- How to Spot an Amateur Buyer
- What is a REIT
- Why Apartment Building Owners Should Know About REITs
- Advantages of Selling Your Apartment Building to a REIT
- Disadvantages of Selling Your Apartment Building to a REIT
You worked hard, bought a couple apartment buildings, and now you want to cash out so you can spend more time with your family.
1. How to Spot an Amateur Buyer
If something looks too good to be true, it probably is. Don’t be looking for somebody who just won the lottery and seems like they’re willing to pay too much without any work. From my years buying and selling apartment buildings, it’s obvious not to go for something that seems too good to be true.
Amateur investors can be a tremendous waste of time and money. They talk big, but don’t follow through on commitments. Amateurs don’t know the most important aspects of a successful deal. As a result, they ask for work that is meaningless, and don’t pay attention to it when it’s done.
You can ensure you don’t run into problems like this by consulting an experienced multifamily real estate broker. A professional broker will guide you through the process in a way that commands respect from everyone you deal with.
Some buyers go into a deal with negative intent
A common strategy is to “bait” a potential seller. Many brokers and buyers alike promise the moon, but don’t be fooled. They’ll get a seller to spend months of time and energy on them. By the time the seller finds out the buyer isn’t able to pay an agreed price, they’d eventually settle at a low price rather than go through all that hassle again with someone else.
Other buyers might talk about paying higher than market value or lie about their assets so they will be treated seriously, even if it’s only for a short time. It makes them feel important. You’d be surprised what people will do to feel important. Psychologists say it is mankind’s most important need.
Don’t get taken in by amateur or unscrupulous buyers. There are proven methods to know if the buyer you’re talking to really has the money and intent. An experienced multifamily real estate agent will recognize the signs, and can tell very quickly if you’re wasting your time or might even be getting into trouble.
Rule of thumb: If your building is worth 10 million dollars whoever you’re talking to needs to have 3 million in cash
In addition to a lot of cash a qualified buyer needs a very good credit rating. And it helps if they have a friendly banker who’s been lending to them for years.
A good broker knows all the ingredients to a win/win transaction and in what order they need to happen. A good deal has a flow to it. All the parts fall into place just when they need to in order to keep the deal moving.
Too often deals fall apart. People lose interest, their priorities change. That can happen for many reasons. Someone gets sick or has an accident. The fundamentals of the market change, or there‘s a natural disaster. Events like that are more common than they used to be.
One way to ensure your buyer is qualified and has the money is to work with a REIT. Most REITs are cash rich and looking to buy.
A large percentage of multifamily building purchases in Canada are made by REITs
2. What is a REIT?
A REIT (Real Estate Investment Trust, pronounced “reet”) is a company that combines the capital of many investors to own or finance income-producing real estate. REITs are unique in that they allow individuals to buy shares in commercial real estate portfolios. REITs can include many types of properties – industrial, office, retail, apartments, self-storage, hotel, and diversified real estate holdings.
In contrast to development firms, selling properties is not the main goal of REITs. The majority of profits generated by REITs is income from operating the property, including rent and direct payments. REITs must distribute a large portion of profits back to shareholders in the form of dividends.
REITs were modelled after mutual funds. They offer investors the benefits of commercial real estate investment along with the advantages of investing in a publicly traded stock. Each share of the company distributes a certain percentage of the money generated by the company’s properties.
Essentially, REITs let you invest in real estate “the easy way.”
Canadian REITs must pay at least 90% of their net income to investors
For large companies, REITs are becoming increasingly popular as a relatively easy way to hold property and attract investment with tax benefits and flexibility that other types of investments just can’t match. For individuals, investing in REITs is an easy way to hold income-producing real estate while saving the cost, work, and risk of owning and managing your own properties.
REITs are one of the largest owners and operators of multifamily buildings in Canada. And given current market conditions they are predicted to undergo significant growth in 2019 and beyond. Due to the demand for housing rising while affordability declines, rental demand continues to rise. Residential REITs are expected to continue performing well in the future.
