Baron Realty - Commercial and Multi-Family brokers in Toronto, Montreal, Quebec, Ontario, Canada
CategoriesAdvice

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.

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Baron Realty located in Montréal and Toronto - Prime and Experienced Real Estate Agents
CategoriesAdvice

Off-Market Deals Are Trendy: Here’s Why!

Everybody loves a “deal”. From consumer goods to services and even apartment buildings, buyers want to feel they made a good investment, and if possible, a better one than is available to the general public (or their competitors).

What is an off-market deal?

Simply, when a vendor entertains an offer without exposing the property to the broader market of potential buyers. Just excluding a property from MLS does not make an “off market deal” –a brokerage firm may have a mandate to exposes the property to buyers that make sense directly, in which case, the property is considered as having been marketed with a “quiet” but still competitive process.

How does an off-market deal work?

An off-market deal is typically initiated by a broker who sees the match between a specific building and a specific buyer. The buyer is always someone who the broker has complete confidence in to close the transaction. In some cases, an off-market transaction is initiated by a vendor who trusts that their Broker will bring them the best offer, or by a vendor who values privacy above all else in the sale process, for personal or professional reasons.

Private owners of apartment buildings in Canada (vs the US) are generally understated folk. We’ve had vendors who visited their own buildings “in disguise”, and we personally know an owner who, for 20+ years, has lived in his own high-rise and pretends he is the janitor! A large percentage of apartment assets in Canada has not changed hands over the last 20+ years, and much of the management has become, in many cases, a family affair. Hence in some cases it makes sense that the final decision maker may want to look at an offer without the headache of a full marketing process where everyone in the family may “have a word to say”. Instead, they seek out to make an executive decision and (if the numbers work based on the offer received), exit elegantly.

We are in the process of selling a portfolio in Montreal where the owner asked us “what is the top price I can get”, and when we advised him, he stated that “for that price, why go to the market, just bring me the offer”. We knew the top buyer, had mirrored their valuation approach, and made a match that made sense for both parties. Of course, trust and reputation are key factors in getting both the signatures on that offer: trust from the buyer that we are not wasting their time and resources in bidding, and that we can obtain commitment from the seller; but also trust from the seller that we indeed brought the best offer. Key offer elements that prove unequivocally the seriousness of the buyer and the intention to close (such as tight deadlines and non-refundable deposits) are often elements in getting a deal done off-market.

Do you know who the best buyer is?

What makes a buyer the best for a certain property is not necessarily their track record of previous acquisitions. Simply knowing who bought last in a given market for a top price is no real guide. For example, we thought we had a perfect asset in Montreal last year for a buyer who had bought similar product before, but were told “sorry, we are overleveraged in that market, but bring us something similar in another market!”. Timing is key and, especially for larger portfolios, the “best buyer” shifts constantly. Knowledge of buyer strategy, market transactions and the ability to interpret trends are key to obtaining top price for an apartment building asset.

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.

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Baron Realty - Realtors in Montreal and Toronto
CategoriesAdvice

Apartment Building Sales: How to Get Multiple Offers

Self-serving, arrogant, duplicitous – if this is the typical perception that the public has of brokers than it is no surprise that the value of a correct listing process is sometimes underestimated.

Our Experience

If you’ve been following our articles, you already know we write from direct transactional experience and this story is no different. Our seller client had initially attempted to sell his 100+ unit portfolio himself. He published a newspaper Ad and expected offers to quickly follow (in his defence, he belongs to the generation that still reads the newspaper). He ended up with one offer and several months of wasted time before finally listing with us and conceding that there was a role to play in hiring a professional brokerage team.

We take a formal commercial listing approach for multi-family assets. For those unfamiliar, and unlike other commercial asset classes, owners of apartment buildings rarely want their asset advertised on the MLS system – it is the asset class that trades most discreetly due to sensitivity towards tenants. Therefore it is the broker’s task to maintain a strong database of qualified buyers to market to directly – not to mention ensuring those buyers are closers.

The Role of the Broker

The Broker’s role is more than just maintaining a list of buyers though. They should:

  • Compile information on the building: It is a waste of everyone’s time to negotiate a top price while hiding a building defect for example, as the issue will come out at inspection and the buyer will ask for an appropriate price reduction.
  • Prepare a professional information brochure: Brokers should know exactly what buyers need to evaluate a purchasing opportunity. A brokerage team should prepare the financial information, technical details, market information, and underwriting, from both a current NOI and a potential NOI perspective.
  • Create an e-dataroom: A transparent process, with the data protected through signed confidentiality agreements, should include the sharing of relevant files, photos, and data to prospective buyers online.
  • Call and Email their internal database of buyers: A broker who has a “favourite” buyer is not looking out for the interest of their seller client. This is extremely important because, due to the nature of our business, often a brokerage team ends up working with the same 2-3 buyers over and over again. Buyers should be notified of a new listing at the same time, and know that they have to compete to win the deal.
  • Orchestrate a bid date process: While not always appropriate, we sometimes find that a bid date works well when selling larger assets (generally 100+ units). While some buyers will rush to place an offer, it’s often the buyers who take their time and “do their homework” on a building that see the greatest value (which is subjective) and bid accordingly.
  • Conduct building tours: Tours ensure that buyers have had the opportunity to see the building and form an accurate impression of the condition and type of building they are bidding on. This step eliminates some buyers, which is a good thing as otherwise those buyers would have put forward offers, but dropped the deal at the inspection stage.
  • Shield the seller: We know buyers who buy off-market deals from widows who can’t pay the building mortgage (real example) – do you think the widow who couldn’t make her mortgage payments got the best deal by negotiating directly with a buyer? The broker’s job is to negotiate with all potential buyers and get the best deal for their client.

The Reputation of Your Broker

In the example introduced to start with, our process generated 6 offers, from buyers with proof of funds for closing, and quick timelines. Two of the offers increased their price during the process when informed how many other offers were on the table (a broker is obligated to disclose the number of offers received to all interested parties who make offers).  All the parties who submitted offers were professional owners, already owning between 500 and 6,000 units. None had seen the sellers Ad, but they did know our reputation as brokers and trusted that when we brought them an opportunity it was one that they should look at seriously.

The Sale Process

Any professional brokerage team ensures a process has been followed that results in a top price. But a broker is also useful in avoiding what should be a seller’s worse nightmare: going through the sale process, providing mountains of information, negotiating, accepting an offer, tying up the property for months… only to have the buyer be unwilling, or unable to close. When buyers know they are the only party at the table who were interested, or when they know the seller “loathes” brokers and will not list the property, what’s stopping them from coming back towards the end with a few price-reduction requests? This is not likely to happen if the buyer knows that there are multiple competing offers waiting to take the deal if they try to drop it.

 

Baron Realty specializes in matching buyers and sellers of apartment buildings.

Contact us now to work with our team!