April 2021 Edition - Winning a Call for Offers on Multifamily Properties
Do you have a strategy for winning a Call for Offers (CFO’s)? Have you noticed that with Class A and B multifamily properties the majority are being offered on a CFO basis? I’m sure you have. I’ve also noticed some other trends over the last 6+ months that may help you when the next CFO comes up.
The two most important trends that you need to consider are (1) a CFO is not what it once was and (2) Hard Money is going to be required to win. Here is some guidance for you.
When you see a Class A or B property that you are interested in, don’t waste any time. Begin your due diligence process immediately. Visit to the property and get a Property Condition Inspection scheduled. Get your attorney and your lender lined up and check title. Be ready to submit and offer as soon as possible. Base your offer on where the property is located and on the property conditions, financials, rent roll and recent comparable sales in the area.
It is important that we submit a “preemptive offer” as soon as possible as offers are being reviewed on a rolling basis. If you wait for the CFO deadline, the property will probably already be under contract. As I said, CFOs aren’t what they once were. Most listing firms are using CFO dates for their own benefit. By setting a CFO date, they can tell their clients, the sellers, that they will have the property under contract within 30 to 60 days. This is very helpful in getting the listing. It is definitely not done for your benefit as the buyer. All a CFO does for you, the buyer, is create a sense of urgency and competition for the property which pushes you into a compressed timing position for decision making.
The other new and most important trend in making your offer to purchase is the inclusion of “hard money”. This is not earnest money, which does not go hard until the end of due diligence, but money that is non-refundable from day one. The offering of hard money is a new trend with Class A and B properties that I have noticed over the last 6+ months. Offering hard money positions, you ahead of the pack when deciding which offer to accept. This is a win-win deal for the seller. If you close on the deal, great. If you don’t, they keep your hard money deposit.
The amount of hard money needed will be determined by the value of the property. Based on the feedback I have received, for properties priced up to $5.0M, the deposit should be between 1.0% and 2.0% of your offer. For properties priced over $5.0M, the deposit should be at least 2.5% of the offer. With that said, the amount of hard money you decide to deposit is your decision. When making your decision, please keep in mind that these are high functioning Class A or B properties and you, hopefully, had time to visit the property and complete your due diligence prior to submitting the offer.
I’m sure that you are not happy with the need to submit hard money. I don’t like it either. But, once you get past the initial shock and remember you will be doing this only on Class A and B properties that you are seriously interested in purchasing and have visited and completed some due diligence, the risk of losing your deposit is not that high and the reward is winning the property.
If you are wondering what has caused this, here are a few of the reasons:
1. The southeastern U.S. is currently one of the most desirable areas in the country for multifamily purchases. The multifamily sector in general has remained strong and is forecasted for growth in 2021.
2. CFOs are designed to generate multiple offers on a property. Most CFOs generated 10 to 20 or more offers.
3. There is a very limited supply of Class A and B properties available to purchase.
4. There is a tremendous amount of capital looking to buy Class A and B properties.
5. All of the above results in a “seller’s market”. Competition for each property is high.
The market will allow this bull market condition to continue to exist only to a certain point before it will require an adjustment. When this adjustment will occur and what will be the stimulus that pushes the adjustment into action is yet to be determined. When you look at CAP rates in some areas outside of the Southeastern U.S. there is still room for further CAP compression in the southeast. When you look at rent rates, there is still room for growth. Construction costs continue to rise and increase property values. Population migration to the southeast may continue to increase or may slow down. Economic inflation or deflation may become a factor along with various other macro and micro economic conditions which may change. We live in a very interesting time and place. I will try to keep you informed through my “Just In Case You Missed It” monthly letter.
“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners. It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given). Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience. I can be a valuable resource to you without adding expense to your budget. I look forward to speaking with you and having an opportunity to meet with you. I am always at your disposal to assist you with your multifamily business. If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com.
Respectfully
Rick
G.F. Rick Baker, CCIM
Multifamily Specialist/Investment Advisor
www.RickBakerMultifamily.com
2504 Tinderbox Ln.
Greensboro, NC 27455
Cell: 336.549.6083