May 10, 2024
By: Danielle Jackson, Investor Relations, Senior Manager
Navigating Off-Market Deals in Multifamily Real Estate
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 deal, 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 Deals?
Off-market deals 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 deals 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 deals 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 deals but don’t have the relationships to source these opportunities.
Strategic Advantages of Off-Market Deals
There are many benefits associated with off-market deals, the primary of which is that these deals can be performed in a streamlined manner. Off-market deals 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 deal.
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.
Each deal and seller have their 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 deal may preclude unnecessary roadblocks or issues that can delay or even terminate the deal.
Comparing Closing Costs
Depending on the location, closing costs on real estate deals 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 deal, the seller is usually able to complete the transaction without assistance from a listing agent, which may potentially reduce closing costs.
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 deal may be tasked with paying for the following:
- 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 buyer’s agent commission, which is applicable even if the buyer uses the assistance of a broker
The seller may be able to avoid paying marketing fees because the property isn’t set to be listed on the MLS. Since there isn’t usually an ample amount of competition in off-market deals, the buyer often attempts to reduce closing costs during negotiations with the seller.
Pursuing Off-Market Deals with Ashcroft Capital
During the first quarter of 2024, the Commercial Real Estate market presented a mixed picture. Despite challenges in the office and industrial sectors, multifamily has shown resilience, with anticipated improvements.[3] Morning Star expects the Fed to start cutting rates beginning with the June 2024 meeting. Which would create a more favorable environment for the CRE market by reducing costs, increasing demand, and stimulating economic activity.[4]
The wave of maturing loans in 2024 will likely result in increased multifamily sales volume. With higher borrowing costs, refinancing these loans at favorable terms proves to be difficult for many owners.[5]
Ashcroft has spent years developing strong and meaningful relationships with industry peers, which will continue to be invaluable when sourcing off-market multifamily deals. In fact, by cultivating strong relationships with brokers, Ashcroft Capital has successfully completed 60% of its property acquisitions through off-market deals. 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 deals 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 these types of deals may be even simpler.
If you would like to learn more about investing in multifamily assets, or investment opportunities, schedule a call with Investor Relations today.
