Do I have to be all cash to be competitive?

Many buyers are intimidated at the prospect of competing against an all-cash buyer for a hot property -- but does cash always win?

First, to address a common misconception: most buyers, and especially those vying for co-ops below $3M, are relying on financing to some extent, which means a majority of active buyers are submitting offers contingent on obtaining that financing. So as long as you have enough funds to cover the minimum down payment amount (typically 20%) along with required closing costs/reserves, your offer is still competitive -- and even more so if you’re able to put down 25% of the purchase price. That said, the mighty all-cash buyer still has a huge advantage, right? Well, not necessarily. First off, the seller gets the same proceeds whether they are paid by the buyer or his lender. More importantly, all-cash buyers tend to grossly overestimate the value of their cash and their draw as an all-cash buyer, leading them to make noncompetitive offers.

But an all-cash offer does have some value. Certainly it will tip the scales with all else being equal. And in some situations it might justify a modest discount on the sale price. The value to a seller of an all-cash offer is based on the following two advantages:

(1) Faster Closing. In a typical deal, eliminating the mortgage application and underwriting process can cut anywhere from 10-25 days off the duration of the transaction. Buyers who are financing typically have between 30-45 days from contract signing to apply for their loan and obtain a commitment letter from the bank. Upon receipt, they usually have another 3-5 business days to submit their board package or building application. Cash buyers typically have 10-15 business days from contract signing to submit their building or board application, so the time savings to a seller is really only about 3 weeks.

(2) Eliminating risk. To understand why and how cash reduces risk, it’s important to consider the three things on which financing hinges -- the buyer, the building, and the unit. By the time a seller accepts a buyer’s offer, they will feel pretty comfortable with the first two of these factors, so the only question mark is whether the unit will appraise at the contract price. While low appraisals are not common, even a $1 shortfall could jeopardize a financing-contingent deal where the buyer is putting down the standard 20% of the purchase price. However, the consequences of a low appraisal diminish as down payment amounts increase over 20% of the purchase price. In these cases, an all-cash buyer is effectively no better in terms of risk than a well-qualified buyer who can (and agrees to if necessary) put down 25% or more. It is important for all-cash buyers to be realistic about the value their all-cash status holds. Most often, the discount that it can entice is not worth tying up their capital or foregoing other benefits of cheap financing options.

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What does it cost to buy a home in NYC?

As a first time buyer in NYC, it is important to know the real price tag on your purchase and create a realistic budget that will help narrow your search to properties you can afford and ensure you are able to make a competitive offer when you find "the one."

1. Downpayment

Most coops will require that buyers put down at least 20% of the purchase price as a downpayment (some may have higher requirements of 25%, 40%, or 50%). Condos have a lower threshold -- usually 10% -- but financing more than 80% will involve a surplus on the monthly mortgage payments so will amount to a costlier purchase. Especially in a tight market, buyers will be encouraged to put down at least 25% which decreases the risks of the deal falling through due to a lower-than-expected appraisal - it also difficult to be competitive in any kind of bidding war with an offer that includes less than a 20% downpayment.

2. Closing Costs

Closing costs vary based on whether you are buying a coop or a condo, and whether the purchase exceeds $1 million. Your attorney or real estate agent can provide you with detailed information on closing costs for your specific purchase, however, the most basic takeaway is that closing costs for coops up to $1 million is around $8000-$8500 regardless of their cost or amount financed. Condo closing costs are significantly higher, especially if you are financing (about 2% of the financed amount is due as a mortgage tax). Purchases over $1 million in both coops and condos are subject to a 1% mansion tax.

3. Reserves

Most coop boards will require buyers have some liquid funds remaining after closing, with the amount varying from 6 months to 2 years. This means that coop buyers must show that after deducting downpayment and closing costs, they have 6- to 24-months’ worth of their mortgage and maintenance remaining in their bank accounts. Condo boards have no reserve requirements though bear in mind that most lenders will require some reserves although they differ on whether those reserves can be liquid or illiquid (i.e. retirement accounts).

4. Monthly Carrying Costs

In addition to your monthly mortgage, you will be paying maintenance for a coop (includes your share of real estate taxes and common charges) or separately common charges and real estate taxes for a condo. In Manhattan, $2/square foot is considered a reasonable monthly total for these fees, in Brooklyn, monthlies tend to be lower. While these costs can fluctuate based on amenities, some smaller buildings have surprisingly high monthly charges since basic costs are shared by a smaller number of residents.

If these costs price you out of your desired area, I often advise my buyers to think outside the box and look at adjacent neighborhoods or areas that have the same look and feel as their ideal neighborhood. It's almost always better to opt for a larger apartment in a transitioning area rather than a smaller one in an established neighborhood. For Brooklyn buyers, this might mean Windsor Terrace or Greenwood Heights in lieu of Park Slope, Clinton Hill or Crown Heights rather than Fort Greene, or Prospect Park South or Kensington instead of Ditmas Park.

In Manhattan, the East Side has a lot of value: Midtown East, Murray Hill, and the far East reaches of the Upper East Side and Lower East Side provide great entry level apartments with room to grow. But for those with their heart set on the West Side, I suggest buyers look North: the West Side is beautiful all the way up the Hudson River, from Manhattan Valley through Hudson Heights.

Check out my quotes and ideas from my colleagues in this article in Brooklyn Underground to advise new buyers on which neighborhoods offer them the most opportunity, both in terms of price per square foot and return on investment in resale value after less than 10 years of ownership.

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The Basics of Making an Offer

How much should I put down?

