With the governments “printing” money and the inflation creeping into all aspects of our daily lives, it was only a matter of time before the federal government increased the interest rate to curb the spending. But a lot of people were surprised at just how fast this happened.
Let’s take a fictitious example of an apartment building a broker may have evaluated at $8M six months ago.
Note the down payment requirement changed by more than half a million dollars over the last 6 months, i.e., the buyer would need to have half a million dollars more in non-borrowed funds in order to be able to close this transaction.
Why does this matter? The down payment requirement is key in successful sales. The rate of down payment used to be 20-30%, further increased last few years to 40-50%, and now an almost impossible 60%+. Sure, there are all cash buyers in the market; these buyers know “their value” and will act accordingly (buying at a discount, because they know the majority of regular buyers will not be able to produce or justify the down payment required today).
Vendors need to be aware that in a fast-shifting interest rate market, deals can fall apart at financing stage just because the down payment can increase so drastically from one month to the next. Hence, if a buyer showed proof of funds with offer in October, but had to wait for the Vendor to finalize the environmental report until this April, the same buyer may not be able to close the deal.
Ways to navigate the current market (for Vendors):
- Hold on to the asset until a significant interest rate decrease happens, to maximize the number of buyers available and willing to purchase. Of course, nobody has a crystal ball as to when this will occur; this strategy can be an issue if the building has maximized its value and is now on the decline, or for private owners who are sellers for different reasons (dissolutions of partnerships, changing life directions, no longer being able or manage the building, etc.)
- Be prepared with all the documents needed in the sale process, most important of which being environmental reports (which can take 6 weeks to 6+ months, depending*) – without a “clean” environmental report, the buyer will not be able to obtain financing.
- Watch for deal-delays and know that short delays are very valuable – as long as you trust the buyer has not simply committed to short-delays to tie up the deal with the intention to come and renegotiate the timelines later (buyer reputation is key*).
- Buyers must be willing to commit in writing (offer stage) to put more down payment than required at offer-time.
- The value of an apartment building should always be taken as the value today; in a fast-changing world, even the “safest” real estate investment asset class is not immune; if you have an evaluation from 6 months ago, it will surely not be accurate today.
- The marketing of a property should keep in line with the changing market dynamic. Based on the asset and timing, a bid process, an asking price process or a process of no price (just a range with its respective loan potentials) and “offers anytime” may be appropriate – but the best way to market will be best determined at listing time, not based on the broker’s record from last year*.
Baron Realty custom-tailors each marketing process, and brings the right buyers based on the asset and vendor requirements for deal timelines. We have generated 5-12 offers on each of the listings we have taken over the last 18 months. *Ask us why; we are happy to talk to you about how to best navigate the current environment to achieve your end goal.
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.