January 30, 2019

JF1611: How To Find Your First Apartment Syndication Deal Part 1 of 6

Part 1: On Market Vs. Off Market Deals

We’ve covered a lot of the apartment syndication process so far. Now it’s time to start talking about actually searching for and finding that elusive first deal. We’ve talked due diligence, financing, raising money, and how to structure the GP & LP compensation. This episode will be covering the details of on market vs. off market deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.


Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series –  a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy – that is raising money to buy apartments and sharing the profits. For the majority of this series, we offer a document or a spreadsheet or some sort of resource for you to download for free. All of these free documents, as well as past and future Syndication School series can be found at SyndicationSchool.com.

This episode is going to be episode one of what will likely be around a four-part series, maybe six parts (not really sure yet). This series, no matter how long it will be, will be focused solely on how to find your first apartment syndication deal.

In this episode you will learn what you need to accomplish before you are ready to find a deal, so we’re going to do a little summary of what we’ve talked about so far on Syndication School, and then we’re going to focus on talking about the differences between the two main types of deals, as well as talk about some of the factors to keep in mind that will most likely win or lose you a deal once you start to submit offers.

So that’s what we’re gonna talk about in this episode, but so far what we’ve learned in the Syndication School, just to summarize what we’ve done so far – number one, I want to congratulate you on your journey, but two, I also want to let people who are just starting to listen now, all the steps that we’ve discussed so far, as well as what you’re going to need to do in order to get to the point where you’re ready to find your first deal.

The first Syndication School series – we’re teaching you about the apartment syndication process, as well as the important terminology that you’re going to need to know in order to communicate with your investors, as well as team members. So that’s the educational requirement that you’ll need. Then we also talked about the experience requirement that you will need, that is previous real estate and/or business experience… Experience and education combined will put you at the point where you’re ready to start your journey.

We also talked about establishing  a 12-month goal, as well as a long-term vision, so we talked about goal-setting. We talked about the thought leadership platform and branding in general, so how you can establish yourself as a credible apartment expert by creating an interview-based thought leadership platform – that is a podcast, YouTube channel, blog, things like that.

We also went through the process of evaluating and ultimately selecting the target market that you will invest in. We also talked about the team members that you’re going to need to bring on, what their responsibilities are, how to find them, how to interview them, how they’re going to interview you.

Then we also talked about everything passive investors – different types of passive investors, how to find passive investors, how to talk to passive investors, what questions to expect to get from passive investors… Everything you need to know about the actual raising money aspect of the apartment syndication investment strategy.

Then last week we talked about the three-step financial analysis, because you need to know how to analyze a deal before you actually start looking for deals. The main focus was on selecting an apartment syndication investment strategy that you can use to screen out the majority of deals that come across your desk or your e-mail inbox.

Once you’ve done all those steps, as well as the many steps in-between – you can learn all about the steps I’ve just mentioned in the previous Syndication School series at SyndicationSchool.com – now you’re ready to find your first deal. In this episode we’re going to focus on distinguishing between the two main types of deals, but overall in this series we’re gonna talk about how to find deals and how to determine which deals to actually underwrite. In the next series we will most likely focus on underwriting.

Now that I think of it, this will probably be a pretty long series, so at least six parts, just because we have a lot of strategies for finding deals to discuss… Because at the end of the day, certain strategies work in any market, but the way you’re gonna find deals in a seller’s market is gonna be different than the ways you find deals in a buyer’s market, or the top of the market, or at the bottom of the market, in a really big town or a really small town – it’s all gonna be a slightly different approach… So we’re gonna start high-level the first couple of parts, and then kind of get more detailed and try to find a creative or a specific strategy that will work for you based off of your current situation.

With that being said, as I mentioned, we’re gonna talk about the two main types of deals. In reality, the two main types of deals are on-market deals and off-market deals. If you’re a real estate investor, if you’re a loyal Best Ever listener, you know what those mean… But just to reiterate, an on-market deal is going to be a deal that is listed by a real estate broker, so a broker that’s doing their own lead generation strategies to find owners who are interested in selling their properties. The owner will list their property with the real estate broker, who will then over the next couple of weeks or the next couple of months create an offering memorandum, which is that sales package that you see whenever a  new deal is presented to you. Then, once that offering memorandum is completed, they will make sure they get the financials – the T-12 and the rent rolls – from the owners, and they will list all that information either on their website, or they will send it via e-mail after you signed a confidentiality agreement.

