Jun 19, 2021

Are Cash Buyers Better? 4 tips to decide

Why would a home seller prefer a cash buyer? After all, the seller gets their funds from the title company the same way regardless of how the buyer pays.

Sellers often do not care where the purchase money is coming from, as long as the buyer can get their loan approved in a reasonable amount of time – and the seller gets their money. However, the mortgage loan process can be time-consuming and comes with no guarantees.

Let’s look at four reasons why a cash homebuyer may be more appealing than a buyer getting financing:

1. Skip the appraisal.
Mortgage lenders require an appraisal of the property to determine if they will lend funds for the purchase of the property. Let’s face it. Home appraisals are unpredictable. In our changing market of rising prices, the uncertainty of an appraisal adds risk. There is less chance of the deal falling through if a home sale does not require an appraisal.

2. Disregard buyer loan approval.
When a homebuyer is financing a purchase, the sale is typically contingent on the buyer obtaining loan approval within a specified amount of time. If the buyer can’t get their financing, they can’t buy the property. They may get out of the contract (within a specified time) if there is a financing contingency. Despite promises and pre-approval letters, a seller cannot be certain that a buyer will qualify for their loan.

3. No property loan approval.
In addition to a buyer qualifying for their loan, the property must also meet lender’s requirements for the loan. Those requirements involve the appraisal, insurability of the property and any lender-required repairs. Depending on the terms of the contract, the buyer may be able to get out of the contract if the property does not meet the lender’s terms for their loan.

4. Quicker closing. 
The loan approval process often takes weeks. Cash sales can take just a few days to close. The vetting of both the buyer and the property condition is effectively skipped when no lender is involved. However, just how quickly a sale can close also depends on how ‘clean’ the title may be. The same title search is conducted on both cash and financed transactions to uncover all liens and encumbrances on a property.

Money is Money

A cash buyer will not actually be paying in actual cold, hard cash. In Texas, real estate must be purchased with “good funds” such as a wire transfer or cashier’s check. The title company has the discretion to determine which good funds it will accept.

All title companies are legally required to report any cash or personal checks used to close a transaction that total more than $10,000 to the IRS. This is designed to discourage money-laundering, tax evasion, drug trafficking, and other illegal activities.

Regardless of the source of the funds, the money passes hands through the title company.
Historically, most cash buyers are investors, second homebuyers, or older buyers who are using the proceeds from the sale of another property. Traditionally, the percentage of cash homebuyers in the U.S. hovers just above 20 percent.

For many sellers, a cash offer does not overly impress. Just because a buyer is paying cash does automatically earn them the right to bargain or jump to the head of the buyer line in this hot market. While there are advantages to picking a cash offer, most sellers will agree to an offer with terms that suit them best.
[where: 75230]

May 31, 2021

The Texas Real Estate Contract Kick Out Provision

A Kick Out provision goes by many names in the world of Texas real estate contracts. It’s also known as a Knock Out clause, a Sale of Other Property contingency or simply a contingent contract.

A Kick Out provision is actually an addendum to the contract that takes into consideration the sale of another property by the buyer. It makes the contract conditional on the buyer selling a property they currently own.

“When a property goes under contract with this contingency, the property is shown in the MLS system as ‘Active Kick Out.’ This classification is different than the “Under Contract,” “Pending,” or “Active Option” categories. The property is technically not off the market.

According to the MetroTex Association of Realtors, the description of Active Kick Out, or KO, status is:

“Property has an offer contingent upon the sale of another property by buyer. Still available for showings and backup offers. Will expire on the original expiration date the agent entered.”

While this provides the buyer a benefit, in return it affords the seller a benefit as well. This Kick Out addendum essentially allows the seller to “kick out” the buyer if the seller receives an offer from another buyer. If the seller accepts an offer from another buyer, they must give notice to the current buyer and allow the current buyer the option to either remove the contingency or terminate the contract. If the contract terminates, the backup contract moves into the primary position.

