The reasons people sell their owned multifamily assets are many. Very often the trigger point for listing income property has little to do with the property itself and everything to do with ownership. For one, commercial real estate investing is not a part time business. Sometimes people (owners) just get tired of the grind and decide to devote their time to other money making endeavors.
In the last two years we have had limited price appreciation from inflation or rent growth (market specific). Does that mean we never will? Of course not, however, living through the downturn with no help from the capitalistic positives we are accustom to has some owners crying in their soup.
Another reason multifamily owners are selling is because the national unemployment rate has remained consistently high and this directly impacts occupancy. We sometimes forget that figure means nine out of ten people continue to be employed. This fact brings no joy to multifamily property owners accustom to 95% plus occupancy now struggling to maintain 85% occupancy.
Some sell because of financial or operational burnout. Sometimes selling is spurred by just not wanting to have the responsibility anymore; sometimes it’s a financial imperative. Then there’s age; age of the owners, age of the income property. Here are four reasons multifamily assets are listed for sale:
- Distressed property
- Distressed ownership
- Both – distressed property and ownership
- Neither- distressed property or ownership
In many instances the reason people sell their income property has nothing to do with the property itself. The passing away of a single owner within a group can be the trigger point for listing a multifamily property for sale. Again, this has nothing to do with the quality or operations of the multifamily asset.
In a distressed market everyone wants to know the reason for selling. Like knowing this information is the holy grail. It is not. This information is one factor in the “buyer” decision making process. Note that most of the time the information provided is for purposes of motivating the buyer. Caveat Emptor rules!
Consider the psychological aspects of investing in the stock market. Do investors buy or sell strictly based on the financial standing of a particular stock? No- the nuance of information that surfaces about a stock can sometimes have more impact on value than reported numbers. The same is true for of multifamily assets.
Here is my key point: the reason a multifamily seller is selling has nothing whatsoever to do with why a buyer is buying. This statement excludes any reference to “yes but”. There is no replacement for serious due diligence on the part of the buyer. Serious due diligence considers the reason the seller is selling from the perspective of the buyer.
Example: GM Files for Bankruptcy. Does that mean you make a run on the nearest GM dealership? The same applies to sellers of multifamily assets. Just because a seller is distressed doesn’t mean they are giving away the store.
More to the point: Does GM’s bankruptcy have anything to do with your need for a new vehicle? Being in the market to acquire multifamily income property has nothing to do with the motivations of a given seller.
Question: if you know the reason the seller is selling- so what? There are 123 other people with the same information. This information is a single inflection point within the entire buying process.
Reading the tea leaves of why income property is for sale might be a fun hobby, but there is seldom a single reason for selling. Remember, at some price, you can buy anything. The question is: then what? (exploring buyer motivation is for a different post).
Granted, there are occasions where speed of action is necessary based on the needs of the seller. More importantly, it should be your own due diligence cadence that drives a buying decision- not the needs or desires of the seller. Remember, after closing they go home… never to call or talk to your team again.
When it comes to determining why a multifamily owner is selling, try to refrain from devoting time to conspiracy theories. In the light of day and with good due diligence a buyer can identify outstanding litigation or overt issues undisclosed by an unscrupulous seller.
Reminder: there are no short cuts to quality due diligence and never a reason to close a deal without title insurance. Most people are pretty straight forward. This doesn’t mean they desire to share their deepest thoughts on the matter with you.
There are many reasons people sell. For buyers, the focus should be on the reasoning behind the buying decision.
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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com
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