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Off-Market Multifamily Sellers Are Leaving A Ton Of Money On The Table

CHICAGO — Marketing a property can increase the sale price by up to 23%, which runs counter to the idea that off-market deals can achieve higher values because a buyer will be more aggressive to seal a trade.

“The perception is when a seller has one buyer vying for an asset, that buyer is more aggressive and willing to pay a premium because they don’t want the seller to get into a bidding war for the property. Our research found the opposite,” KIG CRE Managing Partner Todd Stofflet said.

KIG Managing Partner Todd Stofflet and Atlas Residential Chief Investment Officer Leslie Andren

Stofflet said this is a sign it is in the best interests of owners to undergo a marketing campaign for their properties. Growing allocations from institutional investors toward real estate are still driving a sizable pool of investors into bidding for multifamily assets, and a full campaign is what drives the premiums.

Marcus & Millichap First Vice President and National Multihousing Group Director John Sebree said it is the job of a broker to create a competitive environment on behalf of the seller. Putting a building on the market determines the strongest buyer.

“That may not be necessarily based on price alone. If one buyer has a higher-priced offer but weak financial backing, versus a buyer with a stronger track record, taking a lower offer is the way to go. It’s our job to give the seller those options and we do that by marketing properties and generating the highest number of qualified offers possible,” Sebree said.

Sebree said Marcus & Millichap has numerous case studies where a seller received an off-market bid, put it on the market and the off-market buyer still bought the asset but at a higher price.

Stofflet said he has seen the effectiveness of putting a property on the market. In transactions brokered by KIG over the past two years, there has been an average increase in price of 3.92% from letter of intent to a second-round bid. Moving from the second round to best and final offers resulted in a further 2.34% increase in value.

Marcus & Millichap First Vice President and National Multihousing Group Director John Sebree

There are reasons to sell off-market, despite the price cut. Stofflet said some owners may be family office investors who do not want to publicize that they are selling because they don't want any speculation about why they are selling an asset. founder Ray Pressley wrote in December that an owner may want to pursue an off-market trade so as not to impact current tenants or businesses operating on a property. Other sellers may have agreements in place between partners preventing marketing the asset for a period of time.

The biggest argument in favor of pursuing an off-market deal from the seller’s perspective is they don’t have to pay a commission to a broker, because they are dealing with a buyer directly. Stofflet said this is really the only premium a seller has to pay, but it is not overly significant.

“In most cases of institutional-grade multifamily, the commission is less than 1%,” Stofflet said.

Stofflet said as this boom period in Chicago real estate reaches its coda, sellers should be more motivated to market a property. There will be buyers looking to lock in prices knowing higher interest rates are coming and concessions are back in the market.