Want to know a secret? Apartment buildings are being sold in your area…transactions you’ve never seen or heard about.
Off-market deals make up a significant percentage of apartment building transactions in British Columbia. Buying or selling an apartment building off-market can offer advantages and disadvantages. Market knowledge, strong relationships, reputation and patience all lead to success or failure.
In this article, I attempt to answer some of the primary questions people have about doing an off-market deal. Don’t miss out on any more deals!
Here are the 9 Things You Should Know About Off-Market Apartment Buildings
1. What is an Off-Market Deal?
An off-market deal is a direct transaction between buyer and seller on a property that has not been publicly marketed for sale. An off-market transaction can come from a commercial real estate broker, lawyer or directly from a property owner. Off-market deals can come in the form of either an asset sale or a share sale.
2. How is an Off-Market Deal Different?
An off-market deal is different from the two alternatives: Exclusive and Public MLS deals. The main differences are market exposure, cooperating commissions and representation.
Real estate listings are actively marketed by a brokerage. They are usually heavily promoted online and in print. Exclusive listings usually appear on company websites, newspapers, emails, social media and direct to a large network of buyers. Most large commercial brokerages deal almost entirely in exclusive listings.
Public MLS deals include all the exclusive marketing plus being listed with a local real estate board. Additional real estate board tools include the MLS, REALTOR.ca and CLSLink.ca.
Off-market deals are not marketed or published anywhere. They are strictly word-of-mouth deals.
Cooperating commission is the real estate fee offered to a buyer’s agent. Public MLS listing have a cooperating commission offered. Exclusive listings may or may not offer cooperation. Off-market offers no cooperation commissions.
When a real estate broker is involved and the property is in British Columbia, Exclusive and MLS Listings involve Dedicated Agency. Dedicated Agency means that the real estate agent legally represents the best interest of either the buyer or the seller. All agents are required to disclose who they represent.
An off-market deal may, in some cases, involve Dedicated Agency representation. Most of the time, neither buyer or seller is represented. No agency means that the broker does not negotiate on behalf of either party. Their role is as an intermediary, communicating information back and forth with the shared goal of completing a successful deal. An agent must disclose in writing the services he can and cannot provide under agency or no agency situations.
As a result of the three main differences, market exposure, cooperating commissions and representation, off-market deals should be considered carefully and with reasonable expectations of results.
3. Why Should an Owner Consider Off-Market
Off-market deals come in many different variations. Some off-market deals are there simply because the owner does not want anybody to know that they are selling the property. A seller will test the market by going to certain brokers and saying, “I’m thinking of selling a property, what are your thoughts.”
Off-market sellers generally don’t want either competitors, friends, family or even the newspapers knowing that they are looking to sell something. It’s a way to do something very quietly.
One limiting factor is that many prospective buyers who are actively looking for a property may not get a chance to bid. Confidentiality can come at a price.
An off-market deal will not necessarily be at a lower price than “on market.” The buyers may have much less competition in an off-market situation and usually pays what the same price the market would bear.
If privacy and confidentiality are the main concern, an off-market deal may be a good fit. If an owner wants a wider exposure to more potential buyers, an exclusive or MLS listing will be a better solution.
4. Why Should a Buyer Consider Off-Market Deals?
The biggest benefit to a buyer is the exclusivity. A buyer of an off-market property may not have lots of competition and time pressure as with on-market properties. In certain cases, this can mean a buyer may have extra time to do due diligence.
Occasionally, the owner may put strict deadlines on offer decisions and due diligence. A buyer may end up with less time, do to the desirability of a property. In that case it’s especially important to be able to move quickly.
Off-market deals usually come from a relationship that you have, whether its with the owner or the broker. If the broker or seller know you have high certainty to close, they provide you a ‘free look’ that would normally require you to enter a contract.
As a result of all the above, off-market transactions tend to be faster, friendlier transactions. They are based on the fact that there is a relationship. You as they buyer are known as someone who can close. You may have prior business dealings with the person who is selling.
Your ability to close when you say you can is very important! The prerequisite to an off-market deal is you need to know your market and complete due diligence up front. Getting into a deal and backing out because you didn’t do your homework will damage your relationships and reputation. British Columbia apartment buildings represent a relatively small market. A bad reputation can make it unlikely you’ll get offered an off-market transaction.
5. What are the Price Expectations When Buying/Selling Off-Market?
In today’s world off-market transactions typically mean that you are going to be paying either market value or above market value. In a competitive market like British Columbia, most property owners are not going to start an off-market deal without an expectation that they will get at least what the market is paying for this type of property or even higher than what the market would pay.
A premium is associated with exclusivity. It’s a premium associated with the fact that buyers are not going to have competition for the deal. There is great value associated with not having a deal shopped around to all the brokers or all the buyers in the region.
6. What Paperwork is Involved in Off-Market Deals?
Deals can take place over a handshake between two owners or a note on a napkin. All that’s required is to have a lawyer to draft the Contract of Purchase and Sale.
Many off-market deals involve broker knowledge. Anything where a licensed broker is involved requires three documents: Non-Disclosure Agreement, Brokerage Fee Agreement and Agency Disclosure.
A Non-Disclosure Agreement (NDA) gives comfort level to the seller that their privacy will be respected. The NDA may also be called a Confidentiality Agreement. If a buyer volunteers that they’ll sign whatever document that needs to be signed in order to protect the other persons confidentiality, the comfort level for both parties increases.
A Brokerage Fee Agreement is used in off-market deals that involve a real estate broker. A broker’s relationships are priceless. The trust and reputation a broker builds up take many years and countless hours of effort. Deals that appear effortless were likely many years in the making. Virtually every successful investor has worked at one time with an effective real estate broker. And, most have probably worked with some bad brokers. Exercise caution!
A Brokerage Fee Agreement simply states that the brokerage will be paid by either buyer or seller. The Fee Agreement gives your broker peace of mind that they’ll be compensated for their work and clarifies expectations for all parties. Clear expectations and transparency about compensation make an off-market deal run smoothly.
Agency Disclosure is required for all real estate transactions in the province involving a real estate broker. Buyer, seller, or neither party may be represented. Talk to your broker to learn more about agency representation and who’s being represented in any given transaction.
7. What Advice Do You Give to Off-Market Buyers?
Simple: know your business! Make sure you’ve got all your ducks in a row. Make sure that you know your market. Make sure that you know your product type. Make sure that you are financially qualified and can follow through on verbal commitments.
Present yourself in a way that there are no questions about whether or not you’ll complete the deal. Be ready to act in a timely manner. Every deal it’s going to have it’s own challenges, but if you have at least a general idea of how to respond, a transaction can go much quicker.
There typically are no shortcuts for off-market situations. I would say that anyone who is looking to be in the multifamily real estate world has to expect that they will need to spend quite a bit of time building relationships. This is going to be a long term commitment. The most likely scenario is working with a broker who is experienced, specialized and has a reputation in the market.
8. What Advice Do You Give to Sellers?
Be realistic on price, upfront about intent and set firm deadlines. Selling off-market doesn’t mean selling below market value. However, it does mean being reasonable and realistic about your expected sale price. Know your market and sales comps going in. Talk to a broker about similar sales in the area. There are many sources of information on sold buildings.
Be upfront about your intent to sell. If you’re looking to “test” the market and later back out of a deal, you’ll turn buyers away and hurt yourself later on. BC is a small market and reputation travels fast. Buildings can get “stigmatized” and become difficult to sell, especially in medium to small markets.
Set deadlines. Off-market deals can drag on endlessly unless you set hard deadlines and stick to them. Offer reasonable time for due diligence, but make sure there’s a clock ticking somewhere. If a buyer is continually stalling or can’t follow through, do not keep hanging on. Cut them loose and try something new.
Off-market deals can be a fast, easy and private way to buy/sell an apartment building. Anyone considering off-market deals should expect that this is a long-term venture and is built around relationships. It is something that they need to partner up with someone who has a strong reputation in the business. Patience is very important when it comes to off-market transactions.