Real Estate Q: reasonable discount for all-cash (vs. mortgage) offer??

[teddyFBI]

I'm in a fortunate position of being able to make an all-cash offer for a condo (rather than having to take out a mortgage). My broker has given me some good (albeit obvious) reasons why sellers would much prefer an all-cash offer than one where the buyer needs to finance it with a mortgage.

So my Q is this (and I'd love to hear from some ppl who have experience in making real-estate offers, or perhaps from sellers who have had to make this decision themselves):

Is it reasonable to expect that you'll be able to get a discount if your purchase offer is all-cash versus mortgage-backed? And if so, just what type of discount is reasonable??

e.g. Obviously, a seller would prefer a $500,000 all-cash offer than a $500,000 offer, of which 80% is financed by a mortgage...but how much lower an all-cash offer might a prospective buyer reasonably get away with? $10,000 less? $20,000? $50,000? Obv the answer is very seller-dependent, but perhaps someone here has a reasonably-informed reply...

[SossMan]

Great question.

Being able to close quickly and headache free is the main motivation for sellers wanting to go with an all cash offer. You didn't say if this was an investment or a primary. If it's a primary residence, then don't get stuck on having to get a certain % off because of the cash offer. You are going to live there, focus on finding the property that fits for your life, not the absolute 100% leave no money on the table deal.

If it's an investment property, then having cash can certainly make you money. There is no hard and fast %, but 5-10% off fair market value isn't abnormal. You will just have to face the fact that you may have to go through a number of deals before you find a really motivated buyer where the difference between 7 day close and 30 day close means the world.

Also, look into short sales.

[Ray Zee]

the seller gets all cash either way so your only leverage is that you can close sooner and you can leave out the contingincy of having the mortgage approved for you and the apprasial meet the total price. so a cash offer is better sounding but doesnt have alot to offer. it works well when you are having competition from other buyers and your offer is more attractive. but getting more off the price isnt going to happen to a large extent.

[teddyFBI]

Alright, well no reason I can't lay all my cards on the table here with specifics about the place I'm considering, which might elicit some more informed replies.

- It's a very large 1BD co-op in Manhattan (sure i'd rather have a condo, but NYC is 85% co-ops). GREAT space, although I'd prob want to put in 25K worth of work to really make it "mine". It would be my primary residence.

- Was on the market at 700K for a few months and got very little interest. Seller dropped asking price to 600K, and has had some interest, but seller hasn't accepted anything yet (even though the seller's broker conceded that seller was "motivated.") I know for a fact that seller has had offers (20% down / 80% mortgage) in the 550K - 565K range, but has not accepted any of them.

I'm wondering just how much of a discount might be reasonable to expect given that I'm in a position to offer all-cash. I am aware, by the way, that the seller essentially gets the entire purchase price on the day of the closing anyway **EDIT: as I see Zee also pointed out while I was typing up this reply** (e.g. it doesn't matter whether it's 100% all-cash from the buyer, or 80% financed, because the mortgaging bank will pay that entire 80% to the seller on the day of the closing). But as Soss said, the main advantages to an all-cash offer are:
i) it's a more streamlined closing process,
ii) seller doesn't have to worry about financing-approval (although to be honest, I don't really see what's so great about this, b/c seller requires that prospective buyers be pre-approved for a mortgage anyway),
iii) in my case (b/c it's a co-op), I'm told that co-op boards are far more likely to approve an all-cash buyer because there's no concern that the buyer could default on the mortgage, and then there'd be a lien on the property...this may not seem like that big a deal, but I'm told that it's not at all uncommon in Manhattan for a sale to be essentially completed on paper, only to have a picky co-op board reject the applicant...so I've been told not to discount the fact that my all-cash offer would give the seller more peace of mind that I'll be approved by the co-op board.

OK, that's all the info I have to give.

EDIT: Thanks, Zee, for the reply. All the points you make are ones that I've also thought about, re: all-cash really not being as huge an incentive as I initially thought it might be; sure it's a great "tie-breaker" if two offers are otherwise equivalent, but that's why I made this post >> to inquire whether it was just a good "tie-breaker", or whether I might reasonably expect to be able to get away with a lower offer.

[spex x]

[ QUOTE ]
Alright, well no reason I can't lay all my cards on the table here with specifics about the place I'm considering, which might elicit some more informed replies.

- It's a very large 1BD co-op in Manhattan (sure i'd rather have a condo, but NYC is 85% co-ops). GREAT space, although I'd prob want to put in 25K worth of work to really make it "mine". It would be my primary residence.

- Was on the market at 700K for a few months and got very little interest. Seller dropped asking price to 600K, and has had some interest, but seller hasn't accepted anything yet (even though the seller's broker conceded that seller was "motivated.") I know for a fact that seller has had offers (20% down / 80% mortgage) in the 550K - 565K range, but has not accepted any of them.

I'm wondering just how much of a discount might be reasonable to expect given that I'm in a position to offer all-cash. I am aware, by the way, that the seller essentially gets the entire purchase price on the day of the closing anyway **EDIT: as I see Zee also pointed out while I was typing up this reply** (e.g. it doesn't matter whether it's 100% all-cash from the buyer, or 80% financed, because the mortgaging bank will pay that entire 80% to the seller on the day of the closing). But as Soss said, the main advantages to an all-cash offer are:
i) it's a more streamlined closing process,
ii) seller doesn't have to worry about financing-approval (although to be honest, I don't really see what's so great about this, b/c seller requires that prospective buyers be pre-approved for a mortgage anyway),
iii) in my case (b/c it's a co-op), I'm told that co-op boards are far more likely to approve an all-cash buyer because there's no concern that the buyer could default on the mortgage, and then there'd be a lien on the property...this may not seem like that big a deal, but I'm told that it's not at all uncommon in Manhattan for a sale to be essentially completed on paper, only to have a picky co-op board reject the applicant...so I've been told not to discount the fact that my all-cash offer would give the seller more peace of mind that I'll be approved by the co-op board.

OK, that's all the info I have to give.

EDIT: Thanks, Zee, for the reply. All the points you make are ones that I've also thought about, re: all-cash really not being as huge an incentive as I initially thought it might be; sure it's a great "tie-breaker" if two offers are otherwise equivalent, but that's why I made this post >> to inquire whether it was just a good "tie-breaker", or whether I might reasonably expect to be able to get away with a lower offer.

[/ QUOTE ]

The seller being in the position that he is in, I doubt it'd make much difference to him either way. The first thing that you should do is go down to the county courthouse and find out how much he owes on the property. You do that by finding out what the original mortgage amount was and then making an amortization table at a reasonable interest rate. That'll give you a ballpark baseline price that you can be pretty sure that he's not going to go below.

Then what I would probably do is meet with the seller and ask him directly what he needs. As a buyer, you can reserve the right to be present when your offer is presented to the seller (don't give the offer to the agent before hand). Get together with the guy and explain that you can pay cash and close in seven days - that you're offer is not contingent on funding. Offer a decent earnest deposit - like $15,000 to let him know you're serious. Tell him that you've narrowed down your selection to three places, his and two others, and you're meeting with the other buyers over the next two days. Give hime your offer, and make it low - like just a bit less than the amount ke owes. He'll reject it out of hand, but then it'll be his turn to say a number.

Now, you already know what his absolute bottom price is, but he doesn't know what your top price is, so you're at a huge advantage. His number will be too high, no matter how low it is. Just say, "look, i checked with the county, and it appears that you owe somewhere in the ballpark of $X for this property. If I give you $X, you'd have made an X% return on this property. The market is bad and its hard to get jumbo mortgages right now. I'm the best prospect that you've got." You might even consider bringing a banks statement showing that you've got the cash available.

Talk to the seller directly, it'll pay off. You want to get a signed contract. No waiting a day or two and thinking it over - keep harping on that you need to buy quickly and that you're going to start negotiating with two others in the next few days. You don't have time to wait and need a decision, blah blah blah.

Its a buyer's market. Put the screws to him.

[stephenNUTS]

Teddy I responded to your PM this am,and it said your message box was full.I re-sent it again and I am not sure if it went through,so just let me know if you got it

~Stephen [img]/images/graemlins/cool.gif[/img]

[stephenNUTS]

[ QUOTE ]
the seller gets all cash either way so your only leverage is that you can close sooner and you can leave out the contingincy of having the mortgage approved for you and the apprasial meet the total price. so a cash offer is better sounding but doesnt have alot to offer. it works well when you are having competition from other buyers and your offer is more attractive. but getting more off the price isnt going to happen to a large extent.

[/ QUOTE ]

Nice points Ray,

IMO the only time an ALL-CASH offer gives you THAT much bargaining power,is when the seller is forced or anxious to sell/close ASAP for personal reasons,avoiding foreclosure,divorce,etc

With all the paper work,recording doc's,IRS forms,title/deed paperwork,etc at closing.....EVERTHING is documented and leaves a substantial paper trail....... so even someone "tempted" to offer some cash under the table is taking a risk that can come back to haunt them some day.
Real Estate closings/sales...are not the Wild West,or Bugsy Seigal showing up at a home.....and saying "here..take this suitcase"...I WANT your home...lol

They really shouldnt even take a chance...as the $500k you pay is going to be a cut check anyway I assuming

It really just boils down to how quickly/desparately the seller wants to close.Another thing which is important since the credit-mortgage crash... ALOT of deals have fallen through due to the buyere being UNABLE to secure a mortage now

That should give you abit of wiggle room as well

Other things include the location,home sale inventory in that area,etc

I would DEF would take a shot though,coming in lower and work from there....it CANT hurt?


Stephen [img]/images/graemlins/cool.gif[/img]

[teddyFBI]

Stephen: Hmmm...no, I didn't get it, and my inbox isn't full...only had 193 PMs in it and I thought max was 200, so there should have been room.

Regardless, I cleared out another 20 messages, so hopefully it will go thru this time. Thanks, I value your input on this! (If it still doesn't work, and doesn't contain sensitive info, feel free to post it as a reply here!)

(Thanks for the reply, spex; one thing to consider, though. This is Manhattan, which is its own little housing market, largely unaffected by fluctuations throughout the rest of the country, including the current subprime mortgage fracas. It's never truly a buyer's market here. Your 'hardball' tactics are all good ones, but sellers here know that theirs is some of the most desired real estate on the planet.)

[skindog]

Great post spex!

[SossMan]

[ QUOTE ]
[ QUOTE ]
the seller gets all cash either way so your only leverage is that you can close sooner and you can leave out the contingincy of having the mortgage approved for you and the apprasial meet the total price. so a cash offer is better sounding but doesnt have alot to offer. it works well when you are having competition from other buyers and your offer is more attractive. but getting more off the price isnt going to happen to a large extent.

[/ QUOTE ]

Nice points Ray,

IMO the only time an ALL-CASH offer gives you THAT much bargaining power,is when the seller is forced or anxious to sell/close ASAP for personal reasons,avoiding foreclosure,divorce,etc

With all the paper work,recording doc's,IRS forms,title/deed paperwork,etc at closing.....EVERTHING is documented and leaves a substantial paper trail....... so even someone "tempted" to offer some cash under the table is taking a risk that can come back to haunt them some day.
Real Estate closings/sales...are not the Wild West,or Bugsy Seigal showing up at a home.....and saying "here..take this suitcase"...I WANT your home...lol

They really shouldnt even take a chance...as the $500k you pay is going to be a cut check anyway I assuming

It really just boils down to how quickly/desparately the seller wants to close.Another thing which is important since the credit-mortgage crash... ALOT of deals have fallen through due to the buyere being UNABLE to secure a mortage now

That should give you abit of wiggle room as well

Other things include the location,home sale inventory in that area,etc

I would DEF would take a shot though,coming in lower and work from there....it CANT hurt?


Stephen [img]/images/graemlins/cool.gif[/img]

[/ QUOTE ]

lol, stephen...I don't think anyone thought that 'all cash' literally meant 'ALL CASH'...as in Benjamins.