All-cash offers are killing us

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All-cash offers are killing us

Kristopher S.
Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote

We are well qualified buyers who are continually getting beat out by all cash offers on properties in the New York City area. This past week a 1.2m offer on a property was beat out by an all cash offer below asking. We have over 2m in assets (stocks and property) but this is not easily liquidated form a tax perspective. Is there a way to leverage our assets for a short period of time to secure a property and then refi? Thanks in advance for any help.

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Max T.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
9y

Listen if you know you won't have problems with financing you can always waive your financing contingency (cash offer). Just make sure you leave enough time for due diligence and lending before settlement, because you could lose your EMD if financing issues cause you to not be able to settle on time. It's riskier, but come settlement day the sellers don't care if you're paying them their money or the bank is.

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  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    9y

    Listen if you know you won't have problems with financing you can always waive your financing contingency (cash offer). Just make sure you leave enough time for due diligence and lending before settlement, because you could lose your EMD if financing issues cause you to not be able to settle on time. It's riskier, but come settlement day the sellers don't care if you're paying them their money or the bank is.

    2Reply
  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    Thanks Max! The issue here was that the seller would be paying a large capital gain penalty if they didn't close within 30 days. Their attorney strongly advised them to take the all-cash offer over ours as it didn't risk complications with a lender.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    And there's NOTHING you can do to compete with the sellers needs.  You'll loose these every time.  A seller who wants/needs to be out of the property will always go all cash :sigh:

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    @Kristopher S. how far below your offer was the all cash offer that won? 

    There is always going to be some dollar value that entices a seller over the all cash offer, and thats going to vary from market to market.  Your agent should have some sort of idea what that dollar figure is.  At the $1.2 million price point in my market, you would be typically looking at $50-$100k over an all cash offer to win the bid.  Figure out what the premium is, and there is your solution.

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  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @Russell Brazil we were 50k over asking and 200k over the all cash offer that won. We were trying to figure out a way to do a quick loan (30-60 days) against our assets and then refi. That would theoretically work but couldn't find a good solution in time

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    @Kristopher S. Very surprised $200k wasnt enough incentive.  What advice has your agent given you on the subject?

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    @Russell Brazil,@Kristopher S.  The seller is fighting TIME and last I heard, it's not on the open market at any price.

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  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @Russell Brazil we had the option to add penalties to the contract that would cover any taxes incurred by missing the closing deadline. The penalty could have been upwards of 350k though and that wasn't a risk we were willing to shoulder.

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  • Steve K.
    Denver, CO · Member since 2017 · 265 posts · 234 votes
    9y

    @Kristopher S.

    Was speaking to a Denver realtor about this issue here. One idea would be to find a Hard Money Lender to give you the loan that could close in 2 weeks and equal the cash offer/quick close.

    My experience is that 2 points and 10% interest at least. On a $1MM loan would be $20,000 in points...but would get you your house. Then you refi with your permanent financing...take out the HML

    2Reply
  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @Steve K. thanks Steve! Any thoughts on finding good hard money lenders?

    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Kristopher S. You're saying this has happened more than once. Is it always happening with a ~$200K spread? Anyone who takes $200K less is clearly valuing time above all else. That isn't likely the case with all of the sellers. Or, rather, it's highly unlikely. If you do get a hard money loan those points (and interest payments) are going to eat into your offer and ability to negotiate. You would effectively be trading your ability to be make a more compelling offer than a quick-close offer. I would have thought more sellers (likely not this one) would just look for a hefty EMD and removal of the financing contingency. At least then if you can't perform their backstop is a hypothetical $100K.
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  • Steve K.
    Denver, CO · Member since 2017 · 265 posts · 234 votes
    9y

    @Kristopher S.

    I believe you can look on the private lending forum.....I've noticed several BP members have "hard money lender" in signature on BP....sorry, I don't know anyone in NY

    https://www.biggerpockets.com/forums/49-private-conventional-lending-discussion

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  • Steve K.
    Denver, CO · Member since 2017 · 265 posts · 234 votes
    9y

    also, there's a "Market Place" were some HML's advertise:

    https://www.biggerpockets.com/hardmoneylenders

    0Reply
  • Colin B.
    Rental Property Investor · Astoria, NY · Member since 2011 · 16 posts · 11 votes
    9y

