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The Meaning of an Off-Market Deal

Generally, the words "off-market" have absolutely no meaning in the commercial real estate space. Many if not most deals are marketed as off-market, and words themselves are a form of marketing. In fact, if a broker brings you a deal which s/he labels as off-market, its a general indication that they are either lying, or not doing their job, as the whole point of a broker is to market deals. But there are a few instances where you can come across a true off-market deal, and these deals are often the best deals out there.

Why are off-market deals so coveted in our space? The theory of auctions and market design dictates that every potential buyer has their own indecently derived value for an asset which is for sale. Generally, those values may be close, however they are dispersed over a normal distribution. The reasons why on buyer's value may differ from that of another buyer may include their independent operational cost structures, their varying costs of capital, external factors such as 1031 exchange deadlines, ownership of adjacent properties, or for any other reason. The more prospective buyers you can get to look at the property, the higher the likelihood that you will get an offer in the right tail of the distribution, which in our case means a high price. So your goal as the seller of a property is to get the deal in front of as many potential buyers as possible. Now as a buyer, the fewer people who've viewed the deal, the higher the likelihood that you have give the highest offer, even though your offer may be in the left tail of the distribution, and that you get the property for an attractive price compared to what the average buyer would be willing to pay for it.

The first type of off-market deal, and probably the most common true type is the direct-to-seller deal. This is when you have some sort of direct connection to the selling party from either your own marketing or from within your network. The reason why you have a great shot in this case is primarily due to the lack of a brokerage commission. While the common belief is that the seller pays brokerage commissions from their sale proceeds, evidence indicates that the majority of the commission is actually paid for by the buyer, and is reflected in his purchase price. When you are dealing directly with a seller, there is a high likelihood that you may give a low offer, and that the seller may end up walking away with the same amount of money in their pocket due to savings on the brokerage commission.

However, the burden of looking for sellers can be a full time job. From time to time, a broker will send you a deal which actually has not been broadly marketed. This can be for any number of reasons. Often there is an inherent issue with the property, such as title, structural or environmental problems, severe enough that a very limited subset of buyers would consider a purchase. Other times it may be because the seller is looking for a quick sale, and may have a reason not to want broad marketing. These deals only begin to come your way when you have a reputation in the market and brokers have confidence that you will close.

An example of a deal like that came my way late last year. A broker approached me with a property being sold by the deceased developer's wife. She was in her 90's and was planning to retire out of state. She specifically instructed the broker that she was was more interested in retiring after a quick sale over maximizing price. We came to terms on a price immediately, and I got a property at 60% of the market value, with major upside on efficient operation of the property. The closing took place just over a month from the day the property was sent to me.

So the bottom line here is as an operator, if you want off-market deals, the only thing that counts are relationships. Whether with brokers, or other landlords, there has to be a compelling reason why the owner wants to sell to you specifically. And on the converse, you never want to let your buildings be the off-market deal for another buyer. You want your property to be in front of every potential buyer to get the highest possible bid.

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