can choose to reduce the line or slow up the access to it. This happens quite frequently when markets are cooling or if a buyer decides to use monies from a long opened equity line. The bank can get nervous as to why they are accessing it and ask for the purchaser to reapply for the line or verify the information on the account. They could even require a new appraisal on the property to confirm the equity position is still there.  This can cause the funds to not be truly liquid or available it can also cause delays on the closing. More importantly it can cause a cash offer on the surface to not be cash but basically financing because it is pending bank approval to get funds.

The next form of cash but not really cash is hard money. Investors love to walk around as if they are cash and talk about how fast they can close. The real questions is where is the money coming from. Many have what is called hard money lenders and they work just like a bank does. There is usually an appraisal, financing contingency and underwriting. The investor will write the offer to close in 2-3 weeks and hope that the money shows up at the time of closing. What you don’t know as the seller is that this money is actually no different that a typical borrower in that they have to do full financing just like them. The biggest difference is that they are doing a repairs/scope of work as part of their loan. So the math could look like this;

Property is worth after repairs: $350,000

The repairs are estimated at $70,000

The buyer is purchasing the property at $180,000.

So they are going to need $250,000 to do the rehab.

The challenge is that the hard money lender tends to run off of a 60-70% of the after rehab value (ARV) so in this scenario at 65% the purchaser would need $25,000 of their own funds to do the deal. The problems arise when the hard money lender doesn’t’ think the property is worth $350,000 ARV or thinks the repairs are greater than $70,000 or what was budgeted. This is when you can run into some significant road blocks to be able to close the property. This is also when the seller is making plans based on this offer being cash and in fact it was a financed offer.

So how do you protect yourself? First and foremost you ask for proof of funds dated within 30 days of closing. This shows liquid money in their account. It can also show if they are using every dime they have or if they are a regular investor. The account type at the top will identify if this is liquid, retirement account or equity line because it is usually addressed as part of the account type. Looks for words like savings and banking. They could still be doing a hard money loan but this would at least give you some proof that they could buy if this or the equity line doesn’t work. I have some investors who use an equity line but have cash accounts to use as back up. That is fine because  they have the money just using a different account to fund the deal.

The next is ask for an amount of earnest money that would create a serious buyer. What I mean by that is ask for 1% certified funds or wired to be deposited once all inspections are completed. Then require it to be non refundable for any reason that the buyer may cancel. Basically you would be committed to providing clear title but if for any other reason the buyer doesn’t purchase you are protected.

Lastly, work with an agent who has a couple of investors like me who buy properties on the regular. I work with really only a handful of investors and they are truly cash investors. This allows me to walk into a house, make a truly cash as is offer for a house and know it is done. You tell us when you want to close and we agree on price and close. We are able to close in less than 5 days in most cases. I hear story after story of buyers who come in make offers and months later close or renegotiate the price the day before closing because their hard money lender didn’t think it was worth what they thought it was. This is heartbreaking when you are making plans for the money and moving. Working with an agent who has experienced investors can make the selling process easier and make getting to the closing table smoother.