What Is 'ALL CASH' Worth?
A: A good topic to discuss considering the environment and the fact that one of my buyer clients unsuccessfully bid over ask in a recent highest & best situation. When you are up against 'all cash' bids, what premium should that offer have over a bid reliant upon financing? The short answer is that it all depends on the seller's risk level and situation, the more creative answer in my opinion is about 2-3% of the purchase price. There is no formula for finding out what 'all cash' is actually worth in any given deal, but it is safe to say that in tough lending environments its value surges!
What sort of discount should a buyer offering all-cash in this environment expect? On the flip side, how much should an all-cash bid be worth to the seller? Here is a recent situation where an all cash bid took complete control over a multiple bidding situation; I'll discuss the basics with changed details to get to the point of the discussion.
I'm blessed with very savvy buyer clients who are mini-experts on their price point. This buyer was no different and knew a great deal when one popped up. So, going into the first open house (which was active) we knew a strong bid was the very least needed to get this deal. Not surprisingly, multiple offers came in the very next day including ours. We did our diligence, formulated how under-valued we felt the property was priced compared to comps and property condition, spiced up the terms of our final bid, and went for it!
In the end we bid about 5% over ask and just under what we perceived as market value for the apartment. But it was the altered terms of the deal that we focused on to put us on par with an all cash competitive bid that we were told was already submitted; a very tough task to accomplish when credit crunch headlines make front page news everyday. Here is what we did and what you can do if you ever want to strengthen your bid in bidding war situations:
a) provide a pre-committment letter instead of a pre-approval
b) provide credit score; especially if its very strong
c) offer to sign a no-finance contigency contract of sale
d) raise the down payment by 5% to lower debt/income ratio and ease board review process
e) flexible closing date
the standards: point out liquid assets after closing, debt/income ratio if deal were to proceed, attorney info, lender info, salary & employment info, and a little note that we had advised the attorney to do due diligence within 2 business days of full receipt of doc's!
Did it work? Unfortunately no. We lost to an 'all-cash' bid that was also over the asking price. OK, not the end of the world but certainly frustrating. At least we knew our comfort zone and made a strong play for the property. Which brings us to why we lost!
In my opinion, I think we were the highest bid! Of course I'm not 100% sure, but its just a gut feeling after hearing back from the broker.
TO COMPETE AGAINST AN ALL CASH OFFER THAT ALSO HAPPENS TO BE ABOVE THE SELLER'S ASKING PRICE, PROVES TO BE A VERY DIFFICULT TASK IN TIMES LIKE THESE! SO, YOU MUST BID A PREMIUM TO MAKE THE SELLER EVEN CONSIDER TAKING YOUR DEAL THAT INCLUDES SOME RISK!In normal times, I would say that an all-cash offer should gather 1-2% of the purchase price as a premium for providing the seller with the comfort of bypassing the loan & board approval process; although I have heard of all cash deals getting rejected by a co-op board, though it is not the norm! Let me explain using a similar over-ask multiple bidding scenario as we just went through with the numbers changed:
NORMAL LENDING / MACRO ENVIRONMENT
$895,000 Co-op Property w/ 2 bids submitted
Bid 1 --> $925,000, solid buyer putting minimum required down and financing the rest
Bid 2 --> $900,000 all cash 2.7% below highest bid
SELLER DECISION --> I would bet that the seller would go with Bid #1 and take the extra $25,000 with little risk the buyer will get a loan and pass the board. When I say solid, I mean that this buyer has the financials required by the board for approval.
TIGHT LENDING / MACRO ENVIRONMENT
$895,000 Co-op Property w/ 2 bids submitted
Bid 1 --> $925,000, solid buyer putting minimum required down and financing the rest
Bid 2 --> $900,000 all cash 2.7% below highest bid
SELLER DECISION --> In today's environment, I'm willing to bet that the all-cash $900,000 offer, even though its $25K less, is extremely appetizing to the seller; assuming of course the seller is aware of what is going on right now in the mortgage markets! It's still over the seller's asking price, who obviously priced low to get a quick sale in first place, and its a lock of a deal both for the loan commitment and the board approval! That is quite a comfort that is certainly worth something.
It's the psychology of the seller that has changed because of the deteriorating credit & mortgage markets. Cash is a very valuable tool for any offer right now, so if you have the means, do use it especially if you want that edge either in negotiating or against competing bids to get the deal done! In my opinion, as long as the mortgage and credit markets are in distress, an all cash offer should be able to win a deal at a 2-3% discount from what otherwise would be an acceptable bid or a competing higher bid!
