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Be Wary Of The All Cash Offer

by Benny L. Kass

Q. We have just received an advertisement in the mail offering "all cash” for our house, or in the alternative to give us a monthly payment for our equity. Our house is an investment property, which is in need of a lot of repairs, and thus the offer sounds attractive. What guarantee does a seller have that he/she will get the full amount. Suppose the company goes bankrupt? How can these companies offer such benefits as without even seeing the property?

A. The moral of this column can best be summed up with the old Latin adage "caveat emptor -- let the buyer beware."

As with any transactions among strangers, most are legitimate, but many are fraught with problems, including fraud. You have received an unsolicited mailing, whereby a promoter offers to buy any house -- often sight unseen -- and pay the seller on a monthly basis any equity that exists in the house.

At first blush, this may be a good deal. You -- as seller -- will be able to sell your house, and take payments on an installment basis. You will not have to pay a real estate commission. If you make a profit on the sale, since this is investment property, you will have to pay capital gains tax immediately. If you get monthly (or yearly payments) this is called an “installment sale”, and you will be able to defer full payment of the capital gains tax until you are paid in full on your equity.

Furthermore, by selling your house, you will be relieved of any obligations to pay your outstanding mortgage as well as the real estate taxes. Keep in mind that if there is a tenant in the house, that tenant will have rights which have to be honored and respected.

Sounds too good to be true? It may be, since there many negatives involved in this kind of transaction.

Let us look at some of the possible pitfalls:

Buyer goes into bankruptcy. You raise the question of the possible bankruptcy of the purchaser. If the proper protections are taken at the time of settlement, the filing of bankruptcy will create a delay, but should not pose a major problem for you. If you take back a first deed of trust from your buyer for the amount of the equity you are lending, and if this deed of trust (mortgage) is properly recorded in the land records where your property is located, you will be a secured creditor. In the worst case, you will ultimately get the house back.

But, you have to make sure that you have a first trust. If, for example your buyer obtains a first trust, and is only prepared to give you a second trust, there is a potential of great risk. If the buyer does not pay you, I suspect that the buyer will also not pay the first trust lender. The first trust lender can foreclose on the property and your second deed of trust may be wiped out.

Over the years, there have been some real fraudulent situations. Here’s a common one. You agree to sell your property for $100,000, and agree to take back a trust in the amount of $70,000. The Buyer gives you the difference in cash, namely $30,000. But unbeknownst to you, he arranges with his friendly title company companion to have your trust put in second position behind a first trust also in the amount of $70,000. The buyer leaves the area and defaults on both loan.

But don’t shed any tears for the buyer. He has received $70,000 in cash from the first trust proceeds, and has paid you $30,000. He has left the area with a cool $40,000 profit -- all at your expense.

Due on Sale clause. . If your buyer just wants to assume your existing mortgage, there are other issues to consider. Most mortgages contain what is known as a "due on sale" clause. This means that upon the sale of your property to a third party, your existing lender can call the entire unpaid balance of the mortgage due. While lenders do not often assert these clauses, the possibility remains. This is too great a risk, and I cannot recommend that you enter into such a sale without first obtaining your lender's approval of the transaction.

Additional encumbrances. . Even if you own your home free and clear, and you do not get full cash at settlement, there is nothing to stop your buyer from taking out a new mortgage on "your" home after settlement. If that new lender does not receive the monthly payments on time, it can foreclose. This can cause you a lot of aggravation, as well as uncertainly and legal fees.

Financial status of your buyer. . Before entering into this kind of transaction, you must learn more about your buyer. Are there any tax liens against the buyer that could become a super-priority lien ahead of your deed of trust? Is your buyer judgment-proof -- i.e., you will not receive any money even after you successfully obtain a court judgment. There is no cash register at the back of the court house.

Sales Price. . What price are you willing to accept from this buyer? Clearly, that buyer is not a charitable organization; there is a profit motive behind the transaction. Why should this buyer offer you market price for your house, since when the house is ultimately resold, your buyer will not make any profit.

Guarantees. . You ask what guarantees your buyer can give that you will ultimately receive payment in full. The short answer is none. Unless your buyer pays you all cash, you face a serious risk -- on a monthly basis -- that you may not get paid in full. After all, you are dealing with a stranger -- and one who presumably is in the business of buying and selling houses. If there are any tricks -- and if the buyer is not completely reputable -- they will use every trick in the book to take advantage of you.

My bottom line: stay away from these types of transactions. While they appear attractive, there are too many pitfalls.

If you still want to go ahead with such a transaction, please consult your legal and tax advisors before signing anything.

Published: June 9, 2003

Use of this article without permission is a violation of federal copyright laws.

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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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