The most common type of real estate transaction is an on-market sale. An apartment owner who is interested in selling their property lists it with a broker, the broker markets the deal to the public, in today’s competitive market a bidding war ensues and the contract is generally awarded to the highest bidder. The more uncommon transaction type is an off-market sale, where an apartment owner who is interested in selling their property does so without enlisting the help of a broker.
If you’re an apartment investor who’s looking to expand your portfolio, to find the best deal, focus on off-market opportunities. It is true that an on-market opportunity is much easier to find. However, due to being highly marketed by a broker, the proceeding bidding war will result in an artificially high sale price. Conversely, off-market opportunities can be more difficult to find, but the financial benefits of acquiring an apartment directly from an owner are worth the time investment.
If an owner can get a higher sales price by listing their apartment with an agent, common sense dictates that they’ll be resistant to selling it off-market. However, by bypassing a broker and selling directly to a buyer, there are three main ways the apartment owner will benefit. By understanding these benefits, you, the buyer, can put yourself in the best position to negotiate with pure intentions — since both parties will benefit from the transaction — and the better you’re able to communicate these benefits to the seller, the better chance you have of securing a contract.
1. Higher Profit
The first benefit an apartment owner has by selling their property off-market is that they will actually achieve a higher profit. That’s because of the cost savings associated with not hiring a broker.
Generally, in a real estate transaction, the seller is responsible for paying the broker’s fee. A listing broker charges anywhere between 2% and 6% of the purchase price. Moreover, listing on-market increases the chances of the buyer being represented by a broker who charges the same fee. On a $5 million sale, the seller would lose between $200,000 and $600,000 in pure profit.
But, by purchasing the apartment off-market, the seller will benefit by saving between 4% and 12% of the final sale price.
2. Faster Closing
When an owner is interested selling a property, don’t automatically assume that their primary motivation is to make as much money as possible. If the owner is facing a distressed situation, which could be due to delinquent taxes or mortgage payments, facing many evictions, low occupancy, deferred maintenance or a multitude of other reasons, their main interest may be to unburden themselves of the property as quickly as possible. Even if they aren’t distressed, a faster close means they’ll get their money quicker, which they can then use for other purposes.
If an apartment owner lists a property with a broker, the broker will have to create an offering memorandum (OM). The OM is a detailed report that outlines important information about the apartment community — the financials, sub-market information, a competitive analysis and more — that can take weeks, if not months, to complete. Additionally, the time horizon widens if there is a competitive bidding situation. Then, the contract could be awarded to a buyer who, for some reason or another, backs out.
Instead of waiting for their broker to complete the OM, as well as to avoid the other potential time-consuming occurrences, the owner can sell off-market. They’ll send their rent roll and trailing 12-month expenses to the buyer, who can quickly underwrite the deal and submit an offer, expediting the closing date in the process.
3. Less Hassle
Finally, selling a property off-market has much less of an overall hassle. Again, not every owner is primarily motivated by getting the highest offer price. They may just want the least stressful exit.
By selling off-market, there are no open houses or property tours scheduled with several interested parties. There aren’t multiple question and answer sessions with prospective buyers. Random buyers and their contractors aren’t poking around the property and disturbing the tenants. And, there are no rumors floating around about the apartment community being sold to an unknown party, which could negatively affect resident and/or vendor relationships. Instead, the owner has to deal with one buyer, which eliminates much of the hassle of listing on-market.
From the buyer’s perspective, there are three ways that they will benefit by purchasing an off-market opportunity. First, they will save money by avoiding a bidding war and the broker’s interest in finding the highest paying buyer who will close. Second, they have more opportunities for creative financing since they’re working directly with the owner and can identify their pain points and goals for selling. Finally, the overall closing process is faster with the broker out of the equation.
But ultimately, an owner’s willingness to sell their apartment off-market will come down to how it will benefit them. If you can sufficiently convey these three benefits — more profit, faster closing and less hassle — to the seller, you’ll succeed in creating a win-win scenario for both parties and add a new apartment to your portfolio.
Have you ever persuaded an owner to sell you their property off-market, and if so, how?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.