“Off Market Deal”. The three most magical words in the real estate acquisition game.
If you can find an off market deal, it means you’ve won right? You got an asset without any competition, and you probably put it under contract well below true market pricing. Rainbows, unicorns and champagne!
At Wildhorn Capital, we’re no strangers to off market deals–our last asset in Austin was purchased off market. This year, we’ve looked at no less than five off market deals–yet we haven’t bought any of them. In today’s competitive environment, we’re seeing more and more deals being shopped “off market”. Why would a seller do that? Why wouldn’t they want maximum exposure and visibility to get the highest offer price for their deal?
In today’s article, we want to spend some time dissecting off market deals. What is the real definition of off market? And what are the pros and cons of evaluating off market deals?
First, the definition. We’ve talked ad nauseum about the importance of relationships in our business, and how those relationships are the key to our growth. In the acquisition space, we focus those relationships on brokers AND getting to know other operators. We’ve been presented with off market opportunities through both channels.
Wait, what? You’ve seen off market deals coming through from brokers? If a broker is involved, is the deal really considered off market? How do you define off market? Obviously if you are working directly with an owner, and they aren’t widely shopping or marketing the asset it can be considered off market. But how does a broker fit in? In our experience, we’ve seen three types of off market deals from brokers.
- Pre-market. The broker has a relationship with the owner, and perhaps they plan to market the asset in 6-9 months. Prior to doing 30+ tours, taking professional photos and building out their sales deck they may send the deal discreetly to a couple of groups to look at. If someone is interested at or near the expected market price, it might be worth it for the broker and owner to sell it preemptively. With little to no competition here, these are good opportunities to see if a deal will work for us.
- Post-market. These are recycled deals that have been listed on the market (or being shopped quietly) but for whatever reason didn’t sell. Several months later you’ll see them come back around and be presented as off market deals. Typically, these aren’t great opportunities as there is a reason we passed on it the first time, and will politely decline the invitation to look further into it.
- Opportunistic. The brokerage business is as competitive as our business as they all compete for the same listings. Often times, prior to officially getting awarded a listing brokers will send out a deal trying to drum up interest or offers and take those back to the owner as a way of ensuring they get the commission. We’ve seen this where multiple brokers have sent us the same off market deal–where clearly no one has an exclusive listing.
As you can see the variety of off market opportunities can create for some really good–and some really bad–opportunities. It’s not always a home run when you see an off market opportunity. So what are the pros and cons to evaluating, and perhaps buying, an off market deal?
Pros:
- Less competition.
As described above, you will likely still have some competition when seeing an off market deal–even when you are working with the seller directly. But, its certainly an advantage to know there are only 1-2 other groups out there vs a virtual unlimited number of competitors on a marketed property. - Time to evaluate.
With a marketed property, you have a certain amount of time to underwrite the deal and get an offer submitted. On an off market opportunity, you may have more time to evaluate things-and in some cases you may want more time. As an example, we have been circling a property off market for quite some time. When we first looked at, the financials had done a quick turnaround. That was great, but it also caused some concern for us–would they be able to sustain those numbers? We told them we were very interested in the asset, but since it was off market requested they go operate for another couple of months and then send us the updated financials. This will allow us to see if they momentum has been sustained, giving us more confidence in the business plan for that deal and helping us get better debt quotes. - Realistic financials.
When a property is being fully marketed, the operator has been preparing for that for months by way of making their financials look as positive as possible. That could entail cutting back on expenses, boosting occupancy by any means necessary or many other tricks of the trade. When you see an off market opportunity, you are more likely to see the true picture of how that asset is operating, without any cute little strategies applied to the books.
Cons:
- Determining A Price.
I had a conversation with a broker a few months back, and he said a very large institutional level buyer only buys marketed deals. Totally contrary to what we’re talking about today–and against the grain of conventional wisdom. His argument was that with marketed properties, you always know how the market is valuing a deal. And it gives him confidence that he’s not overpaying for a deal. He’s willing to pay just slightly more (less than 1%) than anyone else, but there is a long list of groups who would pay the same. That’s a concern we have with some off market opportunities–are you really getting a good deal? We certainly know how we are valuing the asset and what our business plan and investor returns project to be, but can we be 100% certain that we’re paying market pricing? - Getting information from seller.
When a property is being marketed, the seller is prepared. The broker has gotten a ton of information from them already. And all the reports, due diligence items and big questions have been addressed before the property ever hits the market. With off market opportunities that is not always the case. We’ve found it can be a struggle to get timely, accurate info from sellers when the property is off market–whether there is a broker involved or not. For whatever reason, they just don’t have all the needed information on hand and readily available. Perhaps they simply aren’t that ready to sell or incentivized to get things done, but it can be like pulling teeth to get good information. - Little negotiation room.
We’ve run into this multiple times–when a deal is shown off-market, the price the seller/broker throws out is pretty firm. Whether its a pre-market or post-market opportunity, the seller has a price in mind and will use the “well its off market so we can just wait until its on market if we can’t get our number” excuse. With a marketed property that seller is ready to get out, and will 95% of the time let the market decide what the property is worth. That’s not been the case with our experience on off market deals.
So there you have it. If you come across an off market deal that’s a gem, more power to you! Just make sure you really give it a good shake to make sure it’s not a lump of coal. We’d love to hear your off market deal stories, the good and the bad.
Andrew Campbell is a native Austinite and Managing Partner at Wildhorn. He is a real estate entrepreneur who first broke into the business in 2008 as a passive investor. In 2010 he transitioned into active investing and management of a personal portfolio that grew to 76 units across Austin and San Antonio. He earned his stripes building and managing his personal portfolio before founding Wildhorn Capital and focusing on larger multifamily buildings. At Wildhorn, he is focused on Acquisitions and maintaining Investor Relations, utilizing his marketing and communications background to build long-term relationships.
