Multifamily has been the darling of commercial real estate for more than a decade, and the pandemic has only renewed investor confidence in the asset class. As a result, there is record competition in the space. To win business and provide certainty of closing, investors are more regularly using non-refundable offers.
“The U.S. multifamily market remains extremely competitive for institutional buyers in virtually all markets and sectors due to limited supply, low interest rates, and abundant available liquidity,” T. Gaillard Uhlhorn, a member of Bass, Berry & Sims PLC, tells GlobeSt.com. “In such an environment, buyers seek out-of-market deals or find themselves in competitive rounds between best and last with multiple potential buyers. As a result, sellers may demand concessions that force buyers out of their standard comfort zone of the acquisition process. One way for acquirers to make their offers more attractive to off-market sellers or to distinguish their offers from those of competitors is to offer a non-refundable deposit at the time of contract execution.
While increasing the risk for the buyer, non-refundable offers, i.e. the deposit is not refundable, are often successful. “This approach can be successful because many sellers equate a non-refundable deposit with high certainty of closing – after all, what rational buyer would put down a large deposit and then walk away from the deal without working very hard to get the deal. works,” says Uhlhorn.
The strategic tactic has become popular, but as a means of risk mitigation, Uhlhorn does not recommend that investors make it standard practice. He asks: “Why take this extra risk if it is not absolutely necessary?” However, there are times when it is appropriate to offer a non-refundable deposit to win the deal. “While posting a ‘non-refundable’ deposit can help an interested buyer win the deal, the buyer should understand and accept the potential risk of losing their deposit if they back out of the deal,” says Uhlhorn. .
Before making a non-refundable offer, the investor should be comfortable with the physical condition of the property and the surrounding market. “A standard free inspection period – where a buyer can get their earnest money back at any time for a set number of days for inspection – allows a buyer to thoroughly investigate the physical and financial condition of the property,” says Uhlhorn. “During this free inspection period, a buyer can build a comprehensive financial model taking into account rental growth, improvement costs, and local market conditions.”
This free review period also gives the buyer confidence in the purchase. “Without this post-contract due diligence time, a buyer needs to do so much research up front and be confident that they won’t discover facts later that will completely upend their financial model,” Uhlhorn adds. This period will provide some level of risk mitigation.