Part 3: The Main Way To Find Off-Market Apartment Deals
Last week Theo began discussing how to find properties for you to syndicate. We heard about on market properties, now it’s time to start talking about off market properties. When it comes to syndicating large apartment communities, you will not be alone in your hunt for deals. Having a few different sources and avenues to explore can only help your business. 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 syndications. As always, I am your host, Theo Hicks.
Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of the series we’ll be offering a document or a spreadsheet or some sort of resource for you to download for free. All these free documents, as well as the past and future Syndication School series can be found at SyndicationSchool.com.
This episode is going to be part three of what will likely be a six or an eight-part series entitled “How to find your first apartment syndication deal.” If you haven’t already, I recommend listening to parts one and two, which aired last week. In part one we discussed the difference between the two main types of deals, and that is an on-market deal and an off-market deal. Then we quickly din an overview of some of the factors that will ultimately win or lose you a deal.
Then in part two we talked about how to find on-market deals through commercial real estate brokers, as well as provided a few tips on how to eventually have those same brokers send you their off-market opportunities.
In this episode, part three, we are going to talk about finding off-market deals. That’s gonna be part three and part four, and we’re gonna go over ten ways to find off-market deals. In this episode we’re gonna talk about one way, which is probably one of the most popular ways to find off-market deals besides sourcing those through broker relationships.
As a refresher, off-market deals are not massively listed by a broker, so really the only two ways to find off-market deals – not necessarily actual strategies, but just high-level, the ways you find off-market deals are either speaking directly with the owner of an apartment community, or by speaking with someone who knows the owner of the apartment community.
Last week when we talked about finding off-market deals through brokers, the deal is I guess technically listed by a broker, because the owner is represented by a broker… But since the brokers are the ones who know owners, they might send you the deal before they mass-market it to the public. So that is kind of hybrid on-market/off-market, but we’re gonna consider that an off-market deal.
And of course, there’s other people who also know owners, and we’ll dive into that in part four, so tomorrow’s episode… But for now, the main point I wanna make is that really the only way to find these deals are either to speak directly with an actual owner, or to speak with someone who knows owners. All of your off-market lead generation strategies should be focused on reaching out to owners and reaching out to people who have a relationship with actual owners… And that’s really all you should be doing; anyone that doesn’t necessarily know an owner should not be pursued as it relates to finding these off-market opportunities. In this episode we’re gonna focus strictly on, as I mentioned, one of the most common ways to find off-market deals, and that is through direct mail campaigns.
Now, as I mentioned last week, before I get in the strategy, when you’re starting out, if you want to, you can just focus on cultivating relationships with brokers, and underwriting deals that are on-market, and then hopefully after six months to a year after you close on a deal, they can start sending you their off-market opportunities. However, again, it’s based on your preference; you can also pursue off-market deals right away, from the get-go, or you can do a combination of both. At the end of the day it’s really up to you, and it’s based off of the market. If you’re able to find solid deals that are listed by brokers, then more power to you, but if you’re having difficulty finding off-market deals that pencil in, then maybe it’s time to add in one of these ten strategies we’re going to discuss… And one of those should probably be a direct mailing campaign.
So for those of you that don’t know what a direct mailing campaign is, essentially it is where you send out a batch of letters in the mail to apartment owners directly, with the purpose of having them reach out to you, and ultimately you negotiate and put their property under contract.
The main parts of the direct mailing campaign are gonna be the list, so who you’re mailing to, as well as the actual marketing piece, so what you’re actually sending to these owners, and then how you approach screening their phone calls. Those are the three things we’re gonna talk about in this episode – how to create your direct mail list, how to create your direct mailing marketing piece, and how to screen incoming phone calls.
