A Surge In Nonrefundable Offers on Apartment Deals Highlights Strong Competition

Multifamily has been the darling of commercial real estate for more than a decade, and the pandemic has only served to renew investor confidence in the asset class. As a result, there is record competition in the space. To win deals and provide a certainty of close, investors are more regularly using nonrefundable offers.

“The multifamily market across the US remains extremely competitive for institutional buyers in virtually all markets and all sectors due to limited supply, low interest rates and an abundance of available cash,” T. Gaillard Uhlhorn, member at Bass, Berry & Sims PLC, tells GlobeSt.com. “In such an environment, purchasers are looking for off-market deals or find themselves in competitive best-and-final rounds with multiple potential buyers. As a result, sellers can demand concessions that require purchasers to step outside their standard acquisition process comfort zone. One way for purchasers to make their offers more attractive to off-market sellers or to distinguish their offers from competitors is to propose a nonrefundable deposit at the time of contract execution.”

While increasing risk for the buyer, nonrefundable offers—meaning that the deposit is nonrefundable—are often successful. “This approach can be successful as many sellers equate a nonrefundable deposit with an elevated certainty of close—after all, what rational purchaser would post a large deposit and then walk away from the transaction without working really hard to make to the deal work,” says Uhlhorn.

The strategic tactic has become popular, but as a means of risk mitigation, Uhlhorn does not recommend that investors make it a standard practice. He asks: “Why take on that additional risk if not absolutely necessary?” However, there are times when it is appropriate to offer a nonrefundable deposit to win the deal. “While posting a “nonrefundable” deposit can help an interested purchaser win the deal, the purchaser must understand and accept the potential risk that they will actually lose their deposit if they walk away from the deal,” says Uhlhorn.

Before making a nonrefundable offer, the investor must be comfortable with the physical condition of the property and the surrounding market. “A standard free look inspection period—where a purchaser can get a return of its earnest money deposit at any time during a set number of days for inspection—allows a purchaser to conduct a thorough investigation of the physical and financial condition of the property,” says Uhlhorn. “During this free look inspection period, a purchaser can build out a comprehensive financial model taking into account rent growth, improvement costs and local market conditions.”

This free look period also provides the buyer with confidence in the purchase. “Without that time for due diligence after contract execution, a purchaser must conduct as much research up front and be confident that it will not discover facts later that will completely upend its financial model,” adds Uhlhorn. This period will provide some level of risk mitigation.