Multi-Family Advice

You’ve got to know when to hold ‘em…

By September 14, 2020 No Comments

Now six months into the COVID-19 pandemic, it feels like the world has started to adjust.  I hate the term “new normal”, but our business has a lot more going on today that it did in May.  The deal pipeline is full, as there have been a flood of apartments hit the market (both on- and off-market) in the last 30-60 days. While the world is far from normal, there seems to be a recognition that the Earth is still spinning, and business must carry on.  (The collections data and performance of Multifamily during the last 6 months has certainly helped assuage the fears of many.)

While it is nice to see more opportunities fill our pipeline, the real benefit of seeing and tracking all these deals is keeping tabs on our market.  What is happening with cap rates?  Who is competing on deals? How is a specific submarket performing? 

In tracking and pursuing deals over the last couple of months, we’ve seen the darndest things happen –cap rates in Austin have actually been compressing.  In spite of COVID concerns, deals are getting more expensive around town. The reason?  Competition.  New groups are showing up in town, fleeing the coastal markets and looking for security.  This is true of Class A new construction, Class B Value Add and even in the affordable space.  Upwards of half the Confidentiality Agreements brokers are seeing be signed on deals are coming from buyers that are new to town.  Initial offer prices are sailing past Brokers’ whisper pricing and we seem to be seeing the Austin market move in real time. What that means for future returns and prospects, we’ll leave for a future article. 

In today’s article, we want to speak on the increased competition, and how that impacts our thinking when pursuing deals.  

It boils down to this: you need to be really convicted on a deal if you are going to pursue it.  In the words of Kenny Rogers, you better know when to hold ‘em, and know when to fold ‘em. 

Fold ‘em

For Wildhorn, that means evaluating each deal on a variety of measures and metrics.  And making sure it’s an asset, a location and a business plan that fits our strict criteria.  If anything feels slightly off, or is just outside our comfort zone, we back out.  We fold the hand and move on.  While this has always been our game plan, it’s even more important today to stick to our guns; we’re less likely to hang around the hoop and make an offer just to see where things go on that deal.  Previously, aka Pre-COVID, we might offer on a deal or try to sneak into best and final and see what happens.  What we’ve seen lately is that deals keep running and prices go higher.  Buyers are using aggressive terms–more hard money, inspecting fewer units, to get the nod.  In that environment, if we aren’t convicted we fold. It also feels like our time is of a higher premium with so many dynamic movements occurring. 

We’ve done this a couple of times recently.  One was a deal that met all our initial criteria: submarket we believe in (and own in), good value add business plan, solid vintage.  But, it was a loan assumption that was going to result in low leverage and hamper returns.  And, given what we heard and saw about where offers were coming in, it was soaring past broker pricing guidance.  So, rather than stick around we bowed out and turned our attention elsewhere. 

Hold ‘em

On the other hand, when we find something we like–or should I say love–we throw everything we have at the deal.  We commit and play the hand all the way through. And we play to win. Like a good poker player, we’re looking at all the angles.  Evaluating the competition, putting ourselves in their shoes and trying to determine their cards.  Are they a value-add group, a long-term holder–heck even a developer?  What is their approach on this asset and how are we different?  Where can we create an advantage? 

We aren’t going to stray from our underwriting, but we’re going to make sure we explore all avenues.  How many ways might we add value to this deal?  In addition to interior renovations, could we change the entitlements on the land, or look at it as a development play? Are there any tax strategies we could employ?  What informational advantages do we have? 

What we’re seeing in Austin is that it’s going to take conviction to win deals right now.  For Wildhorn, conviction is never just going to be a gut feel, or a desire to win a deal and get aggressive just because.  We’ve got to know the business plan, but also be better than our competition. Play the game better.  Create better relationships. Have informational advantages other groups won’t.  

A recent deal fit this description perfectly.  It was insanely competitive and saw a record number of offers.  Because of the location and profile, you had all sorts of groups playing on it–from value add groups to developers.  For us, we had a long history with the asset, a committed partner and extremely good relationships.  We also had some informational advantages that allowed us to get comfortable with the pricing as it kept running.  Because of all this, we were able to remain convicted and stay in the hand.  As the game unfolded, we learned more about our competition and played the cards as they were dealt.  Ultimately, we got awarded the deal–which is another article for another day.  But it’s the perfect example of how the game is being played in Austin right now.  It’s competitive and you’ve got to pick which hands you want to play in. 

If we’re all staring at the same underwriting, the extra info that we have will allow us that last nudge to win a deal.  It’s why we stay local and focus on our home market. It’s why we’re confident we’ll continue to see opportunities that make sense for our investors. Its why we spend so much time building location relationships. 

After all, the best poker players know it’s not gambling–the best players usually win.  

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