How to Structure a Winning Offer When Buying a Multifamily Property in a Competitive Market
Owning a multifamily property is undoubtedly a great way to diversify your investment portfolio, generate additional revenue, and give your net worth a boost. The cash flow could quickly perk up your annual income stream with thousands of dollars.
But let’s face it; there’s currently an extremely low inventory of active multifamily property listings. Yet, more and more potential buyers are pumping capital to the Sun Belt. Particularly the states of Texas, Florida, Arizona, North Carolina, Georgia, South Carolina, Tennessee. It’s, without a doubt, a tough seller’s market, with multifamily properties with all the bells & whistles attracting offers from many buyers.
Most properties often sell for more than the asking price in a competitive market, but the price is not always the be-all-end-all factor for the seller. You need to account for an array of other factors when drafting your offer to beat other buyers to the punch.
If you’re looking to buy a multifamily property in such a competitive market, here are handy tips to help you craft a killer offer that won’t be refused.
1- Get off on the Right Foot with the Seller’s Broker
As a buyer, your relationship with a broker can make a massive difference. After all, the seller may lean significantly on the broker when it comes to due diligence and getting a variety of answers about you as a buyer. Who are you? What deals have you done on the marketplace — have you sold, bought, or invested in another property in the market?
Who have you bought a multi-family property from? If you’re an out-of-town buyer (aka a new participant in the marketplace), the seller’s broker may still go ahead and contact his counterpart in an area you already own property. In this way, the broker can evaluate potential buyers and see if they’re legit and so on.
2- Impress the Seller with a Strong Track Record, Terms, and Price
The seller and broker will be screening potential buyers primarily based on their experience, track record, local knowledge, and terms. That’s right; they will toss a little bit of everything into the mix. And it all starts with a questionnaire sent to all buyers on the seller’s radar.
The broker will use this opportunity to ask them a set of questions, most of which are geared towards underwriting the buyers. They serve as a background check of your financial standing and make some assumptions on the buyer’s capital improvements, the debt structure they’re going to work with, and how sensitive they’re to fluctuating interest rates.
Because we’re leaning towards a rising interest environment for the near-term, the broker will also be underwriting for them. It’s about gaining a certain degree of confidence in the success of the deal. For instance, if the interest rates move 50 basis points, is that going to blow the buyer’s deal up?
Essentially, the seller and broker are trying to determine how sure they’re in closing the deal. That’s why it is a no-brainer to wow both parties in your letter offer with a solid track record, impressive terms, and a price that they won’t refuse.
3- Go beyond the Price
It’s true, price does matter (quite a bit, in fact) when buying a multi-family property, but what else should a strong offer include? For one thing, it’s crucial to ensure the terms of your offer are as tight as possible if you want to capture the seller’s attention and beat out other buyers.
Sure, the price will be a major factor, but the seller still wants to get a clearer picture of the offer.
- Does it include an access period or no access period?
- When does earnest money go hard?
- Where’s their debt? Where’s the buyer’s equity coming from?
- If something happens to one of the two, can they go solve their own problems?
The seller and broker want these terms to be in black and white, so everyone knows what they’re getting themselves into.
4- Make Sure Your Offer is Friendly
There’s nothing that pits you against the seller quite like using hostile language in your offer. For one thing, incorporating demands into your offer is likely to anger, frustrate, or irritate the seller. Needless to say, that’s the last thing you want to do in a seller’s market.
If you’re supposed to pay for something like inspection costs, escrow fees, or the title insurance policy, don’t instruct the seller to foot the bill or beat that cost. Instead, it would help if you amicably approached the matter.
Using friendly language can be the edge you need to stand out from other buyers. For instance, if others demand immediate possession on closing day, give the seller a couple of days to do some last-minute packing, cleaning, and whatnots.
5- Address Your Seller by Name in Offer Letter
Starting your buying offer with a generic greeting like “Dear Seller” probably won’t cut the mustard. If at all, addressing the seller using cliché salutations can make it seem like you are either using a generic offer letter or don’t know the seller’s name. Either way, that puts you at a disadvantage right off the bat.
It’s a wise idea to address your seller by their actual name if you want to dramatically improve your odds of winning the bidding war. Your realtor is a credible source if you don’t know or can’t seem to find the seller’s name online.
6- Find Common Ground
The rule of thumb when trying to create any relationship with someone is to find common ground. The same goes for when you want to form a good seller-buyer relationship. What do you have in common? Do you love golfing, fishing, or football?
You’d want to point out these things that you have in common. It could be that both you and the seller are history buffs, coffee connoisseurs, or ardent art collectors. Whatever it is, make sure that you talk about it without going overboard so that you don’t make your seller feel uneasy.
7- Speak to the Sellers Core Motivations
To get a leg over other potential buyers, you need to understand the seller’s core motivations for putting the property up for sale. It’s true; this might sound like a trivial tip, but it can work wonders when drawing an impressive buying offer.
If you know the seller’s motivation, it’s easy to see things from their viewpoint, which can help you write an offer letter that’ll rouse the seller’s basest emotions. In general, sellers have three core motivations:
- Emotional attachment
- Money
- Urgency to sell
If the seller is after Benjamins, you must offer a figure that’s hard to beat. However, if they’re in a rush to sell, include details that’ll speed up the sale.
8- Shorten the Inspection Period
Again, if the seller is in a rush to sell, you’d want to help things move along faster. Most purchase contracts include an “Option Period” that gives you a specific number of days to inspect the property. If the specified default is ten days, consider shortening that period to 5 or even two days.
9- Fast Underwriting And Feedback Turnaround
Some sellers may not want to share their finances upfront, especially if they are Mom and Pop sellers with poor record-keeping. As an active and experienced multifamily operator in your marketplace, you should be able to carry a “soft underwriting” by using your local knowledge of operating expenses, market rent, the property’s current rent roll, economic occupancy, delinquencies, and insurance loss runs. Insurance loss runs would help establish your insurance cost assumptions. Another important point is to externally inspect the property especially the roof, sidings and driveways. Walk the property to get a general feel for the community.
If you can perform soft underwriting within 24-48 hours, you have a great chance for not only impressing the broker and the seller but to locking in an off-market deal!
10- Lending In Order & Ducks In a Row
Making sure that you are prepared to close the deal on time is crucial for having a happy seller and broker.
The main pieces that would allow that to happen are lending, inspection, and appraisal. Your lender should pre-qualify the deal and the required terms early on, typically in the underwriting stage. Give your building inspector a heads up so they can book the inspection well in advance.
Wrap-Up
An offer letter, by itself, isn’t always enough to guarantee that you’ll get the property, particularly if you’re going up against buyers willing to pay top dollar. However, an impressively-written offer can give you the head start that you need in a competitive market. Keep it a little personal, short, and speak to the seller’s motivations.