In our real estate practice, we handle some closings that involve mortgages and some that do not. However, it seems that many transactions now are considered to be “all-cash” in that they are not mortgage contingent, but the buyer is getting a mortgage. At times, this can confuse both buyers and sellers as to what that means.

For buyers, if you agree to an “all-cash” (i.e. not mortgage contingent) purchase, then you need to be able to answer two questions:

  1. If you cannot obtain a mortgage, for any reason, do you have enough cash available to complete the purchase?
  2. If not, can you afford to lose the downpayment, which is typically 10% of the purchase price?

We’ve had clients who have agreed to all-cash deals and then struggled to obtain financing, for one reason or another. The current financial market is unpredictable, so it does happen that seemingly well-qualified buyers are denied a mortgage.

For sellers, often there is uncertainty over whether the “all-cash” deal is truly all-cash or involves a mortgage. We usually reach out to the buyer’s attorney and figure that out prior to the execution of a contract. Closing involving a mortgage usually takes longer than a truly cash deal because the lender has certain requirements and due diligence to perform.

Sellers also can be confused over what it really means when a buyer is in default; in this context, the buyer cannot obtain a mortgage on a deal that is not mortgage contingent and does not have enough cash to close. Sellers often believe that they simply receive the downpayment. It is almost never as simple as that.

First, the defaulting buyer will delay as much as possible, attempting to find other sources of funding. Then, if unsuccessful, the seller’s attorney will have to set a time of the essence closing and try to force the buyer to close. (Most closings in New York State are set as “on or about” closing dates, which means the original contract does not have a hard-and-fast deadline.) Finally, assuming the buyer does not produce the funds at the time of the essence closing, most standard form contracts allow the buyer’s attorney to object to the issuance of the downpayment, at which time the parties must go to court to litigate the dispute. Since most of the closings on the East End are in the millions, the downpayment is usually at least $150,000 or more, so the buyer will not walk away easily.

A seller with a defaulting buyer has a strong claim to the downpayment and will likely prevail. But it is almost never quick and easy, and it typically requires months if not years of litigation.

Both buyers and sellers should be aware of these issues with “all-cash” closings with a mortgage, since they are a popular type of transaction on the East End.

PLEASE NOTE that this article is not intended to create an attorney-client relationship and the information within does not substitute for a consultation with an attorney.

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