Many participants in a real estate transaction get excited at the thought of having a cash buyer. After all, there are so many potential issues that can become non-issues with a cash buyer. However, real estate licensees need to exercise caution on behalf of their cash-buying clients and avoid allowing a novice real estate purchaser to forego protections that would automatically be present in a transaction involving a lender.
Lenders, while primarily protecting themselves and their investment, routinely require services and products that otherwise may not be included in a cash sale. AREC investigators often are asked whether state law requires that a termite inspection be done in a real estate transaction involving a physical structure. The answer, of course, is that the termite inspection is most often required by the lender as opposed to state law. The same can be said for other services and products involved in the transaction.
The lender will often require a closing protection letter, survey, appraisal, homeowner’s property insurance and title insurance. Unless their licensed real estate agent alerts them, many novice real estate buyers who have the luxury of paying cash may need additional encouragement to obtain those services that are an option for the cash buyer.
Many complaints that are filed with the commission could easily have been avoided if the buyer had obtained a survey, specifically a new survey as opposed to one done for a previous buyer. If a buyer, particularly a cash buyer, waives the right to receive a survey, AREC strongly encourages you to document the waiver in writing and obtain the buyer’s signature on the written waiver.
In a recent case before the Commission, a novice buyer paid cash for a property only to learn later that the property was located in a flood zone. This of course created additional building requirements and costly flood insurance. Had the buyer attempted to finance that sale through a lender, the buyer would have most likely learned that the property was in the flood plain prior to closing.
A broker recently told me of an experience where he learned one day prior to closing that his cash buyers had not yet arranged to purchase a homeowner’s insurance policy for the home on which they were about to close. Fortunately, our broker had the insight to make sure his clients purchased a homeowner’s policy prior to closing, but imagine the potential fallout from failing to obtain property insurance at closing if a fire or one of our Arkansas tornadoes had destroyed the property while it was uninsured. Real estate licensees who have cash buyers for clients are encouraged to emphasize the need for considering those services or products that would otherwise be required by a lender. Chances are, if it’s in the best interest of a lender, it is also in the best interest of the buyer. As you review the sales contract, point out those items that a lender would require before providing financing on the property. If the cash buyer still insists on forgoing the survey, etc., agents should be able to show that they advised the buyer accordingly and diligently looked out for the best interest of their client. The less experience and knowledge the buyer has about real estate, the greater the need is for his agent to advise him on the advantages of requiring those items a lender would automatically require. AREC recognizes the limits imposed on licensees by AREC Regulation 10.10 (and the referenced Pope County decision), but these limits do not restrict a licensee from encouraging a cash buyer to pay attention to things in the contract that would be required rather than optional if a lender was involved.
Gary Isom is Executive Director of the Arkansas Real Estate Commission and Immediate Past President of ARELLO, the Association of Real Estate License Law Officials. You can contact him at Gary.Isom@arkansas.gov.