In today’s Syndication School episode, Theo Hicks shares 5 ways of winning the bidding wars. When it comes to securing your bid, simply offering the most money doesn’t always work. Besides, sometimes you are competing against other investors who have way more experience and capital. In this episode, Theo talks about 5 ways to get more apartment deals by making your bid stand out and tell the seller that you are serious and capable of seeing the deal through.
To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
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Theo Hicks: Hello, Best Ever listeners, and 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’m your host, Theo Hicks. Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we give away free resources. We gave away a lot of these documents in the past, so make sure you go to syndicationschool.com, check out some of those episodes and get those free documents.
Today, we’re going to be talking about how to win more bidding wars. So these are tactics that you can implement when creating offers to get awarded more deals. These are particularly good and beneficial in competitive markets, or if maybe you don’t have a lot of experience and you want to create a better offer to attract the seller to your offer, as opposed to someone else who has more experience.
Obviously, one way to create a better offer is to offer more money, which is obvious. So that’s not going to be one of these five. So these are five ways to win more bidding wars in addition to simply paying more money, which might not always work.
So the first is going to be offering a hard or a non-refundable earnest deposit. So the earnest money is what you give to the seller as a good faith deposit upfront, which is usually equal to about 1% of the purchase price. This is essentially showing the seller that you’re serious and capable of buying the property. Usually, by default, the earnest money is going to be refundable, that is a buyer will receive the full deposit back if the contract ends up being cancelled. Sometimes it might be a fee, but overall, you put down the money within the first few days of the contract, and if you cancel it, 30 days down the line or 45 days out, then you get that money back.
So one way to create a more attractive offer is to submit a non-refundable earnest deposit; this is more attractive to the seller because of the negative consequences of a buyer selling a contract. So for example, once a seller places their deal under contract, they’re no longer marketing the deal, they’re no longer taking other offers, they’re no longer doing tours… So if you end up closing, everything’s great. But if you don’t and you back out, then at the very least the seller is annoyed because you wasted their time, but there’s also other potential negative outcomes; maybe the economy changes and on the second round of offers, they get a lower offer price. Maybe the reason why they were selling is because they identified a new opportunity, that they now cannot purchase because they don’t have a capital that’s locked up in the property. Maybe they go back to other people who had submitted offers, maybe the second-best offer, third-best offer, and they’re no longer interested. So it’s very advantageous for the seller to close the first person they award the deal to. So to prove that you’re capable of closing, you can go non-refundable.
Now, there’s a few different ways to go non-refundable. The first is going to be the timing, the money goes hard. So the most attractive timing to the seller would be if the earnest money went hard day one, so immediately. The second you give them the money, it’s non-refundable; they get to keep it no matter what.
Another option would be for the money to go hard after a certain clause is triggered, like at the end of a certain number of days or the end of the due diligence period, for example. Or it could be a hybrid of both, where the earnest money goes hard day one, so a portion of that earnest money goes hard day one, and then the remainder goes hard after a certain number of days or after a certain trigger clause is triggered. So for example, you can put down a 1% down payment on a deal, and then half of that money goes hard day one, or maybe 75% of that money goes hard day one, and then the remaining half goes hard after 30 days.
Another iteration of the earnest money going hard would be the amount of the earnest deposit. So it can be non-refundable, but higher than what is usual. So instead of 1%, you can go 2%. And then again, you can go hard day one, hard three days out, hard after a certain clause is triggered, or kind of a combination of both.
When you do the non-refundable earnest deposit, you still want to make sure you’re including some contingencies, and these are going to be things that are outside of your control. So if something outside of your control were to happen, then you can get your money back. But if you do something, you decide to cancel the contract, then the money is not refundable.
So examples of things that are outside your control would be a major lien on the title. If something comes up during the survey, if something comes up on one of the environmental reports, that’s really not your fault, so you shouldn’t lose your money because of that. But if you just had to cancel because you did improper underwriting, or you can’t qualify for financing, well, then they get to keep that money. So that’s number one.
Number two would be to shorten the due diligence period, to make a more attractive offer. So we’ve done episodes on due diligence before, so I’m going to assume you know what this means. But usually there’s a timeframe where you have this many days to perform your due diligence, and then there’s a contingency where if you’re not going non-refundable, you can back out and get your money back. But after that timeframe, you can’t back out and get your money back for a due diligence related issue. Usually this is going to be 30 days; it could be longer, but usually it’s 30 days. So during that 30 days, the buyer can cancel the contract. So if you offer a shortened due diligence period, then you’re shortening the time that you can cancel the contract.
Kind of like the non-refundable earnest deposit, this shows the seller that you’re more serious about closing on the deal since you’re willing to shorten the amount of time you’re spending on due diligence. And additionally, you might be able to close a little bit faster if you shorten the due diligence period, which results in the seller getting their capital back sooner. That may not necessarily the case all the time. But what is the case is that if you’re shortening it, they’re more confident in your ability and your seriousness to close, and it’s less likely or you have less time to cancel the contract. So that’s number two.
