When Compass broker Stephen Kaseno was listing a home in Chatsworth a year ago, he got an enticing offer from a prospective buyer. The proposal was for an all-cash purchase on the $2 million property.
But tempting as it was, something “didn’t feel right,” Kaseno said.
While examining the “Proof of Funds” document from the buyer, he noticed the margins weren’t aligned and although it was typed, something was off. “It was almost too pretty,” said Kaseno, who works alongside his wife, Liz Kaseno. A teller at a Bank of America, where he took the document to gauge its validity, later told him to “trust your instinct.”
His skepticism was rewarded. The document had been forged by the buyer to make it seem his funds were available and ready to go, when in fact, he did not. Instead, the buyer was hoping to secure a loan on the property once the home was already in escrow and the seller was at ease.
In an effort to compete in Los Angeles’ hot seller’s market, buyers are dangling all-cash offers before pulling back once the sale closes. While not illegal — excluding the forgery — industry pros say the practice could complicate the transaction should the loan get delayed or denied.
Thanks to a few legal loopholes, buyers and their brokers have been increasingly promising all-cash offers despite having no intention of carrying through, brokers said.
The phenomenon of the all-cash offer is a cyclical one, Hilton & Hyland’s Zach Goldsmith said. The most recent incarnation involves homes selling for under $3 million, where supply continues to outpace demand.
“Everyone is looking for ways to one-up the other buyer [when there is] low inventory,” Sonya Coke, also of Compass, said. “If you’re competing with five, 10 or 15 other offers, you want to look as strong as possible.”
But even as the all-cash deal helps some lucky homebuyers land their dream home, it could be contributing to a “false bottom of the market,” Goldsmith said.
“It’s over-inflating the market right now,” he added. “If this trend continues, people are not going to be able to keep up so the market will fall a little bit.”
Buyers who come in with all-cash offers will get preferential treatment from the listing broker and seller because the trades often tend to be quick, considering most don’t include the loan or appraisal contingencies typically deployed to protect the buyer.
That in turn has caused some to get creative when bidding on a property, brokers say.
One of the more popular loopholes comes in the form of the “Proof of Funds” document, as Compass’ Kaseno experienced first-hand.
Interested buyers will borrow some money from a family member or friend, then make it seem as if they have the necessary funds to support an all-cash offer. Once the deal goes into escrow, they’ll get a hard-money loan on the property.
“All you really need to do is show that you have money in the bank,” Goldsmith said.
Verification of the funds then only takes a few days.
Another way to get around the all-cash deal is to secure a bridge loan.
In this scenario, money lenders will provide the capital necessary to purchase the home while the buyer seeks a mortgage on the property. Ultimately, these cost more for the buyer, who then has to pay the lender back, plus some interest, Goldsmith said.
With such loans, which typically borrow against the property’s value, lenders might charge an inflated 10 percent interest over a two-year term, said Julia Lee, an escrow officer at Koreatown-based Hana Escrow. Meanwhile, a traditional mortgage might charge an interest of around 4 percent, spread out over 30 years.
On many occasions, a buyer’s broker will suggest some of those alternatives to help close the sale. But a more experienced buyer, such as an investor or home-flipper, might come up with the plan.
“It’s when buyers get so fed up chasing a deal that they figure out how to do it,” Goldsmith added.
“A lot of investors come in with cash [offers] because banks don’t lend to heavy fixers,” Coke said. “Some are real offers, some are not real offers.”
So what can the seller do once a buyer pulls a bait and switch, by promising all cash, then securing a loan? Not much, brokers said.
Even if a buyer doesn’t end up paying all-cash, the obligation to purchase the property remains, given there was no loan contingency in the offer, Lee said.
“Technically, it’s a breach of contract,” Kaseno said, referring to yanking the all-cash offer. “But at the end of the day, the important thing is that the seller gets the escrow closed.”
Tami Pardee, who owns Venice-based residential brokerage Halton Pardee & Partners, said sellers might feel “head-winked.” But in the end, there’s not much the seller can do if the deal closes on time.
“If you’re going up against eight other offers, you want to use everything to your advantage,” Pardee added.