Navigating a Sudden Shift in Real Estate Transactions: Transforming a Cash Offer to a Financed Deal

By Ronak Desai and Sonia Mann, Attorneys at Parikh Law Group

In the dynamic world of real estate, unexpected changes are not uncommon. One scenario that can cause significant shifts in the transaction process is when a client, initially presenting a cash offer for the purchase of a commercial or residential property, decides to pivot towards obtaining a bank loan to finance the deal. This decision, while sometimes necessary, carries both practical and legal implications that must be carefully navigated.

Practical Implications

Whether it is a residential or a commercial real estate purchase, the most immediate impact of shifting from a cash offer to a financed deal is the timeline. Cash offers typically allow for a swift closing process, often completed in a matter of days. However, when financing is introduced, the process can extend significantly. This is due to the time required for the bank to process the loan application, conduct appraisals, and verify the buyer’s financial qualifications. As a result, sellers may need to adjust their expectations regarding the closing date.

Additionally, the introduction of a bank in the transaction means more parties are involved, necessitating enhanced communication and coordination. This can lead to increased transaction costs, including appraisal fees and potential adjustments in escrow. Buyers and sellers must be prepared for these additional expenses and logistical considerations.

Legal Implications

From a legal standpoint, the shift from cash to financing necessitates a review and possible revision of the purchase agreement. Financing contingencies must be added to protect the buyer from penalties if the loan is not approved. However, it is important to note that the Seller may not agree to the change in terms, closing date, or other conditions resulting from the introduction of financing. Ultimately, if there is no financing contingency included, the Buyer must close the transaction even if the loan is not approved. Moreover, the agreement should contain the specific terms regarding financing, including the loan amount, interest rate, and required documentation.

Sellers must also be aware of the implications of accepting a financed offer, especially if there were multiple cash offers on the table. Evaluating the reliability of the buyer’s financing and understanding the bank’s requirements are crucial to ensure that the transaction proceeds smoothly.

Furthermore, both parties should consider how this change affects any earnest money deposits. Typically, a cash offer might have fewer contingencies, and altering the offer to include financing could impact the security of these deposits if the financing falls through.

Here is a real-life example: Imagine a buyer who initially presents a cash offer to purchase a commercial property, which includes both the real estate and the business operating on it, such as a restaurant or convenience store. Initially, the buyer plans to use personal savings to finance the entire purchase. However, upon further reflection, the buyer decides to seek financing for the business portion of the deal while maintaining a cash offer for the real estate.

This decision changes the transaction’s dynamics significantly. As the buyer’s attorney, it is crucial to add a financing contingency to all relevant contracts. This contingency will safeguard the buyer by allowing them to withdraw from the deal without penalty if the loan for the business is not secured. The financing contingency should clearly outline the terms, including the amount intended to be financed, the type of loan sought, and the timeline for securing the loan approval.

By implementing this contingency, the buyer is protected from losing any earnest money deposits or facing legal consequences should the financing fall through. Additionally, it provides leverage during negotiations, ensuring that the seller understands the potential for delays or changes in the terms if the financing does not align as initially planned.

Including this example underscores the importance of adapting legal strategies to the client’s changing needs, ensuring comprehensive protection throughout the transaction process

Navigating the transition from a cash offer to a financed deal requires careful consideration of both practical and legal factors. Having knowledgeable legal guidance is invaluable in ensuring the transaction remains on track and all parties’ interests are protected. At Parikh Law Group, we are committed to assisting clients through these complex transitions, providing expertise and peace of mind in every real estate transaction.

For more information and to discuss how we can assist with your real estate needs, please contact Parikh Law Group at (312) 725-3476 or visit us at www.plgfirm.com. We appreciate the trust our clients have placed in us for over a decade and are dedicated to continuing to provide exceptional legal support.