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Comments (11)
I'm surprised you allowed your client to "offer to sign a no-finance contigency contract of sale".
If any of the following happens
- client loses their job to to unexpected layoff
- gets into an accident, can't work
- apartment doesn't appraise for some bizarre reason
- market absolutely crashes causing banks to tighten big time or look into very very strict appraisals
- is a victim of identity theft
Any any these occured, what would your client be legally bound to do?
Its crazy I know, but its a crazy world!
Posted by uwsider | March 13, 2008 12:34 PM
Since we are discussing cash...
If one thinks that a Bank or 2 might fail before this issue is done...how can person, who is holding a good chunk of cash protect themselves?
Checking Accounts? Savings? Money Markets? CD's?
Whats the safest way to do it?
Posted by More Cowbell | March 13, 2008 1:08 PM
great point, and under normal circumstances I wouldn't. But I knew this would CALL for a no-fin contigency anyway. So, you fully explain the details, have your buyer talk to attorney to explain risks as well, get a pre-committment and then it is up to the buyer to determine how they feel about their ability to get a loan at that purchase price.
In this case, client was very comfortable and wanted to submit the strongest possible bid and wasn't concerned about the items you mention.
But I certainly did caution about the call, in the end, its the buyer's decision to make, not mine. As long as they are educated on the call!
Posted by Noah | March 13, 2008 1:18 PM
cowbell - well, we're insured up to 100K per account. Joint accounts up to 200K. Spread the accounts out keeping all under this guaranteed limit.
Am I missing something?
Posted by Noah | March 13, 2008 5:55 PM
Noah, yes, spreading out your cash in various institutions will give some protection, but one also needs to consider the health of the banking industry as a whole.
Remember 1988 and the resulting banking failures? The Feds ended up having to open up interstate banking because a large Seattle bank failure would have wiped out the FDIC's insurance fund! So Bank of America in California was allowed to purchase Seattle-First National Bank in order to keep the FDIC from bankrupting itself (disclaimer: I worked for Seafirst.)
If the whole banking industry fails, the FDIC will not be able to bail us all out. Let's hope this doesn't happen.
Posted by Susan | March 14, 2008 3:51 AM
I'm really surprised that you have to spell this out to people...............
Posted by ava | March 14, 2008 9:03 AM
spell what out? Clients asked me in real world what I feel an all cash offer is worth against a competing bid given todays credit crisis? So, I turned it into a discussion.
Would you rather see an article about a new deli that opened in the UWS?
Posted by Noah | March 14, 2008 9:21 AM
Susan -
If the entire banking system fails, i'm sure that any prospective buyers have a lot more to worry about than a making good on a contract. I think the entire economy has a lot worry about.
However, your fears are ridiculous. A widespread US bank failure would grind the entire financial world to a halt. Do you think any European, Asian, African, or South American country can survive financially without the money they get through US finance? It would be a catastrophic event for the world. The government would come up with a way to cover any bank failure - mostly because they have to, but also because it would be in the interest of every government in the world to assist in a US bank recovery.
Posted by mike | March 14, 2008 9:31 AM
Do these numbers have any relevance at a higher price point? We're looking at apts in the $3-$3.5M range. Pretty much all the apartments that we've expressed serious interest in, the sellers say "no way", "not at this level" to a financial contingency clause. So an all-cash deal wouldn't seem to have any advantage if ALL potential offers lack that clause.
Posted by nester | March 14, 2008 9:44 AM
nester- you know, its a great question. I think an all cash deal at that level is GOLD! Ultimate GOLD!
In this environment, when you are talking about 80% LTV on a $3.5M+ purchase, you are talking risk in securing the committment!
If anything, and I was a seller, it would AT LEAST be worth 3%!
Posted by Noah | March 14, 2008 12:40 PM
I just signed a contract on selling my $2 million apartment in an all cash deal - I would have been fine with a mortgage (but NO mortgage contin) but the all cash componant was a bonus.
For the record, I simply wouldn't have gone to contract if my buyer wanted a mortgage contin. It is too much of an "option" as buyer can simply not take the reasonable steps to get him/herself a reasonable mortgage.
Posted by Wes | March 14, 2008 1:48 PM