Then the real estate broker will host open houses or property tours on a case-by-case basis with people. The interested buyers will be in communication with that listing broker, and they’re kind of the go-between between the buyer and the seller. As a buyer of an on-market deal, you’re most likely only going to be talking to the actual broker. You will have limited access – if any access at all – to the actual owner. And as I mentioned, it’s going to be mass-marketed using that offering memorandum. So these are on-market deals.

Off-market deals are deals that are not massively listed by real estate brokers. The two main types of off-market deals is gonna be 1) somehow you find the owner of the property, whether it’s through direct mail, through a friend of a friend, they attend your meetup, or they’ve reached out to you… There’s many different ways to actually find the off-market deals, and we’re gonna talk about that in a future part in this series… But the most important part is that it’s not listed by a broker.

So you’re either going directly to the owner, or the broker found the deal, and before listing it, presented the deal to you as an off-market opportunity. So on the one hand, you go directly to the owner; on the other hand, the broker brings you the deal before actually putting it on the market. Both of those are considered to be off-market deals – essentially, a deal that’s not listed for sale on the market.

The main differences between the two are that for on-market deals they’re gonna be a lot easier to find, whereas for off-market deals it’s gonna be a lot more difficult to find. Pretty obvious, but if an on-market deal is going to be mass-marketed by the broker, then everyone in your area, or anyone who has that city as their target market is going to have the deals sent to their inbox. So this is a strategy where technically at the start of every week you can go to your broker’s website to see what new deals they have listed, and then throughout the week you can favorite or flag various e-mails you receive from brokers with a new deal, and then underwrite it as they come in… Whereas for off-market deals, you’re most likely not going to have off-market deals sent to your inbox on a frequent basis. If  you’re gonna get an off-market deal from a broker, they’ll most likely call you, and if you are going to get an off-market deal from an owner, then sure they could technically call you if you’ve got a strong website, Facebook advertising; you need to be proactive in order for them to reach out to you, but more than likely you’re going to be reaching out to them…

So you’re gonna be sending out direct mailing campaigns and the various other strategies, which again, we’re gonna discuss in a future part of this series. But overall, the point is on-market deals are easier to find, off-market deals are more difficult to find… And what I mean by deal is an actual property for sale, not a property that you’re going to actually buy. Because as I mentioned, since on-market deals are easier to find because they are mass marketed, then you’re more likely going to have to pay more for that property, or at least have a more difficult time finding a good deal because of that competition. So if everyone is looking at this property and you’ve got ten offers, and one offer is higher than the other offer, higher than the other offer, then the price will be bid up and the price will be higher than it would have been if for example you’ve found that owner before they listed it with a broker and you are the only person that was in contention for that deal… Or if the broker brings that to maybe a handful of their premiere investors – it’s still gonna be a lot less competition than the on-market deal.

So the two main differences are going to be the ease of finding – on-market deals are easier to find compared to the off-market deals… But you’re most likely gonna either pay more, or you’re gonna have a lot more difficult time actually putting a deal under contract that is listed on market, compared to off-market.

Which strategy you pursue really depends on how much time you have, and your skillset, and just what your strategy is. There’s plenty of investors who have only bought on-market deals, and there’s other investors who have never bought an on-market deal… But just to talk a little bit more about the off-market deals – it’s important to understand the benefits of these, because not only are there benefits to you as the buyer, obviously, but you also want to figure out what the benefits are to the seller. Because as I mentioned, the on-market deals are going to likely catch a higher price due to competition, so why would an owner sell the property to you off-market? If you reach out to an owner, he might say “Yeah, I kind of am interested in selling my property, but I think I’m gonna list it with a real estate broker, because that way I’ll get the highest price.”

So by knowing how selling their deal off-market will benefit the actual owner, you can put yourself in the best position to negotiate, with pure intentions, in order to create a win/win scenario. These are gonna be the off-market opportunities that you get from the owner themselves; these don’t necessarily apply to one that’s still technically listed by a broker, but not mass-marketed. Those kinds of deals are in-between, and kind of have the characteristics of on-market and off-market deals, but… The owner will benefit in two major ways by selling their deal off-market.

