Multifamily sellers: How to qualify a buyer before going under contract

Multifamily sellers: How to qualify a buyer before going under contract

Don’t waste time and opportunities: learn how to select the right buyer every time

As the seller of a multifamily asset, it’s crucial that the buyer you select is the best possible prospect for your property. Don’t waste time, money, and opportunities: you must ensure they’re qualified and can close and execute the contract as signed.

Keep reading to learn why it’s essential to qualify a buyer before going under contract on your multifamily property and how to do it.

Why do I need to qualify a buyer?

It’s important to close with the first buyer you select. If you don’t, each buyer after that will ask themselves, “What did that other buyer discover about this property that I am missing?”.

When you enter into a contract with a refundable deposit, you’re basically giving your chosen buyer a free option on your property for a period of time, typically 30–60 days. Before you proceed, you must be confident that they can close and execute the contract as signed.

What’s more, your tenants and staff will be disturbed throughout the contract process. To minimize the period of disruption, you should do all you can to ensure the transaction will close successfully at the end of the contract process.

As a seller, you’re required to provide due diligence information to the prospective buyer. When you qualify your buyer, you’ll greatly reduce the risk of wasting a lot of time and doing a lot of work only to not close on the property.

How do I qualify a buyer?

Before you sign the contract, make sure that your prospective buyer can provide certain items. Always ask them for the following:

– Proof of funds

– Lender pre-qualification

– A list of the other properties they own

– A list of the sellers and agents that they have worked with

For added reassurance, it’s recommended that you call the buyer’s lender to confirm their pre-qualified status. You can also call the agents, sellers, and buyers they’ve closed with in the past to enquire about how the transactions went.

Has the buyer toured the property in person before making an offer? Have they reviewed the due diligence information beforehand? If they have, this is a great sign. It’s proof that they have seen and have taken into account any issues with your property, and this greatly reduces the chances that they may later want to back out of the sale, saying they were unaware of the building’s condition. Be very wary of a buyer who doesn’t tour your property in person.

A prospective buyer who shows they’re motivated and wants to move quickly is also a great sign for a successful closing. The shorter the due diligence period, the better, and the larger the deposit, the better.

When you spend the time making sure your prospective buyer fulfills these criteria, you’ll put yourself in a great position to close successfully and ensure a quick and smooth transaction.

If you need help selling your multifamily property, eXp Commercial is here. Our objective as your multifamily advisor is to help you achieve your investment goals: from determining the listing price to selecting the best buyer and handling the sale process through to the closing, we’ll facilitate a smooth transaction for you.

 

Source: Multifamily sellers: How to qualify a buyer before going under contract

https://www.creconsult.net/market-trends/multifamily-sellers-how-to-qualify-a-buyer-before-going-under-contract/

Do I need an attorney for my commercial real estate deal or is my broker enough protection?

Does a seller or a buyer of commercial real estate really have to hire an attorney? The unmistakable answer is, "Yes!"

A broker is a licensed professional who you hire to negotiate the sale or purchase of a real estate for a fee or a commission. However, they are typically not attorneys. Many of them will clearly state that real estate brokers are not providing legal advice. Real estate brokers don’t usually get paid unless they close the deal (or unless you are somehow obligated to pay a commission, for example, by withdrawing from a deal). Therefore, brokers are usually not going to take care of the legal details and may even try to push a deal to close as fast as possible.

Be sure that separate legal advice from a good real estate lawyer is usually worth the additional cost. It's much more cost-effective to hire an attorney to get the deal done right than to get involved in an expensive lawsuit.

A good attorney can also be crucial to getting a beneficial purchase. Also, keep in mind that it’s best to hire an actual commercial attorney who deals with this kind of transaction daily. It may cost a bit more than a general lawyer, but it’s well worth it.

What does a real estate attorney actually do?

The job of a real estate lawyer is to negotiate and make a transaction happen in a peaceful way that's amenable and fair to all parties.

A real estate lawyer takes over after the selling terms and price have been determined by the real estate brokers in the contract, and the parties have signed. At that point, a real estate lawyer reviews the contract and negotiates any necessary adjustments to deal with terms. In case any last-minute issues come up, the lawyer will be at your closing, together with your real estate agent.

