What is an Off-Market Deal?
As real estate syndicators develop broker relationships in key markets, sometimes true off-market deals are presented. This means that the property is not listed or being marketed to the general public. The reason that I specify “true off-market” is because sometimes what is communicated as an off-market deal is not exactly that; it has been advertised and for some reason there is little interest and the broker may reach out to his or her contacts. This is the opposite of where investors want to be. Rather than be the last to know about the deal, they, of course, want to be the first.
Why Off-Market?
There are a few reasons a deal may be off-market. First, the broker wants to quickly sell and has a short list of go-to buyers they he or she believes can quickly close. After first going through that short list, it is at that point that the deal gets marketed. The second reason a deal may not be marketed is because it is not marketable. Perhaps the owner is not serious about selling but wants to get a feeler or the property itself is not marketable. Properties may not be marketable for a number of reasons. Next to being in an undesirable location, overpriced or too highly distressed, one that I can most identify is not having sufficient property/financial details for a broker to market. I will share an example.
Unsophisticated Owners
Although many large multifamily-family property owners are institutions, family offices, syndications and other groups of investors, some smaller apartment owners can be identified as “mom and pop investors.” This term usually refers to a family or older duo that has owned the property for many years, sometimes decades, and are finally ready to sell. These types of owners can be what is referred to as “unsophisticated,” meaning that they may not follow the most robust or standard business practices when it comes to managing the asset or its financials. Here are a few hints at unsophisticated owners or investors:
- The property is self-managed by the owner
- There are signs of physical distress of the property
- Property rents are well under market rents
- Financials are not very detailed and line items not properly categorized
This all sounds unattractive right? Well, they are challenges, and real estate investing is all about overcoming challenges. In fact, that is where the rewards are.
Buyer Advantages
Using the examples above, there are some advantages in being able to buy from apartment owners that are more on the unsophisticated side. If they are the mom and pop operators that have owned for decades, they are ready to be out. They likely own the property outright and for any amount they sell the property, it will be money in their pockets. Knowing this, the acquisitions lead for a syndicator can work to strike a deal that leaves the owners happy with their sell, but provides for a great buying opportunity for the buyer.
Secondly, when financials are not in great order, certain oversights can occur that sophisticated investors can identify to their advantage. Here is an example. When looking at the owner’s financials and going through the expenses, one may occasionally see that certain capital expenses (a below-the-line item) are being classified as operations expenses. Doing so lowers net operating income and, thus, the valuation of the property. To explain, capital expenditures are expenses that improve the property but are not necessary to run the property. They are often confused with ‘general repairs and maintenance.’ Unsophisticated investors do not know this and may include the recent roof repair or renovation of units in the general maintenance and repair category, when it should not even appear in operating expenses. If these activities are included in the valuation of a $3M property, the buyer may be getting a great deal due to this miscategorization.
Problem-Solving
Real Estate Investing, just like any entrepreneurial venture, is about solving problems. Off-market deals may be signs of problems and opportunities for syndicators and passive investors investors to help a seller and make a great deal for themselves.
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