As the saying goes, cash is king. New York City buyers who pay all-cash instead of financing part of their purchase can usually expect to close faster—for example six weeks for a co-op instead of two months—since they’re able to avoid the underwriting and appraisal processes, and options like a mortgage contingency.
That ease can make buyers paying all-cash more attractive to sellers, and the return of all-cash buyers is driving the current sales surge in NYC these days, Jonathan Miller, president and CEO of real estate appraisal firm Miller Samuel, recently told Brick Underground. Bidding wars are on the rise as well. But all-cash does not always signal a sure thing.
In fact, Jennifer Roberts, a broker at Engel & Volkers NYC, recently had two deals in a co-op building that involved all-cash buyers. The board turned down both buyers, despite their solid finances, she says. The reason? The selling price was too low.
“Cash provides some level of comfort but the board cares about the purchase price and today’s boards want a good price,” she says.
[Editor's note: A previous version of this post was published in July 2016. We are presenting it again with updated information for September 2021.]
Even wealthy clients who can pay all-cash go the mortgage route, says Leonard Steinberg, chief evangelist at Compass. "You'd be surprised to see the high-end apartments that are tied to mortgages in the city," he says.
Still, there's no denying the allure of a cash offer. If you’re a buyer who needs financing to close a deal, you may find yourself competing with an all-cash buyer. Fortunately, there are a number of strategies you can deploy—such as financing less, bidding more than the asking price, or simply being easy to work with. Here are six strategies for competing with an all-cash buyer
1. Skip the mortgage contingency
Having a mortgage contingency clause in the contract protects you as a buyer from losing your deposit if you or the building are not approved by a bank. It’s great for you, and not so great for the seller—after all, by that point a property has been taken off the market for a month or so. Which is why the most effective and perhaps one of the most nerve-wracking ways to compete against all-cash is to waive the mortgage contingency.
Obviously, you'll need to feel comfortable about the possibility of losing your deposit if you don't get financing. To cut down on that risk and increase the seller's confidence that you'll get financing rather than walk away from your deposit, get yourself and the building pre-approved. This is because "you need to provide enough good, solid evidence to the sellers to make them feel secure," Steinberg says.
To further mitigate concerns for the seller, a buyer's broker should "come in with proof that the building's been approved for a loan within the last six months," Roberts says.
Julie Teitel, senior mortgage loan officer at Citizens Bank, notes that even with a pre-approval for financing and a pre-approval of the building, unforeseen circumstances—like the loss of your job or a drop in your credit score, or an issue with the building—could put financing in jeopardy.
“No matter what, there is a chance that you can lose your deposit,” she says. Consider the worst-case scenario: Will you be able to bail yourself out? Could you get a margin loan or a loan from a relative? Would you be okay with losing the deposit?
Still, she says it's rare that buyers lose their deposit, noting that she has can refer clients to about 30 different banks, and could likely find a backup. Rather, the question at that point is how long will the seller wait for you?
2. Get less financing
A second way to compete against an all-cash offer is to finance a smaller amount.
Andrew Luftig, a partner at Chaves Perlowitz Luftig, a real estate law firm that specializes in transactional, commercial, and residential lending practices, says he sees a lot of clients who want to finance 80 percent of a property’s value because rates are so low.
But if they have more available cash to put down, he thinks that dropping the financing amount to around 50 or 60 percent and paying cash for the rest can make an offer more attractive. You may want 80 percent “but you want the apartment more," he says.
The approach is seconded by Alan Perlowitz, founder and managing partner of Chaves Perlowitz Luftig. He recalls a buyer who successfully competed against an all-cash offer by offering more than the asking price and dropping down to 50 percent financing. In this case, even if the appraisal came in low and the buyer had to finance more than 50 percent, their strong financials indicated that they would be approved.
3. Bid higher than the competition
Offering more than your competition is an obvious way to get a seller's attention. Even if another party is offering all cash, a bigger purchase price can certainly make the deal more attractive.
But how much more depends entirely on the deal.
Roberts recently sold an apartment on the West Side that went for 15 percent over asking price. Another deal she was involved in went for $55,000 over asking and had 10 bidders.
“It depends on what the purchase price is and who your competition is,” she says.
Unfortunately, it can be hard to glean a lot of details about who you’re up against. A seller’s broker will tell you the number of bids over asking price, “but is not going to tell what the bids are,” Roberts says. “They work for the seller.”
It’s a guessing game, she says. And much depends on how much the other buyer wants it, and if they have been rejected before, or two or three times, which may prompt them to offer more than they would have.
Brokers tell Brick to be sure to size up other buyers whenever you have the opportunity—at a showing, or even on the sidewalk outside a building. The competition will be sizing you up as well, so keeping cool and keeping quiet is advised.
4. Be flexible with timing
A simple yet potentially effective tactic—particularly if a seller hasn't found a place to live yet—is to close the deal at the sellers’ convenience.
Along these lines, another option is to allow the seller to rent the apartment back until they are ready to move—Brick even heard of an unusual case in which a buyer was willing to let a seller live rent free for a short period after the closing—this helped seal the deal.
Oftentimes, being willing to move slowly is a plus. Of course, you'll have to weigh the costs of holding off on the sale. Just because it benefits the seller doesn't necessarily mean makes financial sense for you as the buyer. If your lease is up or the sale of your apartment is moving more quickly, temporary housing is an option, but it's often a pricey one.
5. Allow the seller to keep a part of the deposit if the financing falls through
If you need financing and insist on a mortgage contingency, you might ease the sellers’ financial concerns by promising that if you don’t get financing, the seller can keep a portion of your deposit, Luftig and Perlowitz say.
The amount is often an approximation of what the seller spent during the 30 days in which the property was held up waiting for the financing. It might include any rent and maintenance, attorney expenses, and some overhead. With this provision in place, the seller will worry less about losing money if they take the offer that isn’t all-cash.
It is "something to have in one's arsenal," Roberts says. The money would come from an escrow deposit, she says, and "could work well when combined with a shortened time period to obtain a mortgage—say 15 days versus 30."
And it does happen, Steinberg says. "We recently had a deal where the buyer offered that if the financing did not come through, the seller could keep a $100,000 fee,” he says.
6. Signal your interest, but be professional
When bids are similar, sometimes personalities can seal it in one direction or the other. In the past, buyers would communicate that in a “love letter” to the seller, but these are considered problematic today.
An article on the website of the National Association of Realtors warns these letters could raise fair housing issues because they offer personal information in order to sway a seller, and details about race, religion, or familial status would be an unlawful basis for an acceptance or rejection.
Instead, rely on your broker to transmit your keen interest and impeccable credentials in an efficient, professional manner—your goal should be to show that you are easy to work with and eager to get the deal done.
—Earlier versions of this article contained reporting and writing by Anne Machalinski and Lucy Cohen Blatter.
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