January 26, 2023
By: Danielle Jackson, Investor Relations, Senior Manager
When an investor wants to add real estate to their portfolio, there is a wide range of investment opportunities they can select from. Among the hardest to access is an off-market transaction, which involves a commercial or multifamily property being bought and sold without the property ever being listed on the market. It can take years to develop the strength of relationships with brokers to secure visibility to off-market opportunities. This is a key benefit to investors when working to find the right operator to invest with.[1]
What Are Off-Market Transactions?
Off-market transactions occur when a buyer and seller negotiate the sale of a property without it being placed on the market. Because the seller doesn’t create a listing agreement, it can be challenging for potential buyers to source off-market properties without having strong broker relationships. In most cases, off-market transactions occur for two possible reasons.
The first involves a company or organization searching for commercial property and working with a real estate broker who has the connections needed to identify off-market opportunities. The second is situations where the property owner might want to sell without listing it on the open market.
With the help of a real estate broker, negotiations can take place between the seller and buyer to facilitate a mutual agreement on key terms before drafting an official contract or purchase agreement.
Keep in mind that off-market commercial properties aren’t listed anywhere. Many buyers mistake off-market commercial properties to simply mean they aren’t listed online. The truth is many off-market conversations begin before the properties are even available for sale.
Off-market transactions have been completed for decades. However, they have become increasingly popular over the past few years because of increased market competition.
Most in the investment community are aware of off-market transactions but don’t have the relationships to source these opportunities.
Benefits of Off-Market Transactions
There are many benefits associated with off-market transactions, the primary of which is these transactions can be performed in a streamlined manner. Off-market transactions don’t require as much lead time for the seller because there is no listing agreement. Buyers who have sourced off-market deals are generally extremely motivated to finalize and close the deal, and depending on the situation, sellers may be more willing to negotiate the terms of the transaction.
Many if not most sellers have some real estate investment experience and aren’t interested in considering every offer made on the asset they are trying to sell. Off-market deals are heavily marketed to a core group of potential buyers, but there will be less competition among a smaller buyer pool, making a bidding war less likely. As a result, the buyer may acquire the asset at a more favorable price.
Every transaction and seller has its own unique set of circumstances. Market environments may force an early exit for the seller, investment strategies may change, or personal affairs may require a sale. Whatever the reason for the sale of a multifamily asset, it generally creates a more ideal investment opportunity than a listed property.
The right approach when sourcing off-market deals may provide buyers with more time to perform the necessary due diligence. In cases where the property is listed on the market, many unqualified buyers can access the deal and make offers, which expedites proceedings. When a piece of commercial real estate is kept off-market, the buyer has more time to complete the due diligence and investment underwriting process before sending an offer to the seller.[2]
Many commercial property owners want to keep the sale of their property out of the public eye. Whether they want to make sure that current tenants aren’t too frustrated before the sale goes through or would like to keep employees from becoming concerned about the state of the business, commercial property owners may be more inclined to keep a property off-market compared to residential homeowners. Engaging in an off-market transaction may preclude unnecessary roadblocks or issues that can delay or even terminate the deal.
How Closing Costs Differ from an On-Market Transaction
Closing costs on real estate transactions typically range from 5 to 6% of the total sale price for the property. In most cases, the buyer is responsible for paying the majority of these fees. With an off-market commercial transaction, the seller is usually able to complete the transaction without assistance from a listing agent, which may potentially reduce closing costs by 2.5 to 3%. Standard buyer closing costs include the following:
– A mortgage application fee
– Attorney fees
– Credit report fee
– Loan origination fee
– Home inspection and appraisal fees
– Title transfer taxes
– Insurance payments
Sellers who are involved in an off-market real estate transaction may be tasked with paying for the following:
– The buyer’s agent commission, which is applicable even if the buyer uses the assistance of a broker
– Any concessions that the buyer requests
– Attorney fees in some situations
– Home appraisal fees
– Title transfer taxes
– Title insurance policy
– Potential funds toward the buyer’s closing costs
The seller may be able to avoid paying marketing fees because the property isn’t set to be listed on the MLS. Because there isn’t usually an ample amount of competition in off-market transactions, the buyer often attempts to reduce closing costs during negotiations with the seller.
Pursuing Off-Market Deals with Ashcroft
Multifamily and commercial demand remains strong year to date. The strong demand coupled with short supply means on-market transactions may result in a bidding war and potentially push the purchase price over market value. Ashcroft has spent years developing strong and meaningful relationships with industry peers, which has proven to be invaluable when sourcing off-market multifamily deals.[3]
Of the 11 properties that Ashcroft acquired in 2021, eight were completed off-market as a result of the broker relationships we’ve cultivated over the years. These relationships coupled with our market reputation position Ashcroft with a strong competitive advantage when identifying and potentially acquiring off-market multifamily properties.
Off-market transactions have allowed buyers to find properties at reasonable prices for many years. When partnered with an experienced investment firm that has strength and depth of relationships, finding off-market transactions may be even simpler.
If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.
Sources
1. RealEstateU. (2019, July 8). Home. Real Estate U. Retrieved September 9, 2022 from https://www.realestateu.com/9-tips-for-doing-successful-off-market-transactions/
2. Corley, D. (2013, May 27). On-Market vs. off-market transactions. MW Real Estate Group. Retrieved September 9, 2022 from https://mwrealtyla.com/on-market-vs-off-market-transactions
3. Rohde, J. (2021, June 18). 4 little-known ways investors find off market properties. Stessa. Retrieved September 9, 2022 from https://www.stessa.com/blog/off-market-properties/
