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.

Work with Baron Realty. Reach out today!

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.

Work with Us Today. Reach Out Now!