Hard Money Day One - How??
How are we expected to win deals in multifamily right now when sellers are expecting/demanding 1%+ hard money upfront? How are you able to do real due diligence with this stipulation? People are just throwing money blind at deals to win when there could be massive skeltons in the closet they are unaware of?
Have been told by multiple brokers that in order to win, you’ve got to bring around 1% hard with part of it upon signing PSA. Completely nuts.
This is an interesting dynamic of closing that you bring up and I have some comments and questions.
The way it was taught to me is that purchase price is king with all else equal. In a scenario where two competing offers come in and offer 1 is 5% higher than offer 2 but offer 2 offers double the hard money at signing of PSA the offer with the higher purchase price will win every time. This of course is in theory and in practice both offers will get to Best And Final (again almost every time).
Another thought - no broker will ever push their client for offer 2 in the above scenario because there is no logical reason for them to advocate for an offer than would yield them a lower commission.
Every hard money clause has legal parameters for what could come up in due-diligence and justify walking away from the deal and pulling the hard money out of escrow. This is a massive grey area however and in all but a few cases your firm is forfeiting that deposit if you walk away from the deal.
How much due diligence are you doing pre-PSA and/or leading up to the initial LOI? Interested to know as from my perspective (in office) most deal rooms have leases and T-24 financials down to the property management contracts etc. and can all be viewed pre-LOI.
You mean maybe investment sales brokerage is a scam and the players in it provide no value and don't have their client's best interest uppermost in mind? ~gasp~
From the broker perspective - I think this depends on the size of the asset. In the private capital space (say 2-20M) it makes a lot of sense as a broker to push for the hard money offer.
Ex. Say you have a 2% fee on an asset with offers at 10M (no hard money) and 9.5M (with hard money). So the broker is going to earn either 200k or 190k in fees. After splits and taxes the difference is even less. As a broker, I'd much rather take the 10k haircut with a buyer I know is going to close and not cause me any headaches.
Edit: the reason I said it depends on the size is because I believe at a certain level, deals begin to have "kickers" and bonuses for exceeding specific prices. I don't have any experience with this but could see how this would change how the broker viewed the offers.
Many deals in NYC have had this happening for years. You go hard day one and close 10-20 days later. You do DD up front. I’ve never understood it but people do it. And if you lose the deal-dead deal cost and move on.
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