FEATURE ARTICLE, JUNE 2004

PERFORMANCE BENEFITs APARTMENT INVESTORS, BROKERS IN TODAY’S SELLERS’ MARKET
Joe Gillespie Jr.

Gillespie

While economists are predicting 75,000 new jobs for Atlanta in 2004,* the metro area remains a sellers’ market for apartment investors. There are too many dollars chasing too few prime multifamily properties. But savvy buyers wanting to fill their deal-flow pipeline in the region can woo and win brokers and sellers by executing an acquisition strategy based on performance, not promises.

In nearly 35 years of buying, transforming and managing apartment communities throughout the United States for institutional and wealthy private investors, we’ve found there is an etiquette in working with people on the other side of the table: be smart, tough, tenacious and gracious. This is particularly true in the Southeast and Atlanta where a reputation for closing smoothly, on time and at the contract price is prized.

Buyers have one shot at establishing credibility in an active marketplace, and shortcuts and shortsightedness are remembered. In today’s sellers’ market, the bidding process (designed to level the playing field by giving all buyers equal access to a deal) sometimes backfires — and it’s not the seller’s fault. Some buyers will pounce on an attractive apartment property; tie it up with a winning bid, which is usually an unreasonably high offer; and proceed to contract.

Some buyers begin their search for equity and debt financing only after the contract is signed. As the close of escrow approaches the 11th hour, they barrage the seller with multiple problems discovered in their due diligence. This is designed to re-trade the price, ask for extra time or both.

This process generally weakens the seller’s position and gives the buyer some additional leverage. The seller may be hesitant to put the property back on the market because multiple contracts further the perception that the apartment community may be tainted, which ultimately affects pricing. Additionally, the market may have changed during the time the seller’s property was tied up under contract or other bidders in back up may have found other deals.

Cap rates and interest rates, currently at all-time lows, may have started — and could conceivably continue — to rise, compressing returns and diminishing a once robust pool of buyers. The seller could lose momentum and the property could lose its freshness. Hence, the lower re-traded price may be quietly accepted.

In my opinion, this is an acquisition strategy that sullies the marketplace. It angers and often damages the seller and hurts the selling broker’s reputation with his or her client.

As buyers, we’ve found the seller and its broker are better served by asking for a 5-day window to perform a deep due diligence on the property before going under contract. This way the seller gets immediate underwriting feedback and a realistic pricing point that can be financed and closed quickly. If the buyer and seller can’t agree on a price or terms, the broker hasn’t lost the other interested bidders and the seller hasn’t lost momentum. As an example, in buying the 468-unit Governor’s Point in Alpharetta, Georgia, recently from Equity Residential Properties, we flew in a 31-person due diligence team that combed the 20-year-old, 46-acre low-density apartment community and closed at the contracted price.

Buyers can win the respect of brokers and sellers by being responsive and communicative once the deal is under contract. Don’t let requested documents sit on a desk from a Friday to a Monday; you may have to work over a weekend or a holiday to keep the paperwork moving.

Delays and pokey responses can keep the broker and seller in limbo and raises doubt that the buyer can and will close on time.

A new trend that we applaud is that brokers are more diligent in qualifying buyers to protect their clients. By doing their own due diligence on how buyers have performed in other deals and in other markets, brokers can more accurately advise a client not to always accept the highest bid because that owner-investor may have a history of re-trading. More sellers of apartment communities are wisely disclosing known deferred and recurring maintenance problems and asking buyers for their plans and budgets for upgrading the property before going under contract. This helps eliminate those 11th-hour surprises and protects sellers from dropped contracts and price renegotiation.

You can build and cement relationships with the best brokers and sellers in a market simply by being an honorable buyer or borrower. When you’re obligated to pay a commission, pay it quickly and without renegotiating the fee. Do your homework and know as much about the asset and that marketplace as the broker and seller. You’ll inspire confidence.

A seller’s confidence in the buyer is crucial. “Price is always king, but if the price is close and timing is an issue, you’re always going to go with the proven buyer who will close on time at the contracted price and not re-trade them,” says Derrick Bloom, principal with Apartment Realty Advisors in Atlanta. Brokers and the sellers they represent have yet another reason to select a buyer that will expedite and perform, not just promise and drag it out, maintains Bloom. “If a multifamily community is under contract and it’s a long, drawn-out close, the property management team gets exhausted, the marketing people get exhausted and the tenants get exhausted.”

Bottom line — the enlightened buyer must go the extra mile and reinforce that delicate relationship with sellers and their brokers. This long-term approach will pay dividends for you today and on deals down the road.

Joe Gillespie Jr. is director of acquisitions for Concierge Asset Management of Tiburon, California.

*Mark Vitner, vice president-economist, Wachovia Bank, Atlanta


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