For the list, if you remember back in series number six, where we selected a target market, one of the exercises you performed was the 200 property analysis exercise, and I believe there’s actually a free document that we provided that was the template for that exercise. Essentially, what you did in order to have a better understanding of your market on a street-by-street and neighborhood-by-neighborhood level, we had you pull data on 200 actual apartments; not necessarily apartments for sale, but just apartments in the market… And looked at things like the rents, and their occupancy levels, and when they were built, how much they sold for… And one of the things we did was actually record the owners’ information. I mentioned that that list would eventually be used for a direct mailing campaign… So now it’s eventually, and you can start off by mailing to the owners of those 200 properties.
Now, before you actually mail all those properties, you wanna run through that list and make sure that those properties meet your investment criteria, which we talked about in series number eleven. So if you don’t know how to set your investment criteria or you haven’t done so already, make sure you check out series number eleven at SyndicationSchool.com. But essentially, your investment criteria is what you’re gonna use to initially screen out deals, because obviously there is a ton of cities — you’ve got 50 states in the U.S, you can’t look at every single deal in every single state, so of course, one of your investment criteria is gonna be the market. But then once you actually select the market, there’s gonna be all different types of properties that are listed for sale; some that are class A, super-luxurious, other ones that are class D, very distressed, and it has a lot of problem tenants.
So another part of your investment criteria is gonna be your investment strategy; so are you gonna be buying these turnkey, class A properties, or are you gonna be focused on distressed, class D properties, or are you gonna be somewhere in between? Things like that are what you’re going to want to use to screen out the deals as they come in from brokers, as well as use that criteria to build your list.
In this case, since the list is already created, and at least you’ve got 200 properties, you’re gonna wanna go ahead and make sure that you screen out any of those deals that don’t meet your investment criteria.
Now, once you’ve either exhausted that list of 200 apartments, or if you mail to them in tandem with that list, you can create an additional list — you can either do it yourself manually, going on the appraisal or auditor websites and pulling owner information on properties, but that’s gonna be a little bit difficult, depending on where you live, because you’re not going to be able to easily screen out the properties, because you’re either gonna have to manually go through each individual property, which is gonna take you forever to do, or you’ll be able to download a list – which is ideal; hopefully they let you download a list… If that’s the case, then it’ll be a little bit easier to screen out some deal, but it’s not gonna be perfect, because the data that the appraisal or auditor site holds is not going to be comprehensive, which is why a lot of people who do direct mailing campaigns will build a list using some sort of online service who specializes in building these types of lists.
Examples of such sources are things like ListSource, Direct Mail Tools, Open Letter Marketing… Those are three websites that you can go to and you can essentially input your investment criteria, and it will build you a list of all the properties that meet your investment criteria, including the owner’s name and address. For most of these websites, you can actually send out your direct mailing campaigns through them. So you can create your letter, and the type of letter (envelope), the frequency, and then go ahead and pay them to do that for you.
Another option is to get a comprehensive, full list of the apartments in your market from a local title company, or from your real estate broker. I know for me, I have a very solid relationship with a realtor in Cincinnati, who sends out direct mailing campaigns on my behalf for free, and she sends them to whatever property I want. At the time, I was looking at fourplexes, so I was just sending them out to fourplexes, but if I went back to her and said “Hey, can you start sending them out to 100-unit apartment owners?”, it would just be a couple of clicks in her MLS system and she’ll be able to send those out.
Not every broker is gonna do this for you. I had a personal relationship with this person for multiple years before I even asked that, but that’s just another option… And it’s actually gonna be the cheapest option, because you won’t have to pay for the realtor, or the broker will pay for that.
But your best bet is either going to be to manually create the list if your markets auditor or appraisal site allows you to download a list that has enough information that it allows you to 1) screen out any deals that don’t meet your investment criteria, and 2) obtain the owner name and the actual address.
Now, sometimes the owners of an apartment community is going to be an LLC. If that’s the case, in order to determine who the owner of that LLC is, you can go to the Secretary of State website and look up that LLC. Again, depending on the state, you might have to do a couple of extra steps, but at maximum you’ll have to find the articles of organization and the person’s name and address, and maybe even the phone number will be included on that document.
