Have you ever had an all-cash offer for your building, and did it make you wonder if the price offered equated to a discount on the asset’s market value, or if it was simply a fair price with few conditions?
Why would a Buyer commit itself to an offer with no-financing? Unless the Buyer is a trusted institution whose financing is not in question, the motivation to submit an all-cash offer has to do with securing the asset from competing interests, and/or solidifying the Buyer’s credibility to close the transaction.
However, sometimes the all-cash offer is simply used as a negotiating tactic by entities who have no control over the funds, or who simply try to raise the money after they put the property under contract.
How do you protect yourself from accepting an all-cash offer that is not really “all-cash”? Is it better to take an all-cash offer with a quick closing, or an offer with a financing condition (provided there is proof of sufficient down payment)?
A few elements to consider:
Know the Buyer
Ask yourself, who is the Buyer? Is the buyer a REIT or a reputable institution that has closed on thousands of units in the last few years? If so, there is less reason to be cautious.
Ask for proof of funds
Is the money available in cash (liquid) or is it in assets that need to be (re)financed? If the latter, there is no real guarantee nor secure timeline; even if the asset is financeable, the owner may not like the rate they get; or worse, there may not be enough equity in the existing asset to pull out. We once had a buyer assert that a $30M asset of theirs would serve as collateral for their potential acquisition loan. We did out due diligence though and noted it was carrying $28M in debt – leaving no room for additional leverage.
Question the motives of your all-cash offer
If this a competitive bid environment and this is your only all-cash offer, be particularly careful. Some buyers intentionally lock up a property to eliminate the other buyers, then come back and ask for renegotiations, or VTBs, or (most commonly) price reductions weeks later when the other buyers have cooled off and the vendor it too caught up in closing the deal.
Question the buyer’s track record, and their acquisition team
The market has changed substantially in the last few years. If the Buyer has a large portfolio, but has not transacted in the last 2-3 years, it is unlikely that they will be as familiar with the timelines, requirements and transparency of the current market. New standards such as environmental tests or structural inspections may scare them off weeks or months after an accepted offer.
Find out about the buyer’s conditions and delays
More importantly, all cash offers (if the cash is truly available), should include a substantial deposit delivered within 5 business days. Otherwise, question the availability of cash. If an all-cash offer misses putting the stated deposit within the timeframe provided, you can be certain that there will be additional delays. Long closing delays signal the need to raise funds.
Find out if the buyer is raising money
Is this a real all-cash offer, or will the buyer, upon acceptance, begin to pray that he can raise the capital in time? A long-closing date will be the first signal of this (which is of course, just the normal timeframe for business for a reputable but bureaucratic institution, but not so for private funds that should be immediately ready to deploy their capital).
In today’s market, financing, environmental, and inspection periods are taking increasingly long. The temptation to take the “simple” offer – the all-cash-minimal-conditions deal can be great. It’s clear through that caution needs to be advised to steer the boat past the Siren Song, and towards a successful transaction.
Baron Realty specializes in matching buyers and sellers of apartment buildings. Ramona works in partnership with Mikael Kurkdjian and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec.