What sellers need to know about all-cash vs. mortgage-contingent offers in NYC

Many sellers assume all-cash offers are "safer" than offers that are contingent on mortgage approval, which allow buyers to walk away from the contract and keep their deposit if they fail to get financing. But even cash offers can fall through if the buyer can't come up with all the funds (which happens).

This is helpful intel now that cash offers are outpacing contingent offers in New York City as buyers look to avoid high mortgage interest rates—at least for prices above $2 million to $3 million.

It also helps to know that "people who are making offers with some degree of financing are more inclined to ask for a contingency because of the banking uncertainty," says Lindsay Barton Barrett, a broker at Douglas Elliman. 

So why bother considering an offer that's contingent on financing? For one simple reason: It can be the better deal in the long run—whether it's a buyers' or sellers' market. After all, the end goal remains the same: You want to find a buyer who can close on the deal in a reasonable amount of time and with the least amount of headaches.

What's more, having an exit strategy via a contingency doesn't mean the buyer is not 100 percent committed to closing on the deal. "Even buyers who are fully financeable get nervous that they might lose their deposit for some other reason—namely, the building's financials or a low appraisal," says Andrew Luftig, partner at NYC real estate law firm Chaves Perlowitz Luftig.

Know too that a contingency is open to negotiation. "A lot of sellers look at a mortgage offer as black and white, but there are ways to massage that," says Alan Perlowitz, managing partner at Chaves Perlowitz Luftig. "In a shifting market, you need to be nimble and flexible." 

Read on for the ins and outs you can use in weighing cash vs. contingency offers as a seller—and tips for how to structure the latter in your favor. 

1. Review all offers carefully

All the experts Brick spoke to agree on this point: No matter the type of offer, you need to do your due diligence to make an educated business decision.

Perlowitz points to a recent deal where a townhouse seller was going to accept an all-cash offer for $3 million over an offer for $3.3 million from someone who needed financing. "I said do me a favor, find out more about these two buyers—who they are, does the all-cash person really have the money?" he recalls. So they did, and it turns out the all-cash buyer could only show $3 million in liquidity while the higher bidder was only looking to finance 50 percent and earns a solid seven-figure income as a Goldman Sachs managing director.

"I told the seller, 'That's a home run, and you get an extra $300,000.'" End of story: The seller went with the financed deal "because it made more sense." 

If you are selling in a co-op, the buyer will also need to get approved by the board. "We have to vet buyers more carefully than ever before," says Jonathan D. Schulz, an agent at Corcoran, who says boards are increasingly rejecting applications. He recently accepted an all-cash offer for $4 million by a green card holder who, upon further scrutiny by the co-op board, didn't actually have the claimed amount in U.S. accounts. "We pulled out because there were just too many risks," he says.

Takeaway: Ask potential buyers to complete the financial statement from the Real Estate Board of New York, which is the standard in NYC, and submit supporting documentation—bank statements, tax returns, investment portfolios, etc., as warranted. 

"As a rough guideline, you can always follow the general co-op rule of a 28 percent debt-to-income ratio and two years of carrying charges in the bank post-closing," says Maggie Leigh Marshall, a broker at Douglas Elliman.

If you are still concerned about a borrower, Luftig and Perlowitz suggest being proactive by having your broker or attorney contact the buyer's lender to reach a comfort level, though Marshall says she would only ever do this after first asking the buyer's broker—"and only if the lender was someone I knew by reputation in NYC." 

2. Understand what's involved in all-cash offers 

Sure, cash offers can be quicker to close since there's no need to wait for mortgage approval. And they can be helpful if your building is on the so-called Fannie Mae "blacklist" (see below for workarounds).

"The whole idea behind cash offers is about minimizing the risk," Schulz says. "I get it—going with a cash buyer is in theory less risky."

And in NYC at least, it seems every seller has a "friend" who sold their apartment for all cash or has heard that "everyone" is making cash offers.

"This is a hugely important point," Barton Barrett says. "There's so much gossip around cash deals but most people don't know what it means—it's not like they show up with a suitcase full of cash. Generally speaking, a buyer who makes a cash offer just needs to have enough money in an account to show that there is an ability to pay cash to cover the purchase, even if they have zero intention of ever liquidating that account."

Indeed, she says at least half of the time, before the deal happens, "all-cash" buyers end up financing (unless the contract specifically says "no financing allowed").

That was the case in the above townhouse scenario. "The all-cash buyer showed the $3 million to back up his offer, but that's all he had," Perlowitz says, adding that the buyer admitted to needing financing to close on the deal. "For a $3 million purchase, you'd need to show more like $4 million liquidity."

The same is true when the buyer is getting a mortgage but makes the contract non-contingent. Barton Barrett is negotiating a deal for a $7.5 million townhouse where the buyer who signed a non-contingent contract is seeking 50 percent financing and "now at every turn of the contract we get some slightly modified request for a finance contingency." 

And consider this: If you sign the contract with an all-cash (or non-contingent) buyer and they run into a problem coming up with the funds, "you're locked in with them and it's not always easy giving back the deposit," Luftig says.

Marshall agrees: "The problem with non-contingent deals, whether all-cash or not, is that their lawyer is going to fight to get that deposit back, and then everyone is tied up in litigation forever until someone settles. So in a lot of ways, if you make the deal contingent and it falls through, you can just clean up and walk away."

In her experience, what also happens is the buyer's attorney will write in the contract that the offer is cash and non-contingent but with the ability to get financing, "which is a little bit of a bait-and-switch because it can take longer. If it's a 30-day close and all of a sudden a bank says it's going to take 60 days for the loan, that changes the terms." She says she might be fine having this language unless there's a bidding war—then she might get the seller's attorney to stipulate that it's "cash only/finance only after closing."

3. Know what's involved in contingencies

The experts here caution against having a knee-jerk reaction to contingent offers—you might end up losing the most qualified buyer if you do. And buyers who are borrowing might be willing to push the price up as a way of competing with all-cash offers. (Plus it's hard to blame buyers who want to take advantage of the tax benefits of having a mortgage.)

Marshall is currently working on a sale on Lorimer Street where the first of four offers that came in was contingent on financing.

"It was a very strong offer with a qualified buyer but the seller said 'well that one's not going to fly, we're not doing any contingencies,' and I had to explain that this a qualified person who has done their due diligence and paid attention to what's happening in the market, has a pre-approval and there's no reason not to put this one on top—and that offer ended up winning the bidding war."

In fact, she views a pre-approval letter as one more way to see that the person has had their financials reviewed by a professional—as opposed to receiving whatever the buyer has submitted to their broker.

And by all accounts, the contingency risk is low. "So much legwork has been done in NYC by the time the contract is signed that is it rare when a mortgage is denied, especially when the buyer is already pre-approved," Barton Barrett says.

4. Negotiate the terms of the contingency

If, however, you are still concerned about going with a mortgage contingency, there are ways to mitigate the risk.

Get a lower percentage: The experts here say this is the most effective tactic because it virtually eliminates the chance of a mortgage getting rejected outright. 

"We will almost always counter an 80 percent contingency with a lower amount such as 60 percent," Barton Barrett says, noting that buyers typically come around. "An appraisal that comes in even one dollar low can cause an 80 percent mortgage to be denied, but an appraisal would have to come in really low to cancel a 60 percent contingency," she says.  

Luftig will sometimes write into the contract that the buyer can apply for a high number but if the lender approves a lower number, they are going to proceed. "That shifts some of the risk to the buyer, who would then need to come up with the difference."

Brian Scott Cohen, senior loan officer at GR Affinity, confirms that he will sometimes approve a borrower for less than the requested amount. "We also have options for a pre-commitment letter to waive contingencies to help everyone involved in the transaction feel more comfortable when contingencies are waived."  

Shorten the contingency period: While this option might be off the table in normal times, everyone reports that lenders are turning around financing deals more quickly these days given they are seeing less purchase and refinancing activity overall.

"It's worth speaking to the lender to see if they would be comfortable with a commitment period of less than the usual 30 days," Perlowitz says. 

At least one lender told Brick the answer would be yes. "Plus, through our SameDay Mortgage program, clients can literally get approved in one day and be eligible for a $250 closing credit if they provide the required documentation within eight business hours," Cohen says.

Marshall often counsels a seller to go with a two-week contingency knowing it can be extended later.

"This is admittedly tight but at least by then I'll know whether the financing is headed in the right direction. So long as we know progress has been made and there are no red flags, I suggest giving the buyer one or two more weeks, and nine times out of 10 the seller agrees," she says.

Make it a partial contingency: Rather than having the mortgage contingency apply across the board, you can limit it to just one element of the approval—the borrower's financials, the building, or the appraisal. "Sometimes the buyer will take on their own risk but not the building or appraisal, which is out of their control," Luftig says.

Marshall will employ this tactic when she is aware of certain issues with a building. "There are a whole bunch of reasons certain banks can't approve loans for certain buildings, such as not having enough reserve funds or an outstanding lawsuit with a sponsor." In that case, she might agree to a contingency but only if they go with a lender that she knows. "Sometimes people come in with random banks—one buyer was using a commercial bank that had never loaned to a co-op or condo in NYC and then was approved by the lender we recommended."

Luftig and Perlowitz will also use this tactic. "If you are in a building that's been blacklisted or has issues that might prevent financing, you can dictate that the buyer works with other banks simultaneously. This way, if Bank C gives a loan but Bank A doesn't, you can still proceed."

According to Cohen, "Our decline percentage [based on a building's financials] is very low, so it’s not something that happens often. We have multiple investor partners that we work with directly, so it doesn’t really become a problem for us."

That's good news for buyers and sellers alike. 

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