Market Challenges For Buyers & Sellers With Strategic Selling

Today’s multifamily investment market is active, and likely to remain so for the near future. But there are still challenges for both buyers and sellers.

Experienced buyers understand how competitive the market is and have become accustomed to the process of reviewing multiple offerings, followed by multiple property tours and many offers, most of which end up in disappointment.

For new buyers entering this market, the process can be even more challenging as there is a learning curve to becoming knowledgeable on a long list of critical processes, including underwriting, submarket knowledge, financing, etc. The new buyer can lessen this learning curve by teaming up with an experienced sponsor and/or relying on an experienced investment sales broker.

The “exchange buyer” has all the same challenges magnified by having to perform within a certain time frame (45 days to identify a property and 180 days to close). In any event, the buying process becomes a numbers game of having to sift through many deals before one works.

These challenges are not without their rewards. In the last few years those who have purchased have seen significant rent increases followed by significant increases in values in a relatively short period of time. As this market continues to move forward, these buyers are coming back for more.

All buyers must be competitive on price, but many will try to separate themselves with large earnest money deposits, some hard money day one, short contingency periods and strong rèsumès.

While it is great to be a seller, that brings its own challenges.

The motivation to sell is not as compelling as in previous markets. Occupancies are high, financing is easily available and overall performance is generally good. That makes holding and owning a logical conclusion, leaving price as the overwhelming motivation to sell. Most owners have recognized a significant increase in their property values over the last few years and many have had opportunities to sell for significant profits.

But what to do with the proceeds? While there is no right or wrong answer it requires some planning. For example, taxes are paid on the net gain from the sale of a property (price minus current tax basis), and can be a significant factor in the decision.

While some sellers simply pay taxes on their gain, others will not sell without doing a tax deferred exchange as the tax liability is just too much. The tax deferred exchange has become very popular and allows the seller to reinvest the proceeds into like-kind real estate and defer the taxes.

Return on investment is the typical standard by which success is measured but many times the return on equity can be improved by moving into a larger property and thus a compelling reason for any owner to sell.

Other times, a partnership structure can dictate when a property is sold as these partnerships are designed to return the equity to the investors within a certain period of time.

In any event, this process of buyer to owner, to seller, to buyer is self-perpetuating with challenges in each phase.

To learn more about Bisnow content partner Rowan Properties, specialists in multifamily investment, click here.