Now, the types of properties that you wanna mail to, in addition to ones that meet your investment criteria, in order to maximize your conversion rate, will be to reach out to owners who are motivated to sell, for one reason or another.
Now, the reasons an owner may be motivated to sell – the most common reason would be they’re distressed in some form; something’s happening in their personal life, or something’s happening at the property that makes them no longer want to own it, because it’s too much of a hassle… And if you find them at the right moment, they may be motivated enough to sell you their property off-market.
Other reasons why they might be motivated to sell that aren’t distressed is maybe they’re at the end of their business plan. If you’re gonna do the value-add investment strategy, then most likely you’re going to have a defined hold period. So maybe the plan is to buy the property, stabilize it by the two-year mark, and then hold on to it for five years in total and then sell. So if for example you are a value-add investor, maybe you’ll buy a property from someone who is a distressed investor. So they buy a super-distressed property, they turn it around after five years, and then they sell it to a value-add investors who does extra renovations and increases the NOI even more.
Also, they might have implemented a different business plan. Maybe they bought a property that you added value to, but they just bought it and cash-flowed it; after five years they’re ready to sell it, and now you have the opportunity to actually implement that value-add business plan.
Or maybe they’re just targeting another investment. I was looking at a deal here in Tampa, and the reason why the owner was selling was because it was one of their last multifamily properties, and they were liquidating all their multifamily properties and moving into some sort of — I can’t remember what it was exactly, but it was some sort of a retail-type property.
So an owner can be motivated for many reasons; what’s important is to determine how to actually find these motivated apartment owners, so I’m gonna go through a list of all the different ways… It’s not gonna be an exhaustive list, but it’s gonna cover most of the different ways to identify these motivated apartment owners.
One is gonna be driving for dollars. When you’re driving through your market, keep an eye out for properties that are showing signs of distress… So with poor landscaping, or poorly maintained in general. Maybe they have a Rent Special sign, because they’re having trouble maintaining their occupancy rates. Keep an eye out for apartments that look like the owner may be interested in selling because of issues with the property. Add those to your list, and send them a letter and see what they say.
Another thing you can do is you can look up apartments with recent evictions. Since evictions are going to be a pretty big headache, maybe they’re motivated enough to sell their property at that time. You can typically find the list of evictions on the county clerk’s website.
Similarly, building code violations or delinquent taxes, people facing health code violations, owners facing foreclosure, people that are late on their loan payments, people that have liens on their properties, people that have tax assessments that went way up that year – these are all things that can also be found on a city website.
Also, out of state owners. This is more relevant to smaller multifamily, that are more likely to be self-managed… But still, if someone is owning a large apartment community out of state, they’re more likely to neglect that property than someone who’s living in state. So if you mail to out of state owners, you’re increasing your chance to finding a motivated seller.
Here’s a pretty cool, creative strategy. Go look up the properties on apartments.com, which you should have done while you were doing your 200 property analysis, and if you remember, one of the columns was about the profile picture. So if you have an apartment that doesn’t have any pictures, or only has a picture of the front, or the pictures look distressed, then you might have had a motivated seller… Because if an owner just did a super high-end, fancy renovation of their property, they’re gonna have a ton of pictures to show off that to potential residents… Whereas if they don’t have any pictures of their units, they’re either lazy, which could be a sign of distress, or the units aren’t very appealing and they don’t wanna show them to people. Both of those are signs the owner may be motivated to sell the property to you.
Another example would be expired apartment listings, which you can get a list of that from brokers. Also, you wanna look at properties that are likely owned without debt. These are properties that are maybe bought over 30 years ago, or on certain of these list-building services (like ListSource) you can specify properties that are owned free and clear. They may be motivated to sell because of the fact that they’ve held on to the property for a long time, and also it’ll increase the chances of them accepting some sort of creative financing.
So for someone who maybe lacks the passive investor capital, they want to reach out to properties that are owned free and clear, so that they can get some sort of seller financing or master lease.
I said owners facing foreclosure already, I believe… Section 8 approved properties are another potential motivated seller. They may be sick and tired of dealing with the residents, or the red tape involved with collecting rent, or it may be an opportunity for you to go in there and change it to non-section 8 to increase the rents.
Again, there’s a ton of different ways to find motivated apartments; that’s just a list to get your mind thinking of different ways to identify these types of opportunities… But once you have your list of motivated owners, the next step is going to be to actually send them a marketing piece. Now, as I mentioned, you can either do this yourself, so literally print off a bunch of letters and put them in envelopes yourself, stamp them, write out the addresses, write out the return address and then stuff them into a mailbox, or you could use one of these list building services who also will send the mailers out for you.
Whichever strategy you decide on, the way to create that marketing piece isn’t really gonna change. There’s a lot of variables for the different ways you can make your marketing piece; you can have a different message, frequency at which you send these letters, the actual type of letter, so the type of paper, the size of the paper, the color of the paper… Same with the envelope – no envelope, or having a big envelope, a small envelope, a black envelope, a white envelope, a yellow envelope… There’s a ton of different variables.
One of the best ways to maximize your direct mailing campaign is to A/B test these different variables. Once you have your list, send out at least three different types of mailers; maybe one’s a postcard, maybe one’s a handwritten letter, and then maybe one typed up letter. Send those out in equal amount; so if you’ve got 1,000 different names, send out 333 of each letter, and then make sure over the next few months you record the response rate, as well as the conversion rate of each of those letters.
Now, here are two examples of what the actual message on the letter can say, and these have been used by actual apartment investors to find off-market deals. When I read these, you’ll [unintelligible [00:19:11].09] which one you should use will be based on your current experience and background.
Template number one would be:
“Dear _______ (recipient name),
I am the acquisition coordinator for ABC company. Our portfolio consists of over 1,000 apartment units, all acquired within the last ten months. With one of our principals based in your market, we’re looking to expand to this area. We are familiar with your apartment complex ABC Apartments, and we would like to discuss purchasing this property. Please reach out if you would like to discuss further.
My e-mail is ____________ and my cell phone number is ___________.
Obviously, this letter would be used by someone who actually owns apartment communities already. Template number two would be for someone who doesn’t necessarily own any apartment communities yet, but people on their team do. They would say:
“Dear __________ (recipient name),
I’m interested in purchasing your apartment community. Are you interested in selling? I currently hold a portfolio of apartments similar to yours and I’m looking to add more. Please contact me at your earliest convenience, so we can discuss the sale of your apartment community.
Call me directly at___________ or e-mail me at __________.
If you are not interested in selling at this time, please accept this inquiry as the highest compliment to your investment. I look forward to hearing from you.
Technically, I guess for both of these templates you need to have a portfolio or someone on your team, your mentor, or someone who’s sponsoring the loan, or your business partner – they need to own some sort of multifamily real estate… But the keys to both of these messages are 1) to express your interest in buying their property, and 2) telling them that “Hey, I am experienced”, which in turn shows them that you are able to actually close on the deal. Because at the end of the day, if they’re going to go through the process of sending you all the financials, talking on the phone, negotiating, allowing you to view their property, they’re gonna wanna know for certain that you can actually buy the property. So if you’ve never done a deal before, they’re not going to be very confident in your ability to close, which is why you’re gonna need to leverage the experience of your team.
For example, instead of saying “Our portfolio consists of over 1,000 apartment units”, you would say “I have a partner – who technically could be my mentor – who owns this many apartments. Our property management company has been in business for this many years, and manages this many apartments. We’ve got someone who’s sponsoring the loan who has this experience”, and essentially just leverage the team that you built. That’s why you built that team. You can even mention your thought leadership platform if you want to.
Again, the key is the letter, and you can use those two templates verbatim, or tweak them based off of how you talk and how you write, but at the end the day, the keys are to 1) express your interest to buy their property, so they know “Okay, this person actually wants to buy my property. He’s not just reaching out and telling me how great my apartment community is.” And 2) to show them that you are actually experienced and able to close on the deal.