Experts believe you should always hire a real estate lawyer, no matter your circumstances, because it’s an added layer of protection for both sides, which covers the buyer and seller for all of the contract items. It’s simply a necessary level of protection for large purchases or sales.

Some brokerages even offer the services of a real estate lawyer and broker in one at no additional cost.

A commercial real estate transaction includes many complicated steps, and if the seller hires an attorney early in the process, the lawyer can help the seller to both protect their benefits from the sale and avoid liability if unexpected issues come up.

Many sellers, even the ones that hire an attorney later to prepare the closing documents, don't hire a lawyer during the listing stage, which is also a mistake. Even though Listing Agreements seem to be "standard," many agents are willing to negotiate the terms and conditions.

Either way, both commercial real estate sellers and buyers should engage their own lawyer as early in the process as they can to ensure their best interests are being met throughout the whole real estate transaction.

 

Source: Do I need an attorney for my commercial real estate deal or is my broker enough protection?

https://www.creconsult.net/market-trends/do-i-need-an-attorney-for-my-commercial-real-estate-deal-or-is-my-broker-enough-protection/

Why Should I Sell My Multifamily Property?

Why should I Sell My Multifamily Property?

There are a number of reasons why people decide to sell their multifamily property, but most can be categorized into three groups: Problems, Opportunities, and Changes.

With this decision though comes the consideration of capital gains tax and how to ensure you are getting the most for the sale of your property.

There are several reasons why people do sell:

Problems:             

• Management
• Vacancy
• Maintenance
• Stress
• Health
• Debt
• Neighborhood
• Interest Rates

Opportunities: 

• Strong Market Values
• Alternate Investment
• End of the Hold Period
• Tax Savings

Changes:               

• Divorce
• Death
• Retirement
• Partnership Split
• Relocation
• Consolidation
• Diversification

What do I do with the sales proceeds? I don't want to pay Capital Gains Tax!

There are several options for sellers to defer or minimize capital gains taxes:

• 1031 Exchange
• Delaware Statutory Trust/Deferred Sales Trust  (DST)
• Tenancy in Common Investment (TIC)
• Installment Sale

How do I know I am getting the most money for my property?

We not only market properties for sale. We make a market for properties we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites with direct outreach to our investor database and an orchestrated competitive bidding process that yields higher sales prices. 

What is my property worth?

Contact Us to discuss what information is needed to complete a Complimentary Commercial Broker Opinion of Value (BOV). 

I’m not interested in selling at this time.

This is understandable as only about 5% of the market trades in any given year. We are also happy discuss any purchase or refinance interests and recommend some physical and operational changes you can make to add value to your property you will appreciate when you eventually sell.  

 

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.

We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.

 

https://www.creconsult.net/market-trends/why-should-i-sell-my-multifamily-property/

How Will Rising Costs (CPI) Affect Real Estate Investments

The Consumer Price Index (CPI) measures the year-over-year percentage change in the average retail price of products and services that are typically purchased by households. The Bureau of Labor Services collects about 94,000 prices from 23,000 establishments monthly to calculate CPI. CPI is one of the main measures of inflation. A survey on the rental prices for 43,000 units also occurs, making up a third of the overall CPI, which is then used to calculate the increases in rental prices.

Because there is a correlation between inflation and goods with a limited supply, CPI also impacts real estate investments and housing costs. Here’s how rising costs affect real estate investments and why making smart real estate purchases can benefit you in periods of high inflation:

Rising construction costs

Inflation leads to the increase in prices of many aspects of the construction process, including building materials, machinery hiring rates, and consultant fees. With the costs of labor and construction materials increasing, real estate developers aren’t too keen to invest in any new developments. They will likely wait for inflation to ease and for prices to go down. Projects that are under development may also be delayed as construction costs become too expensive and investors worry about their profit margins.

