On market vs. Off-market
If you’ve been in the commercial real estate business for any period of time, you know that most buyers (investors) of commercial real estate do not want to buy an “on market” deal, they want “off-market deals”. The reasons are many, and they include the fact that the process is frustrating, the pricing competition can be high, and spending a lot of time figuring out a poorly presented deal only to lose the deal can be a big waste of time. But similarly, off-market deals can be equally challenging.
Quality of the Deal
As a buyer of both on and off market assets myself, one of the greatest challenges is finding quality “on the market” deals and the greatest challenge in off-market deals is finding quality information. I often get phone calls or emails from brokers or agents that go something along the lines of, “Jordan Wirsz, I have a great deal for you! A retail deal on XYZ street for $3 million. What do you think?” Well after I laugh a little, I start asking the questions:
- What is the CAP rate? To which I hear, “I’ll have to get that information to you when I get it.”
- Do you have a rent roll? And I’m answered, “not yet, but I’ve asked the seller for it.”
- How many square feet? “Not sure yet, I’ll have to get the floor plans and let you know.”
Fact or Fiction?
I always think to myself how frustrating it is to get even the most basic information from agents who purport to have off-market deals. The unfortunate fact is, many agents who have “off-market deals” don’t really know if they have a “deal” at all. All they really know is that an owner indicated they might sell, and all of a sudden the phone calls and emails start to potential buyers asking if they want it.
I recall a situation recently here in my home market of Las Vegas, Nevada. A broker called me with a “great deal in a great location.” I said, “okay, tell me about it.” He started, “It’s $2.8 million two buildings, one vacant, and big upside.” I continued my queries, only to find out that the seller’s expectations were grossly over market prices, the upside was virtually nonexistent, and to boot, the as-is CAP rate was less than 4% with the only remaining lease expiring in less than 12 months. In effect, I would be buying a job to get to a market cap rate with a whole lot of vacancy risk, potential TI costs, and leasing commissions in the interim. Yet the agent was gung ho and telling me how great of a deal he had for me.
The amount of information that agents have on their off-market offerings is critically important to bona fide, serious and capable buyers. All too often, off-market assets are marketed without so much as a legible rent roll, and the agent is all too eager to collect a “double ended” commission while unwilling or unable to put together even a brochure with the basics.
So, now we know how to break an off-market deal. Now let’s talk about how to MAKE an off-market deal. Serious investor buyers will act quickly, provided that they have enough information to do so. Remember that their time is extremely valuable and they don’t want to spend time chasing the wind.
Off-market deals Rule #1: Create a T-Sheet
A “T-Sheet” as we call it, is a simple page or two of information on a property that we can use to easily, quickly, and efficiently assess a property for acquisition. Simply create a line across the top of a page, and then one line down the middle of the page. Every agent will create one slightly different, but the main property and investment points should be included.
On the left side of the T-sheet, you should include all the property specific information, such as:
- Property address(es)
- Property type (Retail, Office, Industrial, etc.)
- Parcel Numbers
- Total square footage
- # of units
- Age of the building
- Any renovations completed
- Asking Price
- Price asking per foot
- Building class (A, B or C)
On the right side of the T, include all the tenant and income specific information:
- As-is CAP rate
- Pro forma CAP rate
- Average psf rent
- Average market rent for the trade area
- Percentage leased/occupied
- Rough percentages of upcoming lease expirations
- Highlighted tenant names
Behind the T-sheet, simply include a rent roll on your preferred rent roll form from Microsoft Excel. Bingo, you just gave a buyer enough information to reasonably assess an off-market deal and determine if they have further interest.
I know you might be saying to yourself, “but I don’t always have all that information and I don’t want to potentially lose a deal because I wait for a difficult seller to get it all to me.” But the reality is, 99% of the time, you won’t be able to effectively attract a buyer without the information. So in either instance, you still need to dig for information, do research, and take the ball into your own court regardless.
Off-market deals Rule #2: Be helpful to the buyer, not abrasive.
All too often, agents who have off-market deals become over protective, abrasive, and difficult to deal with. Its easy to understand the protective aspect, since often times listing agreements or representation agreements aren’t signed, but there are better ways to avoid any problems in that area…Such as knowing and being comfortable with the people you’re working with, and more specifically the buyers to whom you’re taking the deal. This is why I spend so much time and effort in building deep, lasting relationships with quality agents, so that they know the integrity and character of our business. Few high net worth individuals, investment firms, or institutions will enjoy dealing with an abrasive agent looking out for numero uno. On the other hand, a great relationship can be built by being helpful, friendly, and informative, not necessarily protective and abrasive. Of course there is a role you need to fill given the variety of representation laws and making sure that you are fulfilling your duty to all parties in a lawful and ethical way.
Both agents and principles will agree that “off-market” deals are their preferred way of doing business. There is a tremendous amount of business to be done in the world of off-market transactions, but every agent needs to take the responsibility seriously, to represent our industry and its participants in a professional, ethical, and genuine way.
Photo Credit: Courtesy of “Make Money Text And Switch” by Stuart Miles FreeDigitalPhotos.net