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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How to make the transition from first- to second- home?

I’ve been in real estate for about 6 years and recently I’ve been seeing some familiar faces. Some of my earliest clients have outgrown their first homes and have come to me for help in making the move to a second home. The question becomes how to sequence the transactions with minimal inconvenience. Financial circumstances will determine which of the three options — buy first, then sell; buy and sell simultaneously; or sell first, rent, and then buy — is the right way to go for a given client.

Buying first and then selling is certainly the most ideal situation — there is no timing pressure and just a single move to coordinate. However, this is also the most difficult financially as most people are unable to cover the downpayment and monthly expenses of their new home while continuing to carry the old. This is particularly true if the second home is going to be a co-op since co-ops require prospective buyers to meet certain debt-to-income requirements which would almost certainly be based on the carrying costs of both apartments. So while buying first and then selling is clearly the simplest option, it's just not feasible for many folks.

A second option is to buy and sell simultaneously. If it's too expensive to carry both homes at once, you could - theoretically - close on the sale of your current home and then, minutes or hours later, use the sale proceeds to close on your new home. In reality, closing dates are very difficult to line up, and the proceeds may need to be liquidated to meet other approvals along the path to purchasing the new home (such as for clearance on the loan or approval by a co-op board), so there will usually be some gap between the sale and the purchase. However, since this period is limited and there is reasonable certainty about how long such housing is needed, many inconveniences related to the move can be avoided without great expense.

The downside with attempting to sell and buy simultaneously (of course assuming a proper home is found during the pendency of the sale) is that the offer on the purchase may be much less competitive if there is any doubt about whether the sale on the existing property will go through in time. If a buyer lacks the funds to cover the new downpayment without the proceeds from the sale, a “sell first” contingency could be included in the offer, which would allow the buyer to back out of the purchase (and get the 10% deposit back) if the sale falls through or is delayed. A “sell first" contingency significantly weakens an offer, however, so it is generally reserved for purchases where there is little to no competition from other prospective buyers or the buyer is willing to substantially overpay. It can be possible to avoid a “sell first” contingency and still have minimal risk depending on the timing; if there are no conditions left (board approval, bank commitment letter, etc.) for the closing on the sale, it may be worth the risk to move forward without a contingency.

The most common option is to sell first, rent for a set period of time (usually we recommend a 6-12 month lease term), and then buy. This way the proceeds from the sale are liquid and can be used without any financial constraints or contingencies on the next purchase. Of course this option requires multiple moves, and there is also the unavoidable uncertainty about how much time to commit to the rental. While this can be a hassle, selling first provides the most flexibility for the next purchase by making the seller-turned-buyer more financially qualified (i.e. competitive) and by removing any pressure on having to find the perfect "forever" home before a deadline.

Clearly there are numerous routes available when transitioning between a first and a second home, and the right answer will depend on individual, personal, and financial circumstances. If you currently own and are thinking about making the move to a new home, I would more than happy to speak with you about your options. Together we can figure out the best way to make your transition as seamless as possible.

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Buyer Myths Debunked

At my homebuyer seminars, I always begin by addressing the pervasive misconceptions about buying an apartment in NYC. Here are six things that I hear all the time:

1.) “I’m not going to live in New York forever.” NYC has a way of sucking you in no matter what your intentions, but that’s beside the point. Buying an apartment in NYC need not be a lifelong financial commitment since most buyers can expect to break even within five years, and that’s assuming a very modest rate of appreciation. Of course, this may not hold true in the event of a significant economic downturn (like 2008), but even in such cases, NYC’s market has shown its resiliency by bouncing back within a few years and then exceeding pre-recession values. For that reason, it is important to plan ahead to avoid being in the position of selling during a downturn.

2.) “I can save money by not working with a buyer’s agent.” A buyer’s agent is compensated, indirectly, by the seller via his agent. The person who gets a windfall when a buyer is unrepresented is the seller’s agent since most listing contracts have the same commission regardless of whether the seller’s agent has to share his or her commission with the buyer’s agent. Having an agent on the buy-side means the buyer’s interests are better represented, and the buyer has someone to negotiate on their behalf, rather than the seller’s agent acting in a dual capacity representing both buyer and seller. In almost all sale transactions in NYC there are agents on both sides, and in my personal experience, prospective buyers who are unrepresented tend to present haphazard offer packages at non-competitive levels. Being represented by an experienced agent also sends a signal to a seller that the buyer is serious and will be prepared throughout the process.

3.) “I can’t buy as nice of an apartment as I can rent.”

To the surprise of many buyers, the monthly carrying costs of owning a home (including mortgage payments) can be roughly the same as the monthly rent on a comparable unit. Even where monthly costs are slightly higher than a comparable rent price, unlike rent paid to a landlord, a big chunk of these payments (often ⅓ or more) goes toward the equity in the property and other portions may be tax deductible.

4.) “I want to buy a condo, so I can renovate it how I want.”

The perception that condo boards will let you do what you want is generally misplaced. If you live in a building where you share walls, entrances, and elevators with other residents, you can’t renovate willy nilly. Almost all buildings (both condo and coop) have alteration agreements which set forth rules regulating how renovations are done in order to protect the quality of life of other residents (such as hours of construction, duration of renovations, use of elevators….) and to maintain the physical integrity of the building (such as requiring an architect to vet layout changes, prohibiting wet over dry, … ). Alteration agreements aren’t designed to destroy an owner’s renovation dreams, but rather to make sure that one person’s toilet doesn’t leak down into someone else’s living room, or that your neighbor’s renovation doesn’t last 6 years. Often, boards will welcome renovations that are done properly and safely as these raise property values in the building.

5.) “The cheaper the apartment, the better the deal.”

Many first-time homebuyers are easily enticed by listings that at first glance appear to be a bargain. However, an unexpectedly low price tag almost always means there is something about the property that makes it worth inherently less than comparable properties or that the building’s financial condition makes ownership costlier or more risky. The market here is highly efficient and moves quickly unlike many places, so a lower price tag is not usually about timing or a lack of buyers at that particular time, but due to some flaw or immutable characteristic which will limit the upside in the future. That said, there is a property for everyone, so if a buyer is ok with brick wall views and lack of light, they can pay less and enjoy the space all the same so long as they remember that when it comes time to sell, the property won’t be right for everyone so the selling price down the line will also be below market.

6.) “I’m too early in my search to reach out to an agent.”

Many first-time buyers only reach out to agents once they are fully ready to buy. Before that, they have spent countless hours thinking about their budget and stressing out without actually having the right information. A good agent would never push a buyer to rush the process, but can save a potential buyer lots of time and wasted energy, as well as getting them on a more efficient plan to be ready to buy. It is never too soon to reach out to an agent who will be able to answer your preliminary questions, and help you feel at ease and knowledgeable throughout every stage or your search (even if that stage is just browsing listings for fun).

Buying a home is one of the biggest decisions someone can make, but it doesn’t need to be the most painful. If you or someone you know is thinking about buying a home, we are here to help with any questions, big or small.

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