Beginner Series – Where Are The Deals?
Welcome to The Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Today’s show is another in our beginner series. We all have people in our lives who are still in the learning phase. The audience of The Real Estate Espresso Podcast are sophisticated investors. Many of you own large portfolios of properties, but you probably have people in your life who are less experienced. Where do they go for information? In my opinion, many of the information sources focused on the rookie investor leave a bad taste in my mouth. So, these few shows a month, focused on beginner series, are designed to help investors who are still learning.
On today’s show, we’re going to be looking at the so-called wave of distressed properties that are supposed to be hitting the market. So, where are they? It seems like they’re nowhere to be found, and if you do find them, what is the seller looking for and a buyer? In order to answer this question, let’s break down the properties that are coming to market today into a few different categories. I speak regularly with commercial brokers across numerous markets, so what I’m discussing today is not just my opinion but observations from commercial brokers in large markets. For the purpose of this discussion, I’m going to focus on multi-family apartment projects.
Properties for sale are falling mostly into four distinct categories. Number one, some apartment complexes are owned by investment funds that have a specific mandate. For example, they might have purchased the property in a fund with a five-year horizon. That means the fund is looking to start divesting of those assets because the five years are up, for no other particular reason. Number two, there’s those properties that are upside down, they don’t have a path to permanent financing that makes any sense. Those folks need to sell or face foreclosure. Number three, are the tired landlords that have been holding onto a property for a long time and they have no succession plan with a family member to take over the business. Then number four, there are some owners with a portfolio who will choose to sell a performing asset in order to raise cash to solve a problem with a troubled asset. Each of these sellers has a different criteria for selling and therefore they’re looking for something different in the sale.
The one thing that most sellers have in common is the desire for certainty. There’s no question that any buyer is going to have a conditional period. Each time a seller signs a purchase and sale agreement, the buyer has the option to purchase and the seller’s effectively taking the property off the market until the transaction either completes or is cancelled. The longer that period of exclusivity, the more risk the seller is taking of having to remarket the property. It comes down to the basic concept that investors like certainty. They would prefer to get a lower rate of return on their money in exchange for certainty. This is why people buy UST bills and Treasuries. The numbers aren’t great, but they are certain. The same concept applies. Professional investors prefer to rate-lock their long term financing, even though they might be paying a higher interest rate. The certainty of the interest rate is more important than getting the lowest possible rate.
Now, let’s look at each of these four categories. The first one are the fund managers that are looking to sell a property. They don’t want to risk their reputation with their investors because a buyer backs out of the deal and fails to perform. So, what they are looking for is a buyer that brings certainty of execution. Once a deal is locked up, they want to know it’s going to close. We’ll come back to what that means for you, the buyer, in a moment.
The second category are the truly distressed deals. These are large, institutional lenders. These properties are not getting shopped on the market. They’re going directly to the large funds like Blackstone, Fairview, & Banner Ridge. These folks are sitting on piles of cash, and they have access to lending rates and terms that are far better than anything you and I can get our hands on. They bring certainty of closing, fast closing times, and they often get the best price from the seller. They are often buying the property directly from the lender with the lender’s support. The property may not even hit the market. The lender is not going to be holding distressed assets on its books for long, if at all.
The third group are the tired landlords. These are probably the most patient of all the sellers. The property may or may not be on the market, and the broker will send the information to a handful of closely held clients long before the photographer has even been sent out to the property to create the photo package. These sellers are not in a hurry. They’ve owned the property for 30 or 40 years and they can wait another four to six months. Getting the best price is of paramount importance since, in this case, it’s funding the balance of their retirement. They’re probably not going to shelter the capital gain in another property. They might even seller-financing a portion of the transaction in order to defer some of the tax.
The final group of sellers are those who are selling a good asset in order to rescue a troubled asset. They don’t want to sell, but they need to sell, and they need to sell in a timely manner to protect their portfolio. They don’t necessarily need the highest price. They need to raise enough cash to rescue their troubled project, and they need it in a hurry. So, certainty of execution far outweighs the purchase price.
So, what does that mean for real estate investors? It means that due diligence needs to be completed in a short time frame. It means the equity needs to be there. You’re not going to have three or four months to go out and raise the equity in syndication. The seller is going to choose the buyer who brings certainty of execution. The borrowing process also needs to have a short time frame. If you’re dealing with a borrowing process that’s got a long underwriting and approval process, you’re probably not going to be the chosen buyer unless you make some very large, non-refundable deposit commitments. This is the current landscape for value-added acquisitions as we see it based on the numerous discussions with brokers and lenders. Hopefully, this gives you some insight on how you need to position yourself in order to be a buyer in the current environment. As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.
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