Number one is going to be the cost savings associated with not having to pay the broker’s commission. On these large apartment communities on multifamily, the typical commission is going to be between 3% to 4% of the purchase price if the purchase price is below 8 million dollars. Once the purchase price goes above 8 million dollars, then the commission is a flat fee of around $150,000.

So if the owner is wanting to sell their property and they list it with a broker, they can go ahead and knock off at least around $150,000 of the profit they’re gonna make, because they’re gonna have to pay the broker money for putting together the sales package, and tours, and things like that. Now, if they sell it to you off-market, they get to pocket that $150,000 themselves.

The other benefit is going to be the fact that selling a deal off-market can have less hassle. From the seller’s perspective, they don’t have to worry about hosting multiple property tours, they don’t have to worry about a broker coming back to them after every single property tour with a list of questions from the people who toured the property. They don’t have to worry about random people poking around their property, which in turn will result in rumors floating around about “Why are these people touring the property? Is the property being sold?”, which could affect the relationships with the tenants and the vendors.

Instead, they will have one person poking around the property, which is gonna be way less than having 10, 20 property tours. They’ll only have to answer questions from one person, and the number of rumors floating around the property about it being sold will be minimized. So those are the two main benefits.

Then how YOU actually benefit from buying the deal off-market are pretty obvious, but we’ll hit those anyways. Number one, as I mentioned, less competition. So since you are the only person in contention for this deal, you will likely be able to pay a little bit less, and even if it doesn’t mean you’re paying a lower purchase price, you might be able to create better terms that will result in you paying less.

For example, right now in the top market a lot of people are putting down these non-refundable earnest deposits, whereas if you buy the deal off-market you’re probably not going to need to do that. You’re probably not going to need to make your offer very attractive by adding in those types of things.

Another example would be you’re not having to waive any due diligence items. Both of those things don’t directly affect how much money you’re paying for the deal, but if you do a non-refundable earnest deposit and you end up not closing on the deal, that’s money that you’ve lost. Or if you decide to waive due diligence fees in order to win a deal, or if you waive due diligence items in order to win a deal, and you end up closing and realizing that you under-estimated the deferred maintenance by 50%, you’re gonna lose all the money.

Something else too is that there will also be more opportunities for creative financing. Again, the owner of an on-market deal, with a ton of competition, is gonna go with the best offer, and if they’ve got one offer that’s all cash, and then another offer who wants to do some sort of creative financing, like a lease option or seller financing, they’re most likely gonna go with that all-cash offer. Whereas if you’re buying the deal off-market, that means you have the chance to actually speak with the owner, and that can help you identify their goals, or specifically why it is they wanna sell their deal. Once you figure out exactly what they wanna get out of selling that deal, maybe you still just need to get a regular loan, but maybe you can do some sort of seller financing or some sort of lease option, which will reduce the amount of money that you have to put down, and it can make you qualify for the deal easier, as well as maybe make the results of your underwriting meet the required terms that you need, whereas if you did your standard 25%-30% down loan, the deal doesn’t make any sense.

And then lastly, the off-market deals are likely to be perceived as better deals in the eyes of your investors, and that kind of shows that extra level of effort you’re putting forward, because you’re not just sitting back and waiting for those deals to come into your inbox, you’re actively out there proactively either reaching out to owners, or building relationships with the brokers to the point where they’re sending you deals before even listing them on the market, so they’re perceived as better deals, and you’re perceived as a better investor in the eyes of your passive investors.

Again, when you’re just starting out, you can either go all-in on the off-market strategies, which we’ll go over in a future episode, or you can start off by just reaching out to brokers, getting set up on their automated lists, and practicing underwriting their deals, touring properties, touring comps, running rental comp analysis and building that relationship with the broker with the hopes of them ultimately sending you off-market deals in the future.

For example, I just started looking for deals towards the end of 2018, so that was only a few months ago… And I have about 5, 6, 7 brokers that I’ve reached out to, I’ve talked to on the phone, I’ve met a few of them in person already, through property tours, or just getting lunch or coffee. Every time I talked to them, I said “Ultimately, I’d like to get off-market deals for me, but I understand that you don’t know who I am, you don’t know my experience, and you’re more likely going to send your off-market opportunities to people that you know can close… And I want to prove to you that I am a person who can close.” I would say that, and they’d be like, “Yeah, we understand.” They wouldn’t say “We’re not gonna send you deals”, but they would just kind of be like, “Yeah, you’re right.”