One of the questions we are asked about most often is about the size of the downpayment. In most of the country, this answer is determined by credit and income factors. Lenders offer pre-loans that require anywhere from 5-20% downpayment - so in theory many first time home buyers would be financially qualified to buy a home with as little as 5% down.

However, the New York housing market it unique, and a number of factors drive us to advise almost all buyers to consider 20% downpayment a minimum for purchasing a home in NYC.

First, a majority of the apartment inventory in New York City (roughly 70%), are co-ops. Co-ops are unique to New York, and most require a minimum downpayment of at least 20% down, with some requiring higher percentages, with 25% most common, and even higher amounts more rare. For more information on what a coop is and other financial requirements they might impose, see our earlier post here.

Condos typically allow buyer to put as little as 10%, but in reality, where demand for a particular unit is high, we find that 10% is simply not competitive, even if those prospective buyers are offering a higher purchase price. A higher downpayment gives the seller more assurance that financing is not going to be an issue, either due to the borrower's qualifications or factors related to the building or specific unit. Thus, especially at lower price points (under $1.5M), we advise our buyers to be prepared to put 20% down, even if the building permits greater financing.

Also note that in addition to downpayment, buyers should be prepared to have the liquidity for closing costs. We've outlined these costs here, but note that they are much higher when a buyer is financing a condo than a coop. That said, coops will have reserves requirements, so in either case, a buyer must be in a position to have additional cash beyond the downpayment to complete the purchase.

The structure of your offer, not just the number, is important when buying a home in New York City. An experienced and knowledgable buyer's agent will advise you on what range of purchase prices you are most qualified for and how you can structure your offer to be the most competitive.

Do I need to be all-cash to be competitive?

In the last few years, we've all heard the news: All-cash buyers are flooding the market; unless you can buy outright, stay out of the market. Well, there was some truth to this until recently, but only really if you were looking at properties valued over $2 million. Even at the peak of the all-cash-buyer phase, most purchases still involved financing. So what if you are one of the majority that needs financing... well the first step is contacting a mortgage professional and getting a preapproval letter.

In order to make an offer where some part of the purchase price will be financed, a buyer will have to submit a preapproval letter. It could take a few days to gather the documents necessary to present to a bank, and the bank will have to review and verify the buyer's financial profile before issuing such a letter. Thus it is important to have started the process of obtaining a preapproval letter with a mortgage professional very early in the process.

A preapproval letter states that the lender's representative has reviewed the financials of the buyer/borrower, and that the potential borrower has met all conditions for lending up to X amount. In reaching this determination, the potential borrower has to fill out lengthy forms, submit to a credit check, and provide documentation of assets, salary, debts, etc. Gone are the days (at least for now) of the pre-meltdown "no-doc" loans with 2% down.

The relationship with the mortgage professional is ongoing. The initial prequalification will state some approved amount. But what if the potential borrower/buyer sees a perfect property and wants to put an offer in that's higher than the initial preapproval amount? Well, based on certain apartment-specific factors (like if there is unusually low monthly maintenance), the pre-approval could be increased, and a subsequent letter issued. Similarly, if the potential borrower/buyer wants to place a bid that is significantly lower than the preapproval amount, a new letter for a lower approval amount might be better for negotiations so as not to tip off the seller that the offer could be increased.

I've been using the term mortgage professionals because the relationship could be with a banker, a broker, or a broker/banker. The mortgage professsionals at major banks are mortgage bankers. They will approve the loan based on their bank's criteria and the bank will fund the loan. A broker will preapprove the individual based on their creditworthiness and later find an appropriate lender once a specific property is identified. A broker/banker can do both: They can tap into banks, other lenders, and could even have their own bank fund the loan. Depending on your circumstances, it might be appropriate to work with one of these individuals over the others.

Should I make a lowball offer?

As an agent, I’m often asked, how low can I go? Especially where buyers smell negotiability, it may be tempting to make a lowball offer and just see what happens. The truth is lowball offers have a tendency to alienate sellers and can preclude negotiations, rather than encourage a dialogue. A low (but not lowball) offer may be appropriate in some cases, depending on current market conditions, the type of property, and your relative strength as a buyer, and other factors. However, a perceived lowball will almost always be counterproductive.

In a normal market, I advise clients to stick within 7% of the asking price if we believe there is negotiability. Any lower than that and the sellers would have lowered the price themselves. Even if a property is truly overpriced, an offer that is perceived as a lowball -- no matter how fair or appropriate under the circumstances -- is unlikely to be the reason why a seller finally comes to their senses. In those cases, it’s usually better to make no offer on the property unless and until there’s a price cut.

Of course, your strength as a buyer may have some effect on your ability to negotiate. An all-cash buyer may have a freer hand to make aggressive offers without alienating sellers, particularly in a slower market. Being all-cash is especially advantageous when a property is difficult (or even impossible) to finance -- but then again, most such properties are already priced to reflect these challenges. Generally speaking, the perceived advantages of being all-cash are frequently overblown or exaggerated. For example, in the more common scenario of a financeable property, the main advantage an all-cash buyer has over a financially qualified borrower is an earlier closing date.

Unlike resale properties, luxury new developments may offer greater opportunity for price negotiation. Depending on the sheer number of similar new development units that hit the market at once, what percent of units are currently in contract, and and how aspirational the sponsor was in pricing those units, there may be significant (20-30%) room to negotiate below the asking price. Sponsors are also unlikely to be personally offended by low offers, compared to a seller who is more emotionally attached to their home they are selling.

As always, if you’re looking to buy a property and want to know more about how much you should offer and any other steps in the process, feel free to reach out.

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