Gil Uhlhorn Shares Insight on Use of Non-Refundable Offers in Multifamily Deals

March 4, 2022
GlobeSt.com

Bass, Berry & Sims attorney Gil Uhlhorn shared insight for an article by GlobeSt.com on the increasing use of non-refundable earnest money in offers by investors in multifamily deals due to the highly competitive investment landscape.

“The multifamily market across the U.S. remains extremely competitive for institutional buyers in virtually all markets and all sectors due to the limited supply, low interest rates and an abundance of available cash,” Gil said. “In such an environment, purchasers are looking for off-market deals or find themselves in competitive best-and-final rounds with multiple potential buyers.”

Gil explained that these market conditions can allow sellers to demand concessions that require purchasers to step outside their standard acquisition process comfort zone, including making their offers more attractive to off-market sellers or distinguishing their offers from competitors by proposing a nonrefundable deposit at the time of contract execution. While this carries risk for the buyer, it is often a successful strategy.

“This approach ca 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 the deal work,” Gil said.

Despite the potential for success, Gil added that investors should not make the tactic a standard practice, saying “why take on that additional risk if not absolutely necessary?” Gil suggested that before making an offer with non-refundable earnest money, investors must understand and accept potential risk that they will actually lose their deposit if they walk away from the deal.  To help mitigate the risk when leveraging a nonrefundable deposit, Gil suggested investors build out a comprehensive financial model and conduct as much due diligence in advance as possible to better ensure its accuracy.

The full article, “A Surge in Nonrefundable Offers on Apartment Deals highlights Strong Competition,” was published on March 3 on GlobeSt.com and is available online.