The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
While providing a big cash offer might seem tempting for a multi-family investment, there’s good reason why this isn’t seen in the landscape more often. It makes little sense to raise a large mount of capital, then to give 70% of that capital back when you run into debts later on. While it may seem like a quick way to close in theory, it becomes problematic in practice.
Richard Wilson: Are you seeing in the marketplace offers – cash offers – for multi-family? Just to get it at a better price, fast close, and then people refinance? Because I haven’t seen a lot of that, but you live in this world 24/7, is it becoming so competitive that you can get a better price, you say “Hey, we’ll pay full cash, we’ll close in 15 days.”, or something and people are snagging properties that way? Or is that not very common at all?
Brian Burke: It’s not very common. It may be a little bit more common, perhaps, in over the 50 million dollar mark when you might have one of the 800 pound gorillas that have billions and billions of cash sitting there literally in a bank account waiting to be deployed. I could see them doing that just to edge out their competition. But in the typical private capital space, we’re just not seeing that, and for good reason. Most operators are either raising capital on a deal by deal basis, which of course wouldn’t make a lot of sense to raise 50 million and then give 70% of it back when you get debt later, and then there’s other groups that are using funds, that’s what we do. We use a fund to acquire property, but to make a capital call for a large amount of cash, close, and then return cash or have to redeploy it quickly, it’s tactically problematic. So we really haven’t seen a lot of that.
Richard: Sure, sure. I’ve also experienced that sometimes the bank underwriting, whether you agree with the bank’s checklist or not, is almost another layer of due diligence because if 4 different banks all give you a hassle for some reason because of a flood plain or something that was overlooked because of proximity to something – if it’s going to be hard to finance, you’re going to want to know then before you buy it as well, right? Otherwise you might have a headache the next month when you try to do that plan, unless you really know your stuff and have at least talked to the banks to prep that refinancing right after you close, right?
Brian: Without question. I mean, it would hurt a lot to acquire a 50 million dollar property all cash with the intention of getting a 35 million dollar loan after the fact and not get it.
Richard: Right, right, Yeah.
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