Well, just last week one of the brokers that I was working on a deal with towards the end of last year, the deal ended up not working out, but we did a property tour together, kind of chatted about our personal lives – we had a lot in common, actually – and he referred me to a lender who I talked to as well, and then just last week he called me with an off-market opportunity. Now, that off-market opportunity was not in our target market, which obviously we’re not gonna be investing outside of our target market, because we have not evaluated other markets yet, plus I live here and this is what we wanna focus on… But just the fact that he sent me that off-market opportunity kind of shows that working on your relationship with the brokers to get sent off-market deals is possible, and it is possible to do it quickly, too.

Tomorrow’s episode, part two, is going to be focused on how to find deals from brokers, but I just wanted to quickly tell that story before going into the last part of this episode, which is going to be the factors that will win or lose you the deal.

Obviously, how you buying the property and your offer benefits the owner is going to be very important, and we went over how the seller, as well as the buyer benefits from buying a deal off-market, and even like an on-market deal as well… But there’s five other factors that will ultimately win or lose you the deal. One is going to be the price, so how much money you actually offer; 10 million dollars versus 10.5 million dollars. The highest price doesn’t necessarily always win, but it’s gonna be an important factor that the owner will take into account when they are determining who to sell their deal to.

Something else is going to be the terms. So you’ve got the price, but then you’ve also got the terms, which are things like the earnest deposits, the inspection period, the due diligence period, the closing date… So terms that the owner might take into account when deciding who to sell the property to are whether you put a non-refundable earnest deposit, or if you are submitting an all-cash offer, or if you decide to waive certain due diligence items, so that you can close faster or reduce the opportunity of you backing out of the actual deal. Those terms could win or lose you a deal, especially in a hot market.

Number four is going to be the relationship you have – that’s the relationship you have with the broker who is listing the property, or the owner if it’s an off-market deal. So what’s your relationship with that broker – have you been following the strategies that we’ll talk about tomorrow? Have you been following up with them? Have you been paying them a consulting fee?

And then for the owner – if you’re sending out direct mailers, then you probably don’t know the owner at all… However, there are ways to increase your chances of being recognized by that owner. For example, if you have a powerful thought leadership platform with a bunch of followers, maybe they’ve heard of you before. Or if you are talking to a lot of the brokers, property management companies, lenders in the market, and they also work with the same lenders, they too might recognize you… So your relationship with the owner is gonna be a little bit more difficult, but there are ways to build that relationship with them without actually meeting them first. Then it also helps if you have a meetup group in the market as well, for name recognition.

Number five is going to be your team. For example, some owners won’t sell to a investor who doesn’t have their own in-house property management company, because they believe that that company is not integrated enough and ultimately won’t be able to close on the deal. Now, whether that’s true or not doesn’t really matter, because some owners think that to be true. And of course, they’re also going to want to know about the experience of your team; so what’s your experience, what’s your property management company’s experience… Because ultimately, if you’re inexperienced, then you’re less likely to be able to close on that deal.

Then the last thing that could win or lose you the deal is gonna be your underwriting. What that means is when you’re underwriting a deal – sometimes a larger one, 100 units, 200 units, everyone’s gonna underwrite that deal differently, based on their background and their skillset. So if you’re able to identify more value-add opportunities than the next guy, then you’re gonna be able to pay more for that property… And vice-versa – if you’re unable to identify value-add opportunities that your competition are, then they’re gonna be able to submit a stronger offer, because they’re gonna be able to increase the NOI more than you will be able to.

So those are the six things that will ultimately win or lose you the deal. 1) How it will benefit the owner, 2) your offer price, 3) your offer terms, 4) your relationship with the selling representative (broker or owner), 5) the structure and experience of your team, 6) your ability to identify the most amount of value-add opportunities while underwriting the deal.

So that concludes part one. In this episode you learned about the seven (or so) things you need to do before you’re ready to actually find your first deal. Then we also discussed the differences between the on-market and off-market deals, as well as how the off-market deal can benefit you as a buyer, and then the seller as well. Then we talked about the six factors that will ultimately win or lose you the deal.

In tomorrow’s episode – or if you’re listening to this way in the future, the next episode – we are going to discuss how to find off-market and on-market deals from real estate brokers.

To listen to other Syndication School series about the how-to’s of apartment syndications, and to download all of the free documents that we’ve provided for past episodes, visit SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow.

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