The myth of the ‘all-cash’ foreign buyer

International purchasers may pay in cash, but often they're bankrolled by mortgages in their home countries

Illustration for The Real Deal by Paul Ciaravino

It’s an oft-repeated mantra in New York real estate that foreign buyers pay in cash. Indeed, their ability to come to the negotiating table with rubles and renminbi and reals in hand — ensuring a quick closing — is seen as confirmation of their affluence.

“The perception here is that because they’re not getting a loan in the United States … they are these really wealthy people putting down hundreds of thousands of dollars,” said Marc Fitapelli, a Manhattan-based commercial and residential real estate attorney.

But that’s not always the case.

While everyone knows when a foreign buyer obtains a mortgage in the U.S., when they get a loan in their home country — secured against cash, stock, local real estate or other assets — U.S. sellers, brokers and attorneys are often none the wiser.

Guido Pompilj, founder of Manhattan-based Vivaldi Real Estate — who works with foreign buyers, primarily from his native Italy — estimated that 75 percent of foreign nationals who buy in New York are truly all-cash. But the remaining 25 percent, he said, rely on financing, with the majority taking out loans back home.

Even some buyers who can afford to purchase entirely with cash are taking out loans, rather than depleting their capital, insiders said.

“[Foreign buyers] come here and they have the cash ready, or the ability to get it ready in a timely manner,” said Barak Dunayer, the founder of Barak Realty. They appear to be all-cash when they arrive stateside, but eight times out of 10 they are relying on financing back home, he said.

Coming to the U.S. with cash in hand, of course, makes it easier to convince New York City sellers that a deal is doable, given the hurdles foreign nationals face when obtaining financing here.

One of Fitapelli’s clients, a London-based investment banker, financed his purchase of a $4 million Upper West Side condo with a loan secured against stock that he obtained in the U.K., after failing to find a better interest rate in the U.S.

It’s not that foreign buyers are sneaking around, Dunayer said. It’s that the sale is structured around a cash payment, without a mortgage contingency. Just like a true all-cash deal, the buyer doesn’t have an out if he or she can’t come up with the purchase price, and the seller is entitled to keep the deposit if the deal falls through. For that reason, sellers rarely probe about where the cash is coming from, Pompilj said.

“They’re not coming with a contingency, so how they raise their money overseas is, candidly, not relevant,” said Michael Xylas, co-manager of the real estate department at law firm Abrams Garfinkel Margolis Bergson in Manhattan. “A check is a check is a check.”

Sellers, and even brokers, may never know whether the funds for the purchase are ultimately coming from an Italian or a British bank, rather than an individual’s existing wealth, insiders said.

In theory, loan information should come to light when a buyer submits financial statements to the seller, particularly if a condominium board is involved, Pompilj said.

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But that is not a surefire way to uncover international financing, and there are no rules requiring foreign nationals to disclose overseas loans, experts said. A condo board or a sales office may ask for proof of a buyer’s funds, but that has more to do with proving they can pay common charges than determining whether or not they are leveraged abroad, Xylas said.

“When a client gives me financial statements and tells me he has no loans overseas, there’s no way that can be determined for sure,” Pompilj said.

As for more-stringent co-op boards, most foreign buyers steer clear of them anyway, insiders said.

Sometimes brokers don’t ask enough questions of their international clients. “They don’t qualify the buyers all the way,” Dunayer said, adding that as a seller’s broker, he has met numerous buyers who appeared to be all-cash, but upon further questioning, turned out to have loans overseas.

However, with the economic upheaval roiling Europe and its banks, it may become more difficult for Europeans to get financing abroad, experts said.

And, for some foreign buyers, a mortgage in the U.S. is also an attractive option, albeit one with additional complications — including, typically, a 50 percent down payment, translations of financial documents, and additional reference letters to verify assets and income. The biggest difficulty, however, may be the small number of U.S. banks willing to lend to foreigners, a problem that became more pronounced when U.S. banks tightened their lending standards after Lehman Brothers collapsed.

“Now, it’s a very segmented market,” said Ilya Bykov, principal at New York’s Protax Services Inc., which provides legal, tax and property-management services for international clients. “There are very few private banks that would touch foreign nationals.”

But that might be changing, according to sources, including Jason Auerbach, a divisional manager at First Choice Loan Services.

Auerbach opened the New York office of First Choice a year ago, partly to cater to foreign nationals seeking U.S. mortgages. In the last year and a half, three competitors have also started lending to this market, he said.

“The foreign national mortgage market is very active,” he noted.

While the bar for foreigners to obtain mortgages in the U.S. is high, the upside is an interest rate that, in many cases, is lower than those available at home, insiders said. (A buyer like Fitapelli’s London-based investment banker, with an established banking relationship back home, may still be able to get a lower interest rate overseas, experts said.)

Interest rates in Russia, for example, vary between 10 percent and 20 percent, depending on the type of loan involved, Bykov said. But wealthy Russians whom private banks are courting as customers can get rates in the U.S. as low as 2 percent, he said.

Fitapelli and Robert London, a private mortgage specialist at Manhattan-based lender Thomas Funding Group, worked with one Panama native who signed an all-cash deal — and could have come up with the funds if necessary — but decided to finance half the purchase price with a U.S. mortgage anyway.

The contract did not have a mortgage contingency, nor did it prevent the buyer from applying for a loan, Fitapelli said. But the seller, who assumed the foreign buyer had the money in hand, was “a little upset,” he said.

“It’s true for brokers and sellers,” Dunayer said. “Just ask the questions; don’t take anything for granted.”