Selling Multifamily: Five Hard Exit Strategies

In today’s environment, selling an owned multifamily asset can be a tough nut to crack.  Why?  It would be easy to say ‘its the times we live in”.  Well, yes, but that is not actionable or of any value.

Today’s multifamily exit strategies are complicated, primarily because people fail to recognize the time and complexity of the process.  Buyers are there, and assets are available – the timeline is the thing.  How does a seller navigate the process and retain the highest amount of net proceeds from the sale?  The first thing sellers attempt is to eliminate brokerage fees.

I learned an interesting thing recently: according to my friend Sanford Coggins, eighty-five percent of small multifamily sales in his market area is accomplished without a broker. For smaller deals in the throws of determining their multifamily exit strategy (smaller deals being those under $7.50 million), sellers bristle at paying brokerage fees because they can represent a large share of net equity.

If you are selling a 5.0M dollar multifamily asset with $1.0M in presumed net equity if brokerage fees are six percent (6%) of the sales price, this equates to $300,000.  This amount represents 30% of the net proceeds.

Unless the seller has a deep understanding of the marketplace, there is a risk of eliminating brokers.  Two reasons that come to mind are that the seller is taking a blind shot at a reasonable price point (valuation), and the second reason is limited market exposure (talking with a single buyer).

I am not a broker, so I’m not singing their praises because of being in “the club.” Selling an asset without the added expertise of an experienced broker could harm you financially. What if the net selling prices should be 10% with willing buyers in the wings?

I know, using my $5.0M example, that the seller at this higher price would still be complaining about brokerage fees even though the net-to-seller is $170,000 more!

The First Steps of Your Multifamily Exit Strategy

When determining a multifamily exit strategy, your first act is to contact the brokerage community and at least hear what they have to say. At least allow them the opportunity to present you with a value proposition. Then decide on if their services fit for your circumstances.

As multifamily asset size increases, broker participation increases. That means buyers and sellers of small multifamily assets are often going it alone.  I can confirm this is true because I know so many of them, and they are hard-headed and cheap (not broke or poor, just cheap).

“Why should I hire a real estate attorney, they cost money?” For those of you that think this way, consider hiring counsel as “cheap insurance.”  The monetary pain, and litigation, they save you could be significant.

While many multifamily investors are in this sector for a long term buy and hold investments, it always pays to have an exit. Having multiple exit strategies is always better. Park Capital Partners

Multifamily exit strategies are complicated because they require a very high level of expertise and a serious time commitment from beginning to end.  Selling is as common as buying, of course, just recognize the timeline. Market time to a sale in primary markets is six to twelve months, more extended in secondary and tertiary markets.

The following categories represent some hurdles to selling assets and why it’s best to think through your multifamily exit strategy before offering an asset to the marketplace.

Limited 1031 Exchange Activity

Gone are the days you can wait on a hungry 1031 buyer that must invest NOW, NOW, NOW!  They are few and far apart. As the real estate investment universe becomes choosey, finding someone amid a 1031 Exchange who wants “exactly” what you have for sale narrows.

And when 1031 Exchange volume slows, so does the money flow instigated from this tax strategy.  There are traders, but at what price glory?  The only difference between a 1031 buyer and anyone else is that they have a definitive timeline to meet.

Otherwise, they are the same as any other buyer. Sure, this occasionally works in favor of the seller; however, my point is that you cannot rely on this to occur in your required timeline.

Brokers are still the center of attention in buyer identification on large deals, but they have competition for the availability of for-sale-multifamily-product, including; LinkedIn, Loopnet, and a myriad of other on-line resources provide multifamily assets with exposure.

For those with limited experience in the asset class, listing your multifamily asset with a broker is still your best bet.  There are just too many landmines to guess on matters related to selling a commercial multifamily asset.

Cash Buyers

Cash buyers are excellent.  But Cash buyers believe they have a distinct advantage; cash.  Selling to a cash buyer at a punishing discount, is this viable?

Having any other options, you would avoid this, of course.  But wait!  There’s more!  Times have changed in two respects; multifamily is a highly sought after asset, and in large markets, there are often multiple buyers seeking to deploy offers with all cash.

A cash buyer’s proposal with a proof of funds letter in hand is great if the price and terms offered are acceptable.  If the offer is within your strike zone, proceed.

The two sides of the “all-cash buyer” coin having a single offer from one cash buyer versus having multiple offers from multiple all-cash buyers. If the proposals were identical, you have some thinking to do deciding on which one to accept.

If one all-cash buyer’s offer is $10,000 higher, this seems like a no-brainer, right? Well, what if the higher offer is from a local that “everybody knows” is hard to do business with and the lower offer is from someone that has contacted you through a reputable third-party (such as a broker or attorney) and their money for the deal is in a local bank?  Do you want to play roulette with the higher risk buyer for the chance at $10,000?

It’s your call.  My point is that even when you have multiple all-cash buyers, their offers have nuances for your contemplation.

As an aside, people devote way too much time pondering buyer motivations, including cash buyers.  Assuming your bases are covered, meaning no environmental or structural issues are undisclosed by you, the seller go ahead and close the deal.  Talk about buyer motivations at dinner with your investors while handing out checks.

CMBS lock-outs

The quantity of CMBS loans with extended lock-out periods is enormous.  These lock-out periods protect mortgage investors by preserving yield for an extended period.  That makes sense.  And, borrowers/owners signed up willingly.

Now comes the pain as deal after deal tied up in defeasance that drops your multifamily asset into years of limbo, of unsellable stasis.  Be aware of the lock-out period.  At the very least, these provisions require (require as it – don’t even think about selling without prior mortgage=holder approval) mortgagor approval.  Make sure to “know your loan.”  Some questions:

  • Can you sell now, or does your loan prohibit any transfer without notice?
  • What is the lock-out period remaining before you can pay off the loan without penalty?
  • Are there added costs due to the lien-holder associated with liquidating this asset? What are these costs?
  • Who and where is your contact person for obtaining a payoff?  Are they picking up the phone and responsive or your loan documents lost in Robo-document land?

 

multifamily exit strategy,, green door surrounded by vines

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Loan  Underwriting

The pendulum has swung hard. The stack of paper is thicker than ever at loan closings.  And there are more attorneys than iPhones at the table.  There is no way out.

If you want the loan, the required documentation is needed. As a seller, this means being amiable to assisting the buyer infill in their loan package with lender required documentation and updates all along with way.  Lenders need and want the whole story about an asset.

The better narratives get faster loan closings; it’s that simple.  So help a buyer create their account to get the mortgage in place and close the deal.

Time, Patience, and Exposure

Time, Patience, and Exposure; these are your best friends in the selling process.  All are equally important. Patience is the most difficult of all.  Patience is hard. Having all three of these in combination will assist any seller in navigating the items above.

Any viable multifamily exit strategy will still take time to execute. There is no replacement for time in a transaction.  Each sales transaction has a certain cadence.  Trying to rush the sales process creates stress.  Slowing the selling process leads to uncertainty. Find the balance and keep your punch list in hand to get the deal to closing.

In an article with a similar perspective to mine, Derrick Ruiz writes about multifamily exit strategies from his experience.  It’s a good read.

 

John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

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