Recently, we sold a mid-size multifamily apartment building after four years of ownership. As sellers, we found ourselves in the alternative position of evaluating offers instead of submitting them. The property generated a lot of interest and we ultimately sold at a 230% increase from our purchase price.
As someone who remembers what it’s like as a new investor trying to build credibility, I found myself judging these offers with limited information. Many offers were on sales contracts, while others were submitted as an LOI. Some offers had cover letters, and many had no context. The offers and terms were wide-ranging even though our broker provided solid pricing guidance.
It became clear that there were four groups with strong credible offers, and we spent our time evaluating them. The group we went with put together a great offer. We determined that it was the strongest offer even though it was third in terms of the actual price.
So why would we pick an offer where we had others with a higher purchase price? The answer could help you land your next deal.
The trick to buying more properties is to focus less on buying and more on the concerns of the seller. Most investors are focused on acquisitions and ensuring they protect themselves throughout the buying process. However, if you want to do more deals, the key is to think like a seller.
Once a seller decides to sell, they want to move on. They may want to buy another property or retire. Maybe they want to take that trip around the world or buy that vacation home. Maybe they simply want to rid themselves of the responsibilities of ownership. Either way, they are envisioning how their life will be enhanced when they sell. Once they can see this new life, the only thing preventing it from becoming a reality is the deal falling apart. That’s why sellers want certainty that a buyer will close or at least be incentivized to make every effort to close.
In our case, our buyer made strong assurances that they would close. They offered seller-friendly terms including a cash offer (with proof of funds), quick closing, hard earnest money of more than 1%, no contingencies, and no inspection. In addition, they toured the property twice and after their second visit, my maintenance lead called me to debrief me. He informed me that they were making plans as if they already owned the property.
When the final offers came in, my partners and I quickly aligned that they were the right buyers for us. We were concerned that the rising interest rate environment would encourage a group to re-trade or renegotiate the price. We also feared a drawn-out process with backed-up appraisals and apprehensive lenders. The buyers demonstrated a commitment to close and stood out by quickly establishing their credibility, demonstrating their clear vision, and offering strong terms.
1. Establish Credibility
Though the investor was new to my broker and me, they did a great job of establishing credibility right away. For starters, they were local and owned other properties in the area. They were looking to scale, and our property fit what they were targeting, In addition, they had cash in the bank ready to deploy, which gave us confidence, especially with interest rates on the move.
When making offers, establish your credibility quickly. Highlight your experience and if you don’t have much experience, align with people who do. A seller wants to know that you are likely to close if they select your offer, so you want to give them confidence that you are the right fit.
2. Create a Clear Vision
The buyers were local, so they know how popular the submarket is and also that inventory is limited. They had a clear vision to build on our business plan to take the property to the next level. They demonstrated this by touring the property twice and clarifying their plan. This gave them the confidence to come in with strong terms that enabled them to win the deal, even though they did not have the highest offer.
When making offers, go further than putting numbers in a spreadsheet. Have a business plan and clear vision for the property. A seller wants to see that you have taken the investment opportunity seriously and that comes from touring the property and surrounding area, and meeting with key stakeholders.
3. Strong Terms
Finally, you want to offer strong terms that demonstrate a commitment to close. You may not be able to offer hard money, but you can create other terms that demonstrate that commitment. However, recognize that in a competitive market, your “fair offer” simply may not cut it. In a competitive market, you may need to consider reducing your due diligence timeframe, putting up more earnest money, or waiving contingencies.
As the market dynamics shift, there will be more opportunities for investors who are willing to think like a seller to offer attractive terms. Demonstrate your commitment to close and stand out from the pack. The key to improving your buyer-side acquisitions is to think about what you would want if you were on the other side of the table.
About the Author:
John Casmon has helped families invest passively in over $100 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Multifamily Insights. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com