7 ways to compete with an all-cash offer
- You can waive the mortgage contingency or let the seller to keep part of the deposit
- Other options include outbidding other buyers or being flexible with timing
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—because they’re able to avoid the underwriting and appraisal processes as well as options like a mortgage contingency.
And these days all-cash buyers are more predominant. According to Jonathan Miller, president and CEO of real estate appraisal firm Miller Samuel, the market share of cash buyers in Manhattan reached a new record in the first quarter of 56.8 percent.
It's not because there were more cash buyers—it is because buyers who need financing are sitting on the sidelines as a result of mortgage rates that have doubled since last year.
And while bidding wars were "well below year-ago levels, they still remained higher than usual as a result of low listing inventory and a limited amount of new listings entering the market," he says.
It helps to know that not all cash offers are accepted. Jennifer Roberts, a broker at Engel & Volkers NYC, 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 September 2021. We are presenting it here with updated information for May 2023.]
Even wealthy clients who can afford to pay all cash sometimes take some financing. "You'd be surprised to see the high-end apartments that are tied to mortgages in the city," says Leonard Steinberg, chief evangelist and corporate broker at Compass.
Still, there's no denying the allure of a cash offer to sellers. 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 seven 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. This is why the most effective— and one of the most nerve-wracking—ways to compete against all cash is to waive the mortgage contingency.
Obviously, you'll need to reach a comfort level about possibly losing your deposit if you don't obtain financing. To cut down on that risk and increase the seller's confidence, get yourself and the building pre-approved. "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, a mortgage banker in NYC, 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?
That's why Steinberg recommends skipping the mortgage contingency only "if you are 100 percent confident you will obtain financing and about your job if the mortgage is reliant on it." That's especially important now that mortgage rates are still elevated. "In all your planning, assume rates will be this high or higher—and be pleasantly surprised if they come down (highly likely within 12 to 18 months)," he says. "Let that be a bonus rather than an expectation."
What if you are not prepared to skip the contingency (or able to secure financing from a bank)? Steinberg says some not-so-wealthy buyers borrow cash from relatives and friends to forge partnerships; when they sell, they share the gains.
2. Finance less of the purchase price
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 secure the lowest possible loan amount. "After closing, these purchasers anticipate tapping equity through a refinance in the future as interest rates go down."
But if buyers have more available cash to put down, he suggests dropping the financing amount to around 50 or 60 percent and paying cash for the rest to make an offer more attractive. You may want to borrow 80 percent, “but you want the apartment more," he says.
This 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.
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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. How much over asking is up for grabs.
“It all depends on what the purchase price is and who your competition is,” Roberts says, calling it a guessing game. How badly does the other buyer want it? If they've been rejected two or three times before, they may be more motivated to offer more than they otherwise would have. For example, she recently sold an apartment on the West Side for 15 percent above asking. In another deal, the property went for $55,000 over asking and had 10 bidders.
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 not what the bids are, Roberts says. “They work for the seller.”
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 seller’s 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.
Often being willing to move slowly is a plus, especially if the seller needs time to navigate their next move. 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 it 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, though it can be a pricey one.
5. Allow the seller to keep part of the deposit
If you need financing and need to insist on a mortgage contingency, you might ease the sellers’ financial concerns by agreeing that if you don’t get financing, the seller can keep a pre-determined portion of your 10 percent 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, and "could work well when combined with a shortened time period to obtain a mortgage—say 15 days versus 30."
Steinberg has seen this happen. "We recently had a deal where the buyer offered that the seller could keep a $100,000 fee if the financing fell through.” He says you could also offer to keep the listing active while you secure your financing, so in case it doesn't happen, the seller can accumulate backup bids without losing more time to relist.
6. Think outside the standard mortgage contingency
Here's another option when financing a portion of the purchase price is a must, courtesy of Luftig and Perlowitz: You can work to narrowly tailor the protections of the loan contingency to apply only to your biggest risks. For instance, your offer may be more competitive if you waive credit approval and appraisal conditions as ways out of the deal. (Though you will want to check your credit score before taking this step.)
"In the purchase of a co-op or condo, if you are financing less than 80 percent and are confident in your credit, income, employment, etc., you may consider making an offer contingent only on the lender’s project approval (i.e., the lender's review and approval of the building) and funding of the building," they say.
At least one lender has introduced a product that lets buyers waive the appraisal contingency—it's the Approved to Move Plus program from Embrace Home Loans. According to Harris Rosenblatt, loan officer for the company, says being able to have the value supported sans waiting for the appraisal to be approved "can put you in a stronger buying position and help your offer get noticed."
7. 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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