As always, there are a couple of important items to note and to make this provision work.

 This option is not available to the seller without this addendum.

Our Texas real estate contracts generally don’t give a seller the option to get out. This addendum does. It gives the seller the opportunity to require that the buyer waive the contingency with a day or two notice AND it lets the seller require the buyer to put up additional earnest money if they waive the contingency. Many real estate advisors suggest the additional earnest money amount should be a “meaningful” enough amount to reflect the buyer’s sincerity.

This contingency on the sale of other property is actually a contingency on the buyer’s receipt of proceeds from the sale of other property.

The buyer must receive the funds from the sale of their property in order to move forward with this purchase. If the buyer doesn’t receive the funds from their sale, they may get out of the contract. This could become an issue if the buyer were closing their sale on a Friday afternoon and funds were not disbursed before end of business. They wouldn’t have the proceeds from their sale until the following Monday (or later if that Monday were a holiday). Or there could be some sort of judgment or lien on the property that prevents the buyer from receiving any proceeds from their sale.

Sellers sometimes welcome a Kick Out provision because it allows them to continue marketing their property while they have it under contract. Buyers can appreciate a Kick Out addendum because it reduces their risk if their sale proceeds are a necessity for their purchase.

Cooperation from both sides can help keep a deal from landing on its bum.

[where: 75230]

May 19, 2021

The New 2021 Real Estate HOA Addendum

If you are selling a property that is part of a Homeowner’s Association, get ready for a potential surprise. I’m finding some upset sellers dealing with the recent change to paragraph C in the HOA addendum.

Last month (April 2021), the Texas Real Estate Commission made a slight change to the form titled Addendum For Property Subject to Mandatory Membership In A Property Owners Association — a big name for a small document that can have a big impact on your closing costs. This addendum is considered part of the contract when the property is part of a mandatory HOA.

The previous HOA addendum addressed the limit that the buyer would pay for “association fees or other charges association with the transfer.” Buyer and seller would agree on an amount and fill it in on the addendum. Typically, the amount filled in on this addendum was between $100 and $300 for the buyer’s limit. The seller would pay any association transfer fees that exceeded the buyer’s responsibility filled in on the addendum.

The previous HOA addendum also had a paragraph D that stated the “buyer shall pay any deposits for reserves required by the Association.” That changed in April.

The new HOA addendum states the limit that the buyer will pay for “association fees, deposits, reserves and other charges associated with the transfer.” I am still seeing the amount filled in between $100 and $300.

What many sellers and agents do not notice (until it is too late) is that paragraph D no longer requires the buyer to pay for the reserves. That part of the addendum was deleted. The deposits and reserves paid by the buyer are now lumped together with the transfer fee and are limited to the amount filled in the addendum. The seller must pay any amount over that limit. These charges are in addition to the usual seller expense for the resale certificate and HOA documents that must be provided to the buyer.

That is not a problem unless your HOA has a fee for reserves. HOA reserves are sometimes referred to as capital reserves, capital contribution, mandatory reserves, reserve deposit, etc. Some folks call it a ‘buy in.’ It is the HOA fee charged to new buyers in a development to build up their funds.

The reserve fee can be hefty. I’ve seen it range from $1,000 to $10,000. Some sellers are getting an ugly surprise when they realize the capital reserve fee is now mostly their responsibility.

Imagine you are a seller who purchased a property a few years ago and paid the HOA capital contribution when you bought your home. Now you may be paying it again for your buyer because the amount listed for the buyer’s limit is only $150 and barely covers the transfer fee.

Do not count on your HOA or HOA management company to guide you on this new addendum. Most HOA management companies are unaware of this change.

Many HOA documents state that the capital reserve fee is a buyer responsibility. However, if the addendum signed by the seller states that the buyer is only paying up to a small limit for fees, then the seller must adhere to the contract that they signed and pay the balance.

[where: 75230]