Why so many off-market real estate deals? – Orange County Register
Thank you, dear readers, for monitoring my missives over the past six years. We are celebrating an anniversary with this week’s column! Yes. The first column you wrote was really Super Bowl Sunday 2015. Gosh, how the years have passed. Thank-you! To another six. What are you saying?
Recently, I observed a phenomenon of market activity that was seldom seen in my commercial real estate years – “what’s beneath the waves”. Many offers these days that resemble a Zoom attendee dressed smartly from the waist down but wearing pajama bottoms are held out of sight. These secret agreements known as “off-market” dominate!
You may be wondering why. I definitely am. Allow me to express a few opinions.
First a little background knowledge. In the past, the motivation to take up an unsolicited offer has been linked to one of the following factors: pressure to sell such as an outstanding credit period or foreclosure. Desire to avoid disrupting business – after all, publicly marketed offers come with tours – people walking around the area. Sale of the operation. Often times, the buyer of the business pays the most for the properties the business is in. Despite these triggers, throwing a wide net generally maximizes revenue for the seller.
Selling out of the market also has a disadvantage. You can leave money on the table, you don’t have an attorney to guide you through market conditions, and no verification has been done. There could be an unresolved front page issue, a leaking roof, or a persistent tenant who needs to be relocated. Don’t forget the tax implications of selling. Sure, you will go one way or the other, but if this offer hits, do you understand net sales after tax?
But these days we are seeing sales despite all of the obstacles listed above. The appetite for industrial buildings to be occupied for buyers, developers scratching and building new ones, or investors to satisfy deferred tax exchanges is insatiable!
If you’re a seller or considering a sale, you may or may not list. Hmm, sounds like an HGTV show idea. When you make a list, your broker is running a process – put up a sign, create marketing materials, notify the local agents, post in multiples, and alert the neighbors. Sprinkle in a drone fly, a Matterport tour, some digital pushes, and voila! Let the games begin.
But with the obscene shortage of inventory, many practitioners are calling sellers with a different approach. Just accept our proposal, short the marketing time, avoid the disturbance, and by the way, the buyer we have is going to pay us, give you the best dollar and close with no funding option. Bam! Sellers respond positively.
But what I call “mini-marketing” is also in the game. This is how it works. An owner gives an indication that he will be transacting. Broker help is committed. A short information sheet is drawn up describing the offer – all in agreement with the seller. The best half-dozen buyers will be consulted. Usually four have a strong interest. Boom.
After all, a stakeholder cannot be interested in selling. He may just want to lease the building and keep it for the long term. However, when looking for a tenant, buyer activity floods their inbox. At the prices people pay, he can’t refuse. Plus, he can sell a lot and move to a more tax-friendly state like Texas or Nevada and increase his returns.
To see what’s really going on, take a look below the surface. You might just find the whale of a buyer you are looking for.
Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at [email protected] or 714.564.7104.