Last week we closed on our latest value-add multifamily project. This project represented our first closing of 2019, but also our largest in our portfolio both unit count (350) and purchase price (over $40,000,000). As we always do after a closing, we spent some time to reflect and breakdown the acquisition process and what our takeaways were so that we can apply them for our next deal.
Lesson #1. Stay Patient.
I mentioned this was our first acquisition of 2019. Well, it hasn’t been due to a lack of effort. Across our three focus markets of Austin, San Antonio and Houston we have toured and underwritten over 40 deals this year—and dismissed more than that before ever digging in. Our Texas markets remain competitive. But we’ve remained extremely diligent in our criteria. To this point in 2019, that has meant not getting any deals. As my business coach says, you’ve got to turn over a lot of cards to find that Ace of Spades.
We feel like that patience has been rewarded and we finally found that Ace. This asset is located 2 blocks from one of the top 2-3 high schools in Austin in a very strong submarket that stays in demand due to the schools and location near very strong employers. It has a very clear value-add component. And perhaps best of all, our lender told us this is the best Cap Rate he’s seen on a deal in Austin in the last 12 months. We don’t say that to toot our own horn, but to remind ourselves that staying patient and diligent can, and will, pay off.
Of course as we write this, we have a second property under contract that will close about 45 days after this one. Further testament to not get frustrated and stay patient.
Lesson #2. Don’t Hold Back.
We were excited about this deal from the moment we first pulled up to tour it. Obviously we’re familiar with the area and the story, and liked that piece before we ever stepped foot on site. But once we got to tour it, and got our initial underwriting back we knew could be aggressive in our pursuit. But we weren’t the only ones that felt that way.
As a marketed property, this followed the pretty typical pattern of: Initial Offers, Best & Final Offers, Buyer Interview Calls. One thing I always ask the brokers is how a seller is going to run this process—specifically as it relates to Buyer Interview Calls. Sometimes on these calls, Buyers are given one more “opportunity” to move their offer. This is always optional, but I want to know going in whether we should be prepared for two or three rounds of pencil sharpening. In this case, the broker confirmed we’d be given the “opportunity” to change our offer while on the Buyer Interview Call.
In these situations, most buyers will go through their call with the buyer, be given that opportunity and then “reconvene” after the call and send over a modified offer later that day via email. Since we were prepared for the question, we made the decision to verbally increase our offer on the phone with the Seller—to both signal that we were prepared for the question, but more importantly be able to add emphasis to our conversation about how much we liked this deal, how much it fit our model and how committed we were to working with the seller on this deal.
In this case, that strategy worked. After we were awarded the deal, the broker and seller both told us how impactful it was that we made that final move over the phone and immediately, rather than doing it via email later one. In fact, it proved to be the difference. There were two other groups that had offers at the same price as ours, but they sent their offers in via email. That one move gave the seller the confidence to award us the deal, and solidified their choice even as the other groups came back with even higher offers after learning they weren’t going to get the deal.
The lesson here: When you have a deal you know that works in your model, be bold in your pursuit and be direct with the broker and seller.
Lesson #3–Reputation and Relationships Matter.
It wouldn’t be an article from Wildhorn if we didn’t talk about the importance of relationships.
This was the first deal we had closed with this broker, and this seller. However, we were a known entity with both of them. Over the last several years, we had looked at and made offers on dozens of deals from this broker. We had come very close to getting a couple, and had a good working relationship with their office. In every interaction, we made sure to give honest feedback about deals, talked to them about the overall market and had even been a reference for some other groups they were vetting on deals we were not involved in. When it came time for them to make a recommendation to the buyer, they had the confidence in us that we would close and be easy to work with. All because of our reputation from our other deals, and our relationship with them.
Lesson #4—Get What is Promised
This asset has a metal roof—and was marketed as having a transferable warranty for that roof. It was something we liked about this deal from the beginning—given the scope of the warranty we felt confident we didn’t need to allocate many dollars to repair, replace or maintain the roof.
Once we got into Due Diligence, we learned that while the warranty did exist, it had never been transferred into the name of the current owner and was still written out to the previous owner. It was important to us that we get the warranty transferred into our name, and we insisted with the seller if we couldn’t get the warranty then we’d have to reduce our price by the cost of a new roof. Since this was always marketed as having that warranty, it was important we not incur costs related to the roof.
At the end of the day, the seller was able to get the warranty assigned and both parties got what they wanted—we got what was promised to us during the marketing of the asset and they didn’t have to reduce their sales price.
Lesson #5—Investors Love Choice
We just wrote an article highlighting the new equity structure we rolled out on this deal, which includes two classes of equity shares—A and B. Our big lesson here was just seeing how much our investors responded to this structure. This was our largest equity raise to date, with over $17,000,000 funded. But having this new structure gave every single person the opportunity to align their investment with their goals. It also created a new platform for us to have more in-depth conversations with them about their goals and how we can continue to help them reach those goals.
Looking back on this acquisition, it has proven immensely rewarding—and as always, educational. We’re thrilled to have this one in our portfolio and for the investor relationships that made it all possible. And, we’re excited to already be back on the hunt for our next opportunity to apply these lessons.