The Real Cost of a Direct Deal: Everything You Need to Know
Direct Deal VS Targeted-Buyer Approach
Why would a seller ever decide on a direct deal vs a third-party (broker) targeted-buyer approach? Sometimes it’s a matter of privacy (however, MLS is no longer required to obtain the top-price for such transactions), sometimes it’s a matter of ennui and complacence (sell to the first or last buyer who approaches you with a paper on hand), and finally, many sellers believe they are “saving” the brokerage fee.
However, if any of these three are the reason, think again. The market has changed dramatically in the last 2 years and not exposing an apartment asset to the right buyers could mean million-dollar losses to private sellers. Let’s take a closer look at an example of significant loss based on a real deal:
An owner we know sold a building about 5 years ago to a private buyer for approximately $6M. The family owned one other similar, slightly smaller, building that at the time they decided to hold off on selling. Time came to sell a few months ago, and although we chatted several times, we were finally told they are “selling direct”. The deal details came through after the closing – they had sold the building to the same buyer who purchased their first asset 5 years ago, for a price of….ready? About $6M. This is an outrageous discount based on current market conditions, and, of course, the initial buyer was more than ready to capitalize on it: we calculated an approximate market discount of $2M. But, alas, no brokerage commission payable. Sometimes the saving on the costs of a sale is not worth it based on a shifting market; unfortunately, apartment building owners, especially those who have held the assets for many years, are not in tune with the quarterly shifts that occur now in terms of price per unit, best buyers for certain areas, and new buyers entering certain markets aggressively.
Why Choose a Brokerage Team?
The only respectable reason for concern of the three listed at the start of this article is privacy. You must know though, that in order to get a successful sale in this market, you need not put your building on MLS or even advertise it on a public website or the brokerage web site. The best way is to choose a well known and respected brokerage team with a track record in apartment building sales and have them prepare relevant marketing material for a proven (closed) database of buyers. The second best way to obtain top price is to have the same brokerage team show it to the top 2-3 buyers and have one or more of them bring an offer. Finally, the third option would be to have the brokerage bring just one buyer- however be absolutely sure the broker can bring the top buyer for your given asset. Remember, the “last” buyer in the area or the “top priced” buyer from a year ago, may not be the best buyer now, or for this specific asset.
Before Hiring a Broker
Here is what you should be comfortable with before hiring a listing broker:
- MLS – not required for apartment building sales if listing with a top brokerage who has a proven database of closers. Ask to see a demo of this database.
- Comparables – you should see all legally registered trades for the area in the last year, not just the MLS ones – if your broker only brings the MLS ones, they do not have a proper database of information. The larger deals never make it to the MLS system, and therefore the top price per door buyers will not be included in the data.
- Downpayment requirements – your broker should be able to show you exact calculations of the downpayment required (cash the buyer must have available in order to receive a loan) based on several amortization scenarios and a cap rate range that is pertinent to the market.
- Environmental – most assets these days come as “contaminated” based on new environmental thresholds. Contaminated properties do not get insured loans and therefore at least half the buyers will be eliminated based on the property not being “clean”. Your broker should provide a game-plan and be familiar with the costs and delays of having environmental reports ready.
- Track-record – most brokers will be ignored by institutional buyers. Why? A corporate buyer would invest a significant time and staff effort to analyze each deal, and, if in the end this does not lead to a close, the fund performance is affected. If you have a property that may qualify for an institutional purchase, use a team that has a track record of closing deals with such buyers.
- Last test – finally, once the broker presents you with the price data, ask them to list for a price significantly larger (20%+). If they agree to “see what happens”, do not hire them. A good brokerage team will only be taken seriously by the relevant buyer market if they bring forward assets that are priced according to what the top buyers can put forward on paper today. This requires a lot of recent and diverse selling experience.
We only work with proven buyers, who generally can put forward offers that are not conditional on financing.
Baron Realty specializes in matching buyers and sellers of apartment buildings. Ramona works in partnership with Mikael Kurkdjian and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec.