Most buyers do not have enough cash available to buy a home just like that. They need to obtain mortgage bonds, or home loans, to finance their property purchases. And unless your daddy owns a diamond mine somewhere in the Northern Cape or Free State Provinces, you will probably need a mortgage bond as well.
Subject To A Mortgage Bond
Even if your bank was willing to issue you with a home loan pre-approval certificate before you make an offer to purchase, it is not a sure thing that they will be willing to finance your purchase of a house. The mortgage bond is usually granted on the security of the property alone, so they would want their property valuer to inspect the property first, to make sure that it offers sufficient value as security for the loan. But the bank appraisal, or valuation can go either way, remember. So, it is always wise to make the contract of sale contingent upon obtaining a mortgage.
But this means that the seller runs the risk of taking his property "off the market" for at least a few days. It would therefore make sense that the seller could demand the right to be informed of your financing plans in order to evaluate them. If your agreement never becomes binding, due to your mortgage bond being disallowed, the seller would suffer, because he has lost valuable marketing time, and may have made their own plans based on successfully closing the transaction. That is one of the main reasons that financing details are included in your offer.
The contract that I use, when I am the seller, has a mortgage bond clause that states that, should the buyer not apply for a mortgage bond within three days, I can apply for one on his behalf. Also, should the buyer not qualify for a home loan for the full amount, then I have the right to provide private finance. My mortgage bond clause also allows me to accept any mortgage bond, with any terms, on behalf of the buyer, should he not get his own financing.
Now, I would personally never sign an obviously biased contract like that myself, but I've only met one person who objected to the wording of the mortgage bond clause, and that was only after an attorney studied the contract on his behalf, and made some notes in the margin.
So, look out for stuff like this. It is important! Take half an hour to read through any offer to purchase before you sign it. And don't be afraid to insist on changes.
Deposit
As part of your offer to purchase, you will need to disclose the size of your cash deposit. The deposit can indicate to a seller that you are serious about buying, and can make him feel more secure, knowing that, if you are in breach of contract, there is a deposit amount held in trust, which he could claim damages against.
The deposit also allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage bond, when you make a larger deposit. The bank's underwriting guidelines will be less strict, because you stand to lose your cash investment as well, if something should go wrong.
Mortgage Bond Amount
Another reason for including financing information in your offer is to protect yourself. By specifying the mortgage bond amount, your agreement to purchase the property would only become binding once you obtain a home loan to that value, or once you notify the seller in writing that you consider the condition fulfilled. That is, if you made the agreement subject to the suspensive condition that you obtain a mortgage bond, to the amount indicated on the contract.
It would be impossible for most homebuyers to come up with the remaining R500 000 to purchase a property, if they needed a home loan of R600 000, but were only approved for R100 000. Obviously, most South African buyers do their homework a little better than this, but even a R10 000 shortfall on a purchase price for a home can be an insurmountable obstacle, for someone who needs all their available cash for the deposit and transfer costs.
Cash Offers
If you are one of those rare individuals making a cash offer to buy a home, it makes sense to provide some documentation with your offer that shows you have the funds available. A bank statement could be fine, but most contracts require that bank guarantees be obtained. If you have to liquidate stock or some other asset to generate the cash, your offer should give a timetable on when you will provide proof you have converted the asset to cash.
A cash offer is not contingent on any financial conditions. You will have to buy the property, whether the stock market crashes or not. If a "cash offer" is subject to a suspensive condition of some kind, concerning the financing of the sale, it is not truly a cash offer, now is it?
Sale Of A Home
Some sales agreements for homes are subject to the sale of the buyer's current home, or some other real estate. I have met numerous sellers who were so confident in the "cash offer" they received, that they bought their next property without providing contingencies of their own. And then they end up in tears. The "cash sale" fell through, because their buyers were unable to sell their own properties. These poor folks still had to go ahead with their purchases, regardless, or face litigation for breach of contract.
So, make very sure if your "cash offer" is in fact subject to a suspensive condition for the sale of another property. Ideally, the seller would want the purchaser to sell their property before making an offer to purchase their property, but this is not always possible. So the seller could insist on some protection in the contract.
The seller would want to know what your minimum acceptable price is, as well as what steps you have taken, or will take, to market the property. A deadline for the sale would also be included in the contract.
The seller might also insist on the inclusion of a "72 hour clause", which would allow him to keep marketing the property, and if a true cash offer came around, you would have 72 hours notice to either fulfil the conditions of the contract of sale, or declare in writing that you consider them fulfilled. If you cannot perform within the 72 hours, the original agreement would be null and void.
Financing Details In Offers to Purchase
As you can see, including the financing details in the offer to purchase is for the benefit of both the buyer and the seller. So, make sure that your interests are protected in the contract of sale, and include all the relevant financing details.
