Financial Due Diligence for Home Sellers (and Their Agents)
As a former corporate attorney and CPA, one of my strengths selling real estate is helping Sellers “vet” the Buyer’s finances.
Before they get to closing.
In a nutshell, it comes down to this: “Can the prospective Buyer financially perform?” (legalese for “can they afford the property in question?”).
In turn, that question splits into two parts: 1) will a bank lend them the money to buy it?; or 2) do they already have the money in hand (or more accurately, liquid assets)?
In turn (last one, I promise) . . . whether a bank will finance a particular deal breaks down into this two-parter: a) will the home appraise?; and b) is the Buyer sufficiently creditworthy? (based on their credit scores, income, balance sheet, employment history, etc. ” and verification of same).
You’re now ready for your real estate licensing exam (or at least the legal/financial part).
“Proof of Funds”
Oddly, cash deals can be more nerve-wracking than financed ones.
That’s because for every Buyer whose funds are parked at a blue chip bank or brokerage (are there any more??), there’s another who provides a Proof of Funds from a broker you’ve never heard of before.
(When you first have to get a country code to contact a bank representative, you know the risk is higher).
Even if the money is demonstrably on hand at the time of purchase (i.e., when the contract is executed), funny things can and do happen in the typical 6-8 week interval until closing (when title transfers and the Seller gets paid).
Commodity prices gyrate.
And Buyers can move funds around.
In today’s electronic world, where it’s easy to shift billions in a nanosecond . . . moving around a couple hundred thousand or even a few million is no big deal.
Which is a good transition to what I’ll call “Protecting the Seller ” Alternative Strategies,” which loom larger in financed deals.
Specifically, I employ these four:
One. If the Buyer’s lender is a question mark, I make the Buyer get vetted by a lender I know.
Do Buyers like having to do this?
Is it an intrusion on their existing lender relationship?
Maybe, at least temporarily.
However, if the Buyer is serious about buying my client’s property, they’ll go along.
And if they won’t . . . better to have flushed out such a Buyer earlier in the process than later.
Two. Putting teeth in the Financing Addendum.
At least in Minnesota, the standard Addendum has a clause with absolutely no teeth, and another with some bite. See, “You Mean, There’s No Deal AND They Get Their Earnest Money Back??”
Buyers almost always submit offers with the first option; the first term in my Seller’s Counter-Offer rejects that, and insists that the Buyer commit to a deadline for obtaining a Written Statement from their lender.
The Written Statement
That document accomplishes two things: first, it makes the Buyer’s earnest money non-refundable; and second ” and more importantly ” it signifies that the lender has finished underwriting the Buyer, and that the home has successfully appraised.
When both of those things are in hand . . . Sellers can feel much more comfortable that it’s really a done deal.
Which leaves strategies #3 and #4, namely:
If the Buyer wants a standard 6-8 week closing, make them put more earnest money at risk.
If they commit to the stronger Financing Addendum language (per above), and then don’t close, at least the jilted Seller holds on to that (lawyers call this “liquidated damages”).
“Put Up or Shut Up” (or, Less Time in Limbo)
So, what’s the final option for protecting a Seller from a Buyer with finances that may or may not be suspect?
Insist on a fast close. See, “Fast Close = Strong Buyer (Usually).”
If the Buyer agrees, and actually has the dough . . . the closing goes off without a hitch.
The Buyer washes out, and the Seller has only lost a little market time (cautionary note: sometimes the stigma of a busted deal can be more expensive than the lost selling time).