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When in it comes to real estate, whether it’s residential or multifamily assets, one thing is very clear about the climate of the current market: it’s dominated by the Seller.
This is what’s known as a seller’s market and it’s the results of a trifecta: low inventory, record breaking high prices, and multiple offers in a highly competitive bidding space. This places sellers firmly in control, as they can be more demanding, drive higher asking prices, and negotiate more favorable terms for purchase.
In contrast, a buyer’s market is often seen during a recession, which is when there is high inventory, but limited buyers. This forces sellers to reduce prices and negotiate terms more advantageous for buyers. But, for now, that ship has sailed…
While this can be discouraging for some, it shouldn’t be. A seller’s market simply means you must get creative to remain competitive. My company, Blue Lake Capital, focuses on multifamily assets and has over $530M AUM. Here are some of the strategies I have used, as can you, to catapult past other bidders and secure your next asset, even in today’s market:
Lesson #1: Recognize How You Are Unique and Stand Out
Believe it or not, the highest offer is not always the final verdict to winning a deal. Instead of getting caught in a bidding war, find where you can shine. What advantage or unique position can you create that your competitors don’t have?
One example to consider is a hard money deposit. In my world of large multifamily properties, this can range from $1M to as high as $5M or more. Hard money deposits are non-refundable deposits that buyers provide to the seller to demonstrate their commitment in making the purchase. Even if a competitor is coming in at a higher bid, if they aren’t able to prove in real time they are “liquid” and can back their bid with a hard money deposit, this can give the buyer more reassurance you’re offer is the one equipped to finalize the sale.
Another approach that has been successful for us is recognizing when sellers are working under an urgent time frame. If a seller is in this position, you can take advantage of that by offering to expedite the closing process. Traditionally, when closing on a large multifamily property, there is a 30-day period for due diligence, followed by an additional 30-day timeline for financing. Since we have a smaller team, it allows us to be nimble and we can usually complete the process in 45 days. For a motivated buyer on a time constraint, this is appealing and can justify their greater priority, which isn’t just money.
The saying “people do business with people they like” is often true. Share your background and story with the seller. By being honest, a little vulnerable, and transparent you are more likely to establish a genuine rapport with the seller and win the deal, even if your bid is lower.
Lesson #2: Look Closely at Key Financial Metrics
We normally look at and analyze every line in the T12, but in today’s market, we pay even closer attention to three factors that really reveal just what position an asset is in: delinquencies, bad debt, and concessions. These will highlight just how much the owner needs to give up in order to keep the property occupied, and how many residents are behind on rents. The properties that have been impacted more than others by COVID will clearly show it.
If you’re offering a lower bid, justify it by demonstrating to the seller that you recognize these factors, and how you’re going to improve it under your ownership. Even though you must remain data focused in real estate investing, no one wants to see an asset they’ve invested in fail. If you can display experience and competence to the seller, you might be awarded the deal despite a lower offer because you’ve won the seller’s respect and confidence more than your competitors.
Lesson #3: Be Ready to Walk Many More Deals Than You’re Used To
Like many other businesses, winning a deal is a numbers game. The more we underwrite, make offers, and walk properties, the higher the chance to get a deal. Prior to COVID, we used to walk 10-15 deals to get one, which means we now need to walk more, because there is a lot more competition.
Lesson #4: Winning May Come at a Higher Cost
An interesting but dangerous observation I have made is when these bidding wars trump reason and even profits, where some competitors are simply winning a deal to say they won the deal.
It’s easy to overbid and win a deal. It’s an entirely other thing to acquire a property, establish and improve operations, and create cash flow. At Blue Lake Capital, we are committed to our investors’ interest first and foremost, and therefore will not settle for an offering that will yield profits below 5%-6% cash-on-cash. While this admittedly means we have fewer and slower offerings than some of our competitors, the reality is that if competitors compromise their investors’ interest, they will likely lose out on far more for their overbid victory than they intended. In real estate investing, winning is a long game, not a single deal.
Summary
Leading a real estate investment firm in a highly dominated seller’s market throughout 2021 has taught me 4 major lessons that helped me develop strategies for being even more competitive. First, avoid bidding wars and work from your unique strength or position. Another approach is to pay close attention to key metrics to avoid either a deal not worth making an offer on, or to justify your lower bid by highlighting your competence and experience to the seller. Regardless of any other factor in the market, a HOT market means more competition and you must realize it’s a number game. You will have to be prepared to work with higher volume to increase your odds of winning a deal. Lastly, winning the wrong deal is not winning at all. Avoid getting caught up in the competitiveness, hold to your priorities, and honor your investors. Be patient and ensure you’re winning the right deals.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with institutionals, family offices, and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the multiple assets, processes, and strategies used for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie here.