The Secret To Value-Add Deals? Stop Looking For Them—And Make Them
The term “value-add” has been thrown around quite a bit (and rather loosely) over the last couple of years. All buyers want to believe they're buying a deal that they can add value to; similarly, every broker wants to sell a value-add story.
The truth is real value-add deals are becoming harder and harder to find. Deep rehab opportunities have been gobbled up by new, aggressive buyers who have subscribed to picking up these “properties” as their primary acquisition model. The end result is that buyers are left in the dust to tackle rather more complex acquisition processes, in which identifying value-add opportunity isn't as easy or obvious as it once was.
The typical thought process for targeting value-add used to be fairly simple: make capital improvements where needed, then increase rents. This strategy would usually result in a higher NOI.
Buyers today have had to expand their reach in terms of what and where they will buy. Even so, the process is still more difficult. The modern skill set for buyers requires the ability to locate value-add opportunities in hidden places.
These opportunities no longer always arise from capital improvements. Careful property management, dedicated marketing strategies, improved internal operations and refinancing are rapidly becoming the smarter way to reposition properties and create value.
Transaction volume this cycle has been at an all-time high. Properties that have been rehabilitated during this cycle are being traded for a second or third time. This leaves less meat on the bone for new buyers pursuing the value-add business model. To make room for these buyers, the property acquisition strategy will likely shift from value-add to a more traditional approach based on sound fundamental investing.
In turn, brokers must be smarter about matching up the right property with the right buyer profile. Once opportunity is identified, the broker targets that profile of buyer. Every Class-B property does not fit every Class-B buyer; consequently, buyers must become more realistic with their underwriting based on normalized income projections and expense budgets.
It’s the broker’s job to nudge them in this direction through personalized marketing ranging from email blasts targeted at specific demographics—particularly younger, first-time buyers who may not know where to start—to newspaper advertisements to face-to-face meetings with surer prospects.
This model favors the long-term owner who doesn’t have to depend on the flip or quick resale of the property to turn a profit.
This is where firms like Rowan Properties come in.
Rowan Properties is ending a very successful 2016 in which it has already experienced the transition to a more traditional investment approach. Principal Mike Burch sees 2017 as another excellent year for multifamily brokerage, and as such has recently added Rowan Burch to the team. Rowan has spent the past three years with Institutional Property Advisors (IPA) selling institutional properties, and will play a key role in expanding the firm's client base for larger Class-A and B properties.
To learn more about Bisnow partner Rowan Properties, click here.