Now, hopefully, after a couple of weeks you start to receive phone calls from interested, or non-interested and angry owners… And you’re gonna wanna put together at least an opening line for once you receive these phone calls.
A good script that has been used by active apartment investors who have closed on off-market deals is to say — they call you and you say “Hi, my name is Theo Hicks. Thank you for responding to my letter. As I said in my letter, I work for a group of investors, ABC Acquisitions. We were driving around your neighborhood and wanted to know whether there would be any interest in selling.”
At this point, the person will respond in a handful of ways. Number one – and you’ll probably tell this before even saying your script – they’re going to be very angry with you for reaching out to them. That will happen, so be prepared. If that happens, then thank them for their time, and when you hang up, just remove them from your list. If they asked to be removed from your list, remove them from your list.
If the caller is polite – and this is probably the most common… They’re gonna be polite, but they’re not interested in selling at this time – then don’t just hang up; try to find out a little bit more about why they won’t sell, to see if you can identify some sort of potential pain point. At this point, you can leverage — if this is one of those properties from your 200 property analysis, you can leverage the picture you took of something noteworthy to leverage during that conversation.
For example, maybe you drove by that property and saw that the roof was really old, or something; you can sort of leverage that as a potential pain point, of [unintelligible [00:23:45].19] about that, but you’d just mention “I drove by the property and saw that the roof was kind of old. When was the last time the roof was replaced?” and asking them questions like that; maybe they’ll be like “I haven’t replaced them in a while. It costs too much money. I’ve had some occupancy issues and we haven’t been able to afford to actually replace the roof. That’s a perfect way to identify a pain point.”
If after finding out why they won’t sell, and finding a little bit more about their property and their business plan – if they’re still not interested, at this point you can thank them for their time and hang up… But don’t give up just yet. You’ll want to send a follow-up letter thanking them for their time again. Essentially, say “Thank you for your time and thank you for speaking to me on ______ (whatever date they called you). As I said, I work for ABC Acquisitions. I am going to follow up with you on _________ (insert date a few months in the future) and I look forward to speaking with you then.”
Then on that date give them a call again, to see where they’re at, see if they’re still not interested in selling the property, but make sure that you reference that first conversation, as well as that letter when you called them again.
The whole idea with this strategy is to build rapport with them. Maybe they’re not gonna sell you the property on the first call, or the second call, or the third call, or maybe not even the fourth or fifth or sixth call, but eventually, if you keep building rapport with them, maybe they sell you their property eventually, or maybe they say “Hey, I’m not gonna sell you my property, but since I know you so well, I’ve got a buddy over here who owns a property next door who wants to get out for specific reasons. Here’s his phone number.”
This could be called direct or indirect mailing campaigns, because you might not necessarily get a deal directly from the person you reach out to, but it might be some sort of friend of a friend type of situation, which is why you don’t want to just give up when someone says that they’re interested, you wanna keep pursuing that relationship, building that relationship, and hopefully over time either buy their property or buy a property from someone that they know.
Now, if they are interested in selling their property – slam dunk, congratulations. This is probably gonna be not as uncommon as someone getting angry at you; hopefully that’s the least common… But people are more likely to not be interested that they are interested. But if they are interested, then congratulations, you’ve found a potential deal, and you’ll want to extract some more information about the property.
Four questions to ask them are going to be — and again, you don’t want to ask them on the actual phone conversation, but eventually this is the information you wanna gather from them… 1) What type of cap-ex projects have been completed since they acquired the property? 2) When did they purchase the property? 3) Why do they wanna sell? 4) What is their desired sales price?
Those are the four questions you’re gonna need to help you with your underwriting, as well as how you’re going to present your offer. And of course, in order to actually underwrite the deal, you need your hand on a trailing 12 month profit and loss statement, as well as a rent roll. So ask him for that, have him e-mail that to you and make sure you’re staying in constant contact with him about that deal.
