THE RISKS AND PITFALLS OF USING STOCKS & SHARES TO FUND A REAL ESTATE TRANSACTION

Yesterday the stock market took a nose dive, dropping nearly 5% – one of the worst single day losses in history.

With no particular underlying reason for this volatile activity, for most of us it will have little impact, even if we have a stash of investments.  The likelihood is we can ride out the losses and wait for it to regain its value. But what happens if you’re under contract to buy or sell a house, and the buyer is dependent on the sale of those assets to close on the home.? There’s a strong possibility that some the transaction could fail in such a situation.

Increasingly lenders are allowing buyers to use company shares as part of their asset/debt ratio to help increase their purchasing power. And with many Amazon and Microsoft employees who receive a healthy stock bonus every year, there are plenty of buyers in this area who do rely on those assets to fund the purchase of their house – either directly or indirectly.

Should you ever find yourself in this situation, I have two words of advice for both buyers and sellers.

  • Buyers – Disclose, Disclose, Disclose! The purchase and sale agreement should specify that the closing of the transaction is dependent on the liquidation of assets and what those assets are. Also include a statement of value. Failure to do so means you don’t have a contingency in place should the value of those assets suddenly plummet overnight, even if you have a financing contingency for a loan of any sort.  While some sellers may be understanding if you disclose once under contract, ultimately the seller has the right to refuse and terminate the contract. In such a hot market, where back up offers are common, is this a risk worth taking?
  • Sellers –request that your buyers liquidate any such invested assets within three or five days of mutual acceptance.  This should be included in the purchase and sale agreement, irrespective of how long the closing window is.  Buyers, this may seem to put you at a disadvantage, but cash in the bank is always preferable to invested assets.  Any appreciation you might stand to gain from those shares rising in value while you are in Escrow will be minimal compared to what you stand to lose should they drastically drop in value, and you don’t have the required cash to close on the home.

My final word of advice is for sellers working with cash buyers.  While cash is great – it’s not always king.  Be sure to have your realtor dig deep with the buyers agent to find out if they are really are all cash buyers, or if perhaps they are relying on the liquidation of other assets to come up with the required cash at closing.  Proof of funds that reach, or better yet exceed, the value of the purchase is the best way to do this.

Posted on February 7, 2018 at 6:18 am
Ali Tamblyn | Category: Uncategorized

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