The third way would be to sign an access agreement while you’re negotiating the contract. So there’s usually a period of time – it could be very short, it could be very long – where you are awarded the deal and you actually sign on the contract. So you submit your LOI, they say, “Hey, we want to go with you,” you negotiate back and forth with the LOI to get a purchase sales agreement, you sign it, and the deal’s official and you’re under contract, and that’s when the time starts. But again, it could take a while; the time from LOI to signing the contract might take a while, or the negotiations just might fall through and the deal never comes to fruition, which is also a waste of time for the seller.
So to respect the seller’s time and to show that you’re serious about closing, you can sign an access agreement within a certain number of days after you’re awarded the deal. And by signing an access agreement, what this does is the seller is giving you, the buyer, permission to inspect the property before this contract is actually signed; your access is going to be limited compared to what the access is after the PSA is signed, but you can still get a head start on your due diligence. So this is not only shows that you’re serious about closing, but you can tie this to something else, which would be to stipulate that once this cross access agreement begins, the due diligence period begins.
In other words, from the time of you being awarded the deal – maybe it’s a few days of signing the cross access agreement. From the time when the cross access agreement, the due diligence period begins. So if it’s 30 days, then once you sign that cross access agreement, 30 days later, the due diligence period has expired… As opposed to waiting until the contract starts, you might be five days, 10 days, 20 days into the PSA, when the due diligence period expires. Again, it shows that you’re a lot more serious about closing on a deal and you have less time to back out of the contract.
Number four is kind of similar as number three, which is to use and mark up their purchase sales agreement. So again, there’s a time between the LOI and the PSA that is, in a sense, the time that the seller is not going to have access to their money. So the longer the negotiations draw out, the more likely the deal falls apart, but also the longer it takes them to get their money, because usually the contract starts and then it’s 60 days out and they close. So by offering it to use their PSA, and you mark up their PSA, you’re reducing that back and forth negotiation, plus you’re reducing any potential disqualifiers from legal language.
So essentially, instead of you sending them your PSA, you just use theirs. You give it to your lawyer, they use a red pen or red ink or red in PDF or some software they’re using, and they make changes to the seller’s PSA so that the seller can see very quickly what legal changes you made, as opposed to getting a 50 page PSA from you, they give it to their lawyer and they go through every single thing and they mark it up, there’s back and forth negotiation and then maybe there’s some disagreement over legal language that kills the deal. You just use theirs, they can see specifically what changes you made, and this lowers the chances of the deal being cancelled, plus it reduces that LOI to PSA timing.
And then number five, and this is something that might not always be a way to win more bidding wars, but it can be very powerful at a certain time of the year or if a certain event is occurring, which is to guarantee a closing date by a certain date.
So this can be really good for taxes, if you guarantee to close by December 31; then it’d be advantageous to them for taxes, depending on their business plan that they had for the property. Maybe they raise capital and it’s better that their investors get their money back this year. Or the next year — maybe there’s some tax changes coming up in the next year or at some point in the future, and they wanted to close before these new taxes come into effect. An election year, right? You might want to say, “ I guarantee to close before November 3rd,” or, “I guarantee close to the end of the year,” or, “I guarantee to close by inauguration during an election year.”
So essentially what this means is that you’re guaranteed to close by a certain date, which means no extensions to anything. It might also mean shortening the time from contract to close. So again, this might be attractive to a seller depending on what’s going on in the world.
So there you have it. Those are five ways besides paying more money to win more bidding war to create a more attractive offer to the seller. Number one is offer a hard non-refundable earnest deposit. Number two is to shorten the due diligence Period. Number three is to sign a cross access agreement or an access agreement while negotiating the contract before the contract is assigned. Number four is the use and markup the sellers PSA as opposed to giving them your own PSA created by your own attorney and then number five is to guarantee a closing by a certain date.
So you follow these five tactics, all of them, one of them is a combination of a few, you’re going to maximize the chances that you come out as a winner in a bidding war.
Now, one thing to mention is that when you’re in a competitive market, something like simply doing a non-refundable earnest deposit might not be enough, right? Because maybe all the offers have a non-refundable earnest deposit. And so the power is in increasing it, making it go hard day one or maybe only a portion of it going hard day one, it kind of depends on how competitive. The market is not competitive, the deal is. The same as shortening the due diligence period, maybe you need to shorten it a lot, maybe you only need to shorten it by a few days. And then maybe closing by certain date is completely irrelevant, they don’t care, which is why it’s important to understand why the seller is selling so you can figure out what’s important to them and then which of these to use, right? If they don’t pay taxes, if tax is increasing in three months. Well, you can guarantee to close by a certain date. If they want to close as quickly as possible, well, you can shorten the due diligence period and sign an access agreement. If they want to close no matter what, well then you can do the non refundable earnest deposit or a combination of those things.
So that concludes this Syndication School episode. As always, make sure you check out the other episodes we’ve done as well as those free documents at syndicationschool.com. Thank you for listening, have a best ever day and we’ll talk to you tomorrow.
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