    @Kristopher S. I know your pain well. It sounds like you're having problems beyond this one potential transaction so while not all of these strategies would help you with the facts of transaction that you mentioned, they may help you in the next one. The most important thing that I try to do in deals where I expect competition is to convince the Seller that if they choose me, I will get them to a deal. So I try to figure out what Seller and Seller's broker are concerned about and find ways of solving for their concern.  1) Find ways of giving Seller protection in the event that the appraisal is below ask. One challenge that you face (particularly in an up market) that a cash buyer doesn't face is appraisal risk. Appraisers tend to be several months behind the current market so there is a risk that an appraisal will be below your ask and give you a walk right. You can give Seller protection from this risk in a few different ways: a) deliver pre-approval letters from several banks and have your broker tell the Seller's broker that if there is an appraisal issue with one bank, you'll go to the other banks, b) agree that if the appraisal comes in low, you will fund cash for the difference between what the bank is willing to finance and your purchase price, and/or c) offer more than 20/25% down in your offer, which signals to Seller that if the appraisal does come in low you are able (and may be willing) to fund the difference between ask and the appraisal with cash. These strategies worked very well for me in one deal -- the Seller went with my offer despite having higher offers and all cash offers.  2) Find ways of giving Seller the ability to sell quickly. I do this by finding hard money lending (ideally you should do this before your next bid) and be willing to close very quickly.  Hard money lending is very expensive (but you could price it into your offer) and increases your risk (especially if there is any problem with the property that a conventional bank would not fund into, such as a nonconforming tenant) but it will allow you to present an offer that will allow you to close almost as fast as cash. Then, after you close, you can go to a bank and refi. Note that the hard money lender will probably require you to hold their hard money loan for a minimum period of time and you'll want to make sure that the loan is long enough to give you time to finance. 3) Find properties that for whatever reason have sat on the market so that you're not worrying about competition.  

    One thing I would not do (and as you can see from above, I'm willing to eat some risk) is waive my financing contingency. I simply don't want the risk of a Seller coming after me for damages because my financing didn't show up. 

    Good luck - I hope this helps!

    2Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    LendingONE is mine. They were quick enough when I needed it. Curious how your strategy works. I guess I'm just confused on how you were planning to put a downpayment in with stock options, physical non-cash assets. Do you have a lender than can use them purely as collateral as downpayment like a second lien, or were you planning just to liquidate everything you had as soon as the offer was accepted.

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    9y

    Do you know if the Sellers were renting the place at this moment? Maybe the Sellers had a deadline on the Capital Gains Exclusion of $500k which says they can exclude $250k per single person or $500k per couple provided they lived in it for 2 years and owned it for 5 years.

    If that deadline was coming soon, they may be looking at saving a substantial amount of money using the $500k Capital Gains Exclusion which they did not want to jeopardize.

    2Reply
  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    I sniped a deal this week with cash. Seller was about to send a counter when I called and took the deal down for a client. I've been on the other end of this, but it's part of the game these days. 

    Similar to what @Steve K. mentioned, I'm working on the structure where a HM lender would allow a buyer to compete and beat these other offers. It's a work in progress, but we almost have it put together. We'll be testing it out in a few weeks with one of my clients. 

    0Reply
  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @Colin B. thanks for sharing! Very insightful.

    0Reply
  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @David Zheng the idea is to use stock as collateral to secure a loan (only liquidating in the event of default). Liquidating the stock on the front end to pay for a property would be a taxable event and quite costly.

    0Reply
  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    @Matt M. would be interested to hear more about what you're working on. For well-qualified buyers there should be a market solution that is as good as cash to a seller.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    Problem with HML is it is STILL,STILL a loan. There are conditions from the HML to be able to use the money. It is not the same as cash sitting in the bank for a buyer ready to go.

    I remember some investors on houses would say it is an all cash offer but when you dug further the cash was from a HML and they had a term letter to funding the deal. Now they might fund faster with less underwriting then a conventional lender but there still are terms to be met.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    seems like an extra 200k would take care of the cap gain issue.. how much could that be.. and if you closed on time they get the whole thing..   you know that term in real estate NEXT

    you can borrow on your securities with any major investment banking house... and its super cheap like 1 over libor.... 50 to 70% advance..

    Many of my clients over the years access quick flip funding this way... they make a killing without having to sell their securities and pay tax

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    9y

    I use to hate these guys when I started REI in NYC over 35 years ago. I keep running into them, where they snap up deals I was interested in.

    Fast forward to 2003-2008 when I was selling my properties that tripled and quadrupled during the period. I had it for a while, some 20-25 years, I knew there was a bit of deferred maintenance. In one case I priced it 60K below market, and some all-cash investor snapped it up. I'm not sure what he wanted it for, and what the hurry is. Be that as it may, in this case, I cashed out with nearly 500K profit.

    The closing was in Dec 2007, and the market here crashed around June 2008. He had for sale signs up a week after closing, so I knew he plans to flip it. The value of the property fell from $800K to $650K in a few short months, and he finally took down the for sales signs a few months after. Took a few years for values to go back up. 

    I'm still laughing about it thinking about it. All these guys that snapped up my good deals finally get bitten. But the key is, when they snap up a deal I wanted years back, I just  go on to the next one. Still made good money on the ones I got.

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  • Michelle Dowling
    Indianapolis, IN · Member since 2017 · 1 post · 0 votes
    9y
    If your investments are held with one of the major firms (Merrill, Morgan, Goldman) then any one of them should be able to provide you with a loan against your equity. Most equity loans will fund within five business days and you become a "cash buyer." After you are in the home you refi with a traditional lender to repay the equity loan. I used to work in finance and this is how many of our clients were able to compete in hot markets.
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  • Kristopher S.
    OP
    Investor · New York City, NY · Member since 2016 · 17 posts · 1 vote
    9y

    Thanks @Michelle Dowling, sounds like a securities backed loan is a good option. I've never done one so want to make sure we fully understand the terms and risks

    0Reply
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