3. Why Apartment Building Owners Should Know About REITs
REITs are major owners and operators of apartment buildings in Canada. If you own one or more apartment buildings, here are some things you should know about selling to REITs:
(i) They are worth emulating
When it comes to profitable property management, REITs are world-class experts. REITs are extremely detail-oriented and take great care of the property, are efficient at tenant management, and have a solid capital plan including windows, heating, roofing, all things that need replacing, the date, the cost, everything.
Look at the front of the buildings owned and managed by REITs to see the type of envelope, foundation and parking used. Watch the advertisements for REIT-owned properties to learn more about the property and services they offer. If you manage your buildings as well as REITs do, your buildings will be easier to sell.
(ii) They buy apartment buildings
REITs are cash-rich, highly professional property buyers. Different REITs buy different types of apartment buildings, including new and older buildings, as well as individual buildings and entire retail portfolios. REITs raise money both from private investors and publicly traded shares.
4. Advantages of Selling Your Apartment Building to a REIT
If you are looking for a buyer for your real estate assets, a REIT could be your ideal candidate. Selling your property to a REIT has several important advantages, including long-term investment opportunity.
(i) REITs are actively seeking acquisition opportunities
As the real estate market continues to grow, REITs are actively seeking acquisition opportunities across all property types, including multi-family property. Selling your property to a REIT provides a great opportunity to get a satisfactory return on investment.
(ii) REITs have exceptional financial qualifications
REITs acquire properties in three different ways: cash, OP Units (privately placed units of the REIT’s Operating Partnership), or by using a combination of the two. Although REITs are open to paying with OP Units when the right assets are involved, paying with cash represents their easiest and most cost-effective option.
(iii) Always in a position to buy
In contrast to buyers who need a loan in order to purchase a property, REITs are almost always in a position to buy, and they have the capital. If you own more than one or two large buildings, REITs will be some of the best buyers for your whole portfolio at once.
5. Disadvantages of Selling Your Apartment Building to a REIT
(i) Complex Bureaucracies
REITs are large companies with complex bureaucracies. They have a lot of checks and balances to protect their shareholders. Ability to navigate the bureaucracy is essential. It’s much easier to deal with them if your real estate agent knows the people involved on a first-name basis and has done business with them before. An experienced agent will know what they want and how they want it. Things happen more quickly.
(ii) Intense due diligence
Specialists from their expert acquisition team will be involved in nearly every part of the due diligence. No stone will be left unturned. Detailed analysis of every scrap of paper will be carried out, and every part of the building will be closely examined. The seller, the financial statements, and the building will all be under intense professional scrutiny.
(iii) REITs may consider only specific types of assets
Most REITs only consider assets of a certain size, type and location. And their preferences shift and change as decided by Executive Staff and the Board of Directors. REITs are not always interested in acquiring smaller buildings.
(iv) REITs are expert negotiators
REITs are typically headed by professional negotiators with industry-leading market data. Unless you have an experienced professional negotiator on your side you may be at a serious disadvantage.
If you are an apartment building owner looking to sell it’s important not to get taken in by amateurs or fakers. Selling your property to a REIT may provide a unique opportunity to obtain a sound return on investment.
As the Canadian real estate market continues to grow and expand, REITs are well positioned to grow with it. They are actively seeking acquisition opportunities across all property types. Some REITs may be focused on assets of a certain size, type and location. They are cash rich, but have professional acquisition teams that will put your property through an intense due diligence process.
If you are considering selling your multi-family apartment building to a Canadian REIT, it is important to consult an experienced multifamily real estate expert who knows the market and has personal connections with major Canadian REITs to help you negotiate the sales and settlement process.
And finally, the right real estate broker can be completely discreet. Nobody needs to know you’ve just come into a large sum of money.
Seth Baker is an experienced multifamily real estate broker who will guide you through the corridors of power and wealth in a way that commands respect from everyone you deal with.
There are proven methods to know if the buyer you’re talking to really has the money and intent. Seth can recognize the signs, and tell very quickly if you’re wasting your time or might even be getting into trouble.
Seth knows all the ingredients to a win/win transaction and in what order they need to happen. He talks to decision makers at Canadian REITs regularly and knows what they need in order to approve a deal.