From there, you’re gonna submit an offer, and we’ll discuss the process of that underwriting and sending an offer moving forward, but again, the idea is if they’re not interested in selling and angry, then take them off your list; if they’re not interested in selling and they’re polite, figure out why they don’t wanna sell, hang up, send them a follow-up letter and continuously follow up with them every 3, 4, 5, 6 months, until they sell you the deal, or someone else that they know sells you the deal. And if they are interested in selling at that time, you want to get your hands on a profit and loss statement and a rent roll.
To finish up, just four more things I wanted to talk about as it relates to these direct mailing campaigns – I’ve kind of already mentioned this, but you wanna focus on building rapport with these owners. Unless they instantly say “Yeah, I’ll sell you this deal. I need to sell it, I want out of it as soon as possible”, which again, is gonna be very uncommon, they’re likely not gonna wanna sell for some reason, and it could be because they [unintelligible [00:27:28].02] or because they just don’t know you. So if it’s the latter of the two, then you wanna build rapport with them, so that they trust you enough to send you the information and ultimately sell you the deal.
To build rapport, the best way to do that is to speak in terms of their interests. So figure out what it is they want, and then try to talk in ways that let them know that you’re there to give them what they want by buying their property.
Number two is gonna be you want to consistently send out mailers. You’re not gonna see great results your first mailer. You might, but more than likely it’s gonna take a few months for you to gain momentum and see any promising results. So when you’re first starting out, pick a frequency at which you’re going to send out the mailers, and commit to that system for at least a year. So if the plan is to send them out every week, then send them out every week for 52 weeks. Every month? Every month for 12 months. Every two months, every six months – whatever it is you pick, stick to that for at least a couple of frequencies; if it’s weekly, do it for a year, but if it’s every six months, then you’re probably gonna be doing it for a few years before you see any results. So – consistent mailers, pick a frequency, and commit to that system.
Number three – and this is kind of like a creative twist on the direct mailer – is if you’re finding that a lot of owners are either not responding, or a lot of people are calling up saying they’re not interested in selling at this time, then a tweak on the mailer is instead of asking to buy their property, invite them to your meetup group. We’ve talked about that already in a previous series, about a meetup group being a part of your thought leadership platform… So in the letter or in the phone conversation, after them saying they’re not interested, say something like “Hey, I have a meetup group that’s focused on adding value to apartment investors. The next meetup group is going to be in two weeks, and we’re gonna do a presentation on the ten ways to increase the net operating income at an apartment community. As an owner of an apartment community, I think this would be very valuable; would you be interested in attending?” Again, once they come, build rapport. Hopefully eventually something comes out of that relationship, and if not, you’ve made a new friend, you’ve got a new person attending your meetup group; you will learn from an active investor.
And then overall, the last thing I wanted to say is that this entire thing is gonna be an iterative process. So you’re gonna try things out, maybe they work perfectly the first time, but more than likely there are gonna be some issues; then you’re gonna tweak it, send out mailers again, see how that goes; maybe it gets a little better. Same thing with conversations – maybe your first script is terrible and everyone hangs up on you after your opening line, so you tweak it a little bit and then maybe you get a little more traction with the owner… Eventually, you’ll have the perfect letter and the perfect script and the perfect list, but it’s gonna take time to actually get to that point.
That concludes this episode, where you learned about the two main ways to actually find off-market deals; that’s either speaking directly with owners or speaking with people who know owners. And we talked about the number one way to find off-market deals, which is the direct mailing campaign. We talked about how to make a list, how to find motivated sellers, how to make your marketing piece, how to handle incoming calls, as well as the overall keys to creating a long-term, successful direct mailing campaign.
That concludes part three. In tomorrow’s episode, part four, we’re gonna discuss nine more ways to find off-market deals. These involve talking to both owners directly, as well as people who actually know the owners.
To listen to the other Syndication School series about the how-to’s of apartment syndications, including part one and two of this series, as well as to download all of those free documents, make sure you visit SyndicationSchool.com
Thank you for listening, and I will talk to you tomorrow.