Higher mortgage rates

In high-inflation environments, interest rates increase, and consequently, so do mortgage rates. When interest rates are low, more people are likely to borrow money. But as inflation moves higher, banks and other financial institutions raise interest rates to make borrowing less appealing. The goal is to lessen consumer consumption, which will help ease inflation. Overall this should slow transactional volume for real estate purchases, as many may people may be priced out of purchasing due to higher mortgage payments. Typically, as demand wanes, sellers will adjust pricing downwards to compensate.

Rising asset prices

When inflation rises, so does the cost of living and with it comes increasing real estate prices. Rising construction costs lead to fewer new developments, which leads to limited supply. Higher interest and mortgage rates also mean fewer people borrowing money to invest in real estate. All these factors lead to low supply, resulting in increased demand for an existing property. And with amplified demand in those properties comes an increase in their asset value.

Better performance for residential properties

During inflationary periods, residential properties such as condominiums, single-family, and multi-family properties tend to perform better. With higher building costs and more difficulty borrowing money, people will turn to renting more than buying. Commercial real estate also tends to perform better during periods of high inflation, especially those properties that have long-term leases in place, with set rental increases, allowing for the investor to “park” their money and still receive their anticipated returns until the economy improves.

Increase in rent prices

Historically, high periods of inflation have resulted in increases in rent prices. Investors use real estate to hedge inflation by taking advantage of the limited supply and leases that include annual rental increase clauses. Low inventory makes existing properties more in demand. Property owners can also justify the rental increase due to higher maintenance costs as a result of inflation and increased prices on consumer goods and services. Therefore, people with existing residential and commercial real estate tend to reap significant benefits during inflationary environments.

 

Source: How Will Rising Costs (CPI) Affect Real Estate Investments

https://www.creconsult.net/market-trends/how-will-rising-costs-cpi-affect-real-estate-investments/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Purchasing Rental Properties With Existing Tenants

LINK TYPE FOR ENTRY VIEWPurchasing a rental property with existing tenants sounds like a no-brainer: After all, the issue of locating tenants in the first place is solved, right? Maybe, but there's more to it than that.

You must understand what you're getting into before diving headfirst into a tenant-occupied rental property purchase, especially if you're new to commercial real estate investing and being a landlord.

Here is what you need to know when purchasing an apartment with tenants.

Existing Tenant Leases Are Still Legal

A lease is a legal agreement that exists between tenants and landlords. It doesn't disappear when the building is sold.

If you buy the apartment, the leases remain attached to the rental property. Therefore, you cannot raise the rent, change any terms, or evict the tenants just because you purchased the apartment. There are hurdles you must go through if you wish to break the current leases.

Exceptions to & Tactics for Breaking Existing Leases

There are two exceptions when you can break the leases. You can provide written notice to end a tenancy if the term of your rental agreement specifies that the owner may terminate the contract at any point.  Or, if you're purchasing the apartment as a foreclosure, then you can give the tenants proper notice before ending their tenancy.

If you don't want the tenants because you'd prefer to start from scratch, you could submit an offer to the owner contingent on the tenants vacating when the apartment sells. This requires the seller to break the leases before the property is sold.

You cannot raise the rent or evict tenants without going through legal channels. So, if you want to change anything about the arrangement, such as raising the rent or kicking someone out, you'll have to go through the courts.

Existing Tenants: The Good and the Bad

"Existing tenants" means all people were already living in the building before it was purchased.

Buying an investment property with tenants already living there may be ideal. This means instant cash flow, no time to look for the right tenants to live in your apartment, and if the tenants have been living in the house for an extended period, you have a limited chance of the apartment becoming vacant soon.

Screening & Vetting Tenants, Both Existing & Otherwise

Tenant Screenings are essential for protecting your investments. Poorly screened tenants can cause havoc by not paying their bills, causing damage to your properties, and dragging out evictions. However, when you inherit an existing tenant, you're stuck relying on the previous landlords' tenant screenings, which may be lacking in quality.

The buyer could have accepted anyone (regardless of qualifications), or he might have had a long-time tenant who refused to pay rent on time or even not at all.

Landlords beware: they may be trying to sell their property to offload their tenant problem onto an unsuspecting buyer.

Other Roadblocks With Existing Tenants

You may encounter other obstacles when dealing with existing renters. For instance, you might find that the current residents are dream renters, but they're not prepared to continue living there under a new owner.

