Calling All Ideas: Let’s Talk About Off-Market Deal Sourcing…

“Remain top of mind. Check in with owners every 3 to 6 months. Establishing a relationship is important, but it’s even more critical to nourish that relationship.”

Real estate is both a local and relationship-driven business. When looking for operating partners, CF Capital seeks teams who exhibit niche business strategies in well-defined geographies, local connectivity, micro-market knowledge, and a proven track record of successful execution.

The local focus and niche strategy enable operators to source coveted ‘off-market deals’. In this post, I want to explore some of the strategies around off-market deal sourcing.

Before I get into the actual approaches, let me reiterate that these are only effective if you have a niche investment strategy, geographic focus, and history of successful execution. Without that, these strategies are meaningless.

Target deals with (a bit) more hair on them

Down the middle deals that fit the box of a large majority of the buyer pool are unlikely to trade off-market. Instead, target deals that have some inherent complexities; significant deferred maintenance, a loan that needs to be assumed, or an affordable component. Complexities lead to a smaller buyer pool and more favorable pricing.  Being in the business of problem solving leads to more opportunities.

Work with brokers who are not necessarily given the labels as the top brokers in their market

While it’s important to have relationships with all the major brokers, you’re sometimes likely to access off-market deals through smaller boutique brokers who have relationships with the local “mom and pop owners.”  Communicate what you’re looking for and let them go to work.  What may be a small deal for the national or regional flag firm could be life-changing for a local broker who will roll up his or her sleeves on your behalf.

Know the motivations of the seller at the asset and portfolio level

The more you know about the seller and their motivations, the more effective pitch you can make. By understanding their asset-level strategy, hold period, portfolio strategy etc., you can tailor your pitch to align the motivations and create a win-win scenario.  Among the first questions we ask when looking at a new deal is, “Why is the seller considering a sale?”

Consider running 3rd party due diligence before the contract is finalized to condense the closing period

The key to executing off-market deals is surety of close and execution timeline. Consider spending money up front to conduct diligence while the Purchase Contract is being finalized. This will ensure there are no timing issues and you’ll be able to close within the contract timeline without exercising an extension. The shorter diligence and closings periods may be what separates you from other potential buyers.

Relationships, credibility, and reputation are everything

Always do what you say you’re going to do. Pay brokers quickly and don’t haggle them about their fee. Don’t re-trade deals (unless there’s a valid reason, and something material has been misrepresented or due diligence revealed an inherent flaw). Make sure you have the necessary access to debt and equity. Credibility is everything.

Think like a seller and understand the depth of the buyer pool

In order to curate your pitch, you need to understand both the motivations of the seller as well as the likely competing buyer pool. This knowledge will ensure you put your best foot forward without negotiating against yourself. This gives you a clear sense of reality when making an offer, negotiating an agreement, and managing a transaction towards acquisition.

Consider strategies to close on loans more quickly

Make sure you have good relationships with the active lenders in the market. When an opportunity comes up, you need to be able to move quickly. Debt is one of the longer lead time items (not to mention a key factor of risk/return), so make sure you have a roster of active lenders who want to work with you and can mobilize quickly.

Brokers are motivated by the path of least resistance, not maximizing price

An extra $50k in sales price may be meaningful for the seller, but it may not be for the broker. Broker’s, usually will be motivated by the path of least resistance. They want to work with buyers they know will close and require minimal effort and risk for their client in selling to you. Position yourself to be that buyer who talks the talk and walks the walk.

Find privately owned deals with aging owners

Although the multifamily real estate business has become increasingly institutionalized, many properties are owned by generational families, or mom & pop owners. Look for deals that have aging owners who may just look to get out of the deal so they can retire. These owner’s may be less concerned about maximizing price and don’t want to deal with the headache of a mass marketing process. Along the same path, look for deals that haven’t traded in a long time. These deals usually have private owners and are in need of an infusion of capital.

Educate the market about your investment strategy

Meet with everyone in the market and tell them what you’re looking for.   Be specific about your strategy and history of execution. You should be the first person they think of when they come across a deal that fits your profile.

Network relentlessly with owners, brokers, and lenders

You never know where your next deal is going to come from. Meet with everyone you possibly can. Communicate the success of your strategy, and how precise it has been in specific terms. . Find ways to add value to other market participants. Do this every day.

Remain top of mind

Check in with owners every 3 to 6 months. Establishing a relationship is important, but it’s even more critical to nourish that relationship. Check in frequently by adding value so you remain top of mind when an opportunity does arise. Consider hosting a golf outing or other similar event and inviting all the brokers in the market. When working on a specific deal, hang around the rim. We’ve closed on several deals recently that we started looking at years ago. Today the timing may not be right, but when the seller does decide to exit, you’ll be the first call. Further, if another buyer beats you to the punch, the deal isn’t done until it’s closed - stay ready.

Capital gains taxes could be a bigger concern than loan maturities

You could target deals with upcoming loan expirations as a strategy, but a bigger concern for sellers is often capital gains. The market for debt today is robust and during the last downturn many lenders extended maturities, so loan maturities are less of a risk. Be flexible and find ways to work with seller’s who are doing 1031’s.

It’s really challenging to source off-market deals, but there are many strategies to improve your chances. The most important aspect to deal sourcing is having a proven execution of a niche investment strategy and relationships.

It’s also worth noting that just because a deal was sourced off-market, that doesn’t mean it’s necessarily a great opportunity. This might be the most important sentence of this entire blog post. Don’t be fooled by perception!

So let’s now look back and ask, “how will you go about finding exposure to off-market deals?”

We can’t say it enough, please don’t hesitate to reach out to us to learn more about what we can do for you, even if it is just a friendly conversation about off-market deals (we love this stuff)!

In summary, we invite you to employ these strategies in ways that you find most valuable for your real estate investment goals. Further to that, or if you’re hard pressed to find the opportunity to integrate these strategies within your existing responsibilities, we invite you to invest alongside our team that executes these strategies on a daily basis. Click here to begin your journey of becoming a passive investor with CF Capital. 

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