In real estate acquisitions, you seek the coveted off-market deals. These deals are more likely to be mis-priced, creating an attractive risk-return structure for operators with a track record for executing a specific investment strategy. However, fully-marketed deals can also be attractive opportunities. The challenge with marketed deals, however, is that you can spend a lot of time and money underwriting a deal, with no guarantee of being selected as the buyer.
Contrary to common belief, the group that bids the most is not the group that necessarily wins fully marketed multifamily real estate deals. In fact, I’d say it’s often not the group that offers to pay the most that wins the deal. To win you deals, you must form a relationship with the broker who will vouch for you and give you the ‘last look’, is motivated to work with you, and trusts you can close the deal at the terms presented.
To understand the tactics you can utilize, it’s critical to first understand the various interest of each party involved. Why would a Seller opt to give up ~2% and use a broker in the first place? Why would a broker not be motivated to vouch for the groups that bids the most? And why would a Buyer bid on a fully marketed deal?
Seller Motivations for Using a Broker
When exiting an asset, a Seller is willing to pay a big fee to a Broker to market the asset for sale, vet potential buyers, and assist the Seller through the sales process. More specifically, the Seller expects the Broker to assist with the following:
- Find the one-off (qualified) buyers willing to pay more than the market price such as a group looking to place 1031 money, groups who may be pressured to put capital to work, or a new entrant aggressively looking to enter a market.
- Ensure that every potential buyer is aware the deal is on the market and help sell the deal (i.e. pitch the upside, the market, and why its’ worth what they’re trying to sell it for).
- Manager the sale process, weeding out non-qualified buyers, facilitating tours, negotiating terms, and being a resource for the Seller.
- Sell within a reasonable time-frame, eliminating interest-rate risk, market risk, and other unknown risks from the deal.
The Seller ultimately has to balance getting the best price at the most attractive terms, while also getting surety of close, but it’s the Broker’s job to empower the Seller with the information needed to make these informed decisions.
A Broker is a fiduciary of the Seller, however, the Broker also has his or her own self-interests in mind when selling a deal. Here are the broker’s motivations:
- Brokers are typically paid on commission, so they’re motivated to sell quickly and for a good price. It’s only logical that they’d prefer to sell now for a good price to a qualified buyer than several months later for a slightly better price. An extra $50k in sales price may be meaningful for the seller, but it’s not for the broker. Broker’s want to take the path of least resistance.
- Identify a buyer that will close. This typically means the Buyer has a track record of executing similar deals within the submarket.
- Find a Buyer that he or she can do more deals with in the future. Brokerage is a relationship-driven business so brokers are motivated to establish a relationship with a Buyer who they can work with in the future.
Buyer Motivations to Bid on Marketed Deals
As a Buyer, why would you buy a fully marketed deal from a Broker who knows all the players in a market, is motivated to get a good price, and who is working on behalf of the Seller? Well, there are several reasons to buy a marketed deal:
- Buy at an attractive price (fair price). Just because a deal is marketed doesn’t necessarily mean that it’s over-priced. Instead, it means that it’s likely to trade at today’s market value, which could still be attractive.
- When buying a marketed deal, buyers want to trust they’re not negotiating against themselves and the Seller will hold up their end of the deal.
- They want to form a trusted relationship with the broker and do more deals with them in the future. By taking this approach, you can ensure the Broker is honest with you and trust they’ll give you the last look at the deal. The relationship could lead to access to off-market or mis-marketed deals in the future.
With those motivations in mind, there are several ways a Buyer can position themselves to win fully marketed deals without having to overpay.
Brokers typically require potential bidders to complete a buyer questionnaire which asks about your portfolio and track record, high-level underwriting assumptions including a rough capex budget, sources of debt and equity, debt terms, if the decision-makers have signed off on the deal and have toured the asset/market, who’s going to manage the deal, and what your due diligence process looks like etc. It’s used to assess how much time potential buyers have spent on the deal, their ability to close, and how qualified they are. At Atlas, we view this as an opportunity to pitch ourselves. We detail our underwriting assumptions which aren’t simply based on the trailing operations, but on our knowledge operating similar deals and discuss our, debt assumptions based on recent term sheets, share case studies from similar deals we’ve executed, and further make our case as a qualified buyer.
This shows that we’ve dedicated time and resources to the deal, have a history of execution, and are serious buyers.
In real estate relationships and reputation are everything. We provide a comprehensive list of seller and lender references the broker or seller can reach out to. By acting with integrity and always doing what we say we’re going to do, these references can vouch for us as people and professionals. Writing in the buyer questionnaire that “we’ve closed 100% of the deals that we’ve had under contract” is great, but having a previous seller talk about the professionalism with which we conduct ourselves is far more valuable.
Build a True Relationship with the Broker
Brokers want to do business with people they like. During the bidding process, we think it’s important to build a real relationship with the broker. Go out to dinner and drinks, take interest in him or her as a person, and find ways to connect. Most importantly, discuss ways you can work together in the future. If the broker recognizes that there’s a lot of business that he could win with you in the future, he’s much more likely to steer this deal your way. With trust established, a broker will be more honest with you and potentially give your group the last look at a deal. Furthermore, the relationship could lead to access to off-market or mis-marketed deals in the future.
Buyer Interview Process
The buyer interview is another opportunity to showcase your expertise, the depth of your underwriting, and how serious you are about the deal. It’s also a chance to make a connection with the Seller. Just like brokers, sellers enjoy working with people they like. Try to connect with the seller on a personal level rather than simply discussing your firm and the deal.
Submit an LOI with Fair Terms
Although the LOI is a rough outline of terms, it should be well-written and fair. The earnest money deposit, inspection period, closing timeframe, closing costs, and extension options should all be within typical market terms. While there’s sure to be many terms negotiated in the PSA, don’t be overly egregious or out-of-market with the terms of the LOI.
Although we typically acquire deals that are off-market, we’ll look at all the marketed deals that fit our target deal profile within select markets. If the deal pencils and we want to take a run at it, we’ll do everything we can to position ourselves to win the deal. Through this process, we maximize of efforts and upfront due diligence process to put ourselves in the position to win deals that are fully marketed and competitively bid.
What tactics have you found successful when bidding on marketed multifamily deals?