A move from one rental unit to another may cause some disruption for a tenant. However, if your new tenants have been living in their previous rental unit for a long time, they may feel at home.

If the previous landlord wasn't raising the rent annually, or if they weren't performing regular seasonal inspections, you might find that your new tenant doesn't wish to move.

How to Deal With Existing Tenants When Buying a Rental Property

There are three main ways to handle existing tenants when buying a property:

1. Pay them off. If you decide to pay the current owner to remove the tenants, you'll most likely have to pay them the total amount owed plus any additional costs associated with removing them.
2. Let them stay. If you decide to keep the tenants, you'll have to find a way to work around the fact that they aren't technically breaking the lease.
3. Convince the tenants to agree to a new lease that allows you to raise the rent or add more terms to the agreement.

Tasks to Perform Before You Finalize the Purchase

Before you close on a rental property that is occupied, you must perform several tasks to ensure the process goes smoothly.

To begin with, introduce yourself to your new tenants by writing them an introductory email. This will help them get used to living with you and establish an excellent tenant-landowner relationship.

Furthermore, it will allow you to add important information, such as where rent payments must be made and how tenants may request repairs.

Protecting Yourself as a Landlord

Since you will assume the responsibility of the previous owner, it is vital that you fully protect yourself by instructing them to sign an estoppel letter and transfer their security deposit to you.

An estoppel clause lets your future tenants specify which existing leases they want to continue under. It usually covers rent, utilities, parking spaces, etc., but not everything.

You must ensure the previous owner signs an agreement releasing you from any liability for damage caused by their tenant.

It will help prevent any potential legal issues from arising later down the road. If someone makes an untrue claim against you, you can use the estoppel agreement to refute it.

Always Do Your Research and Stay Diligent

Buying an investment apartment is an exciting prospect for people looking to start generating immediate cash flow from their properties.

When buying an occupied apartment, before signing any paperwork, read the lease agreement and check out the tenant qualifications the seller used to qualify current tenants.

If you agree to the rental conditions and feel comfortable with the current tenants, continue with an introduction and sign a cooperative estoppel agreement.

If the current occupants are month-to-month residents, you have more options for changing their lease and tenancy if they meet state and local law requirements.

 

Source: Purchasing Rental Properties With Existing Tenants

https://www.creconsult.net/market-trends/purchasing-rental-properties-with-existing-tenants/

Inflation and Multifamily Real Estate: What to Expect for 2023

Multifamily investors and employees are facing persistent financial pressures, including record-breaking inflation, enduring supply chain constraints, rising interest rates, and plummeting consumer confidence. These concerns leave many rental housing owners and managers wondering: what does the future hold for the multifamily industry?

While U.S. inflation has recently eased, it remains near a 40-year high, according to AP News. Consumers continue to feel their spending power strained by still higher-than-average prices on everything from gas to groceries. Many are tightening their belts as a result. Owners and operators of rental communities are justifiably concerned about the future forecast for multifamily rentals. Will 2023 be a bumpy ride?

 

Record rental growth and high occupancy may be ending.

Amid the tumult and uncertainty of the pandemic in the U.S. for the past two-plus years, the rental housing industry was buoyed by record demand for apartments and surging rental rates. The New York Times reports that according to CoStar Group, “in buildings with more than 50 units, tenants in one-bedroom apartments have been handed new leases costing about 17% more on average than they did in March 2020.”  Multi-Housing News shared that according to Yardi Matrix’s survey of 140  markets, the average U.S. asking rent rose 12.6% year-over-year through July 2022, while the national occupancy rate remained similarly strong at 96% for the fifth straight month.

Are there signs that demand for rental housing is waning? RealPage analyst Jay Parsons puts it bluntly: “A number of indicators suggest the once blazing-hot rental housing market is cooling off dramatically.” He continues, “Apartment demand has cratered from 2021’s all-time highs due to what appears to be an abrupt halt in housing formation.” Data from Yardi Matrix, as reported by Multi-Housing News, also shows a deceleration of growth. “August marks the first month since June 