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The siren call of an all-cash building purchase offer

Have you ever had an all-cash offer for your building? Did it make you wonder if the price offere...

Have you ever had an all-cash offer for your building? 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 which have no control over the funds, or who 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 downpayment)?

A few elements to consider:

Who is the buyer?

Ask yourself, who is the buyer? Is the buyer a REIT or a reputable institution which 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 which need to be (re)financed?

If the latter, there is no real guarantee nor secure timeline. Even if the asset is financeable, the owner might not like the rate they get or worse, there might not be enough equity in the existing asset to allow additional financing.

We once had a buyer assert that a $30-million asset they owned would serve as collateral for a potential acquisition loan. We did our due diligence, though, and noted it was carrying $28 million in debt – leaving no room for additional leverage.

Ask yourself, why are they offering all cash?

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, they come back and ask for renegotiations, or VTBs, or (most commonly) price reductions weeks later when other potential buyers have cooled off and the vendor is too caught up in closing the deal.

What is the buyer’s track record, including its acquisitions 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 two or three years, it is unlikely they will be as familiar with the timelines, requirements and transparency of the current market. New standards such as environmental tests or structural inspections might scare them off weeks or months after an accepted offer.

What conditions and delays are there?

More importantly, all-cash offers (if the cash is truly available) should include a substantial deposit delivered within five business days. Otherwise, question the availability of cash.

If an all-cash offer misses delivering the stated deposit within the timeframe provided, you can be certain there will be additional delays. Long closing delays signal the need to raise funds.

Is the buyer raising money?

Is this a real all-cash offer or will the buyer, upon acceptance, begin to pray they can raise the capital in time? A long-closing date will be the first signal of this (which is, of course, just the normal business timeframe for a reputable but bureaucratic institution, but not so for private funds which should immediately be ready to deploy their capital).

In today’s market, financing, environmental assessments and inspection periods do take an increasingly long period of time.

The temptation to take the “simple” offer – the all-cash, minimal-conditions deal can be great. It’s clear, though, caution needs to be advised to steer the boat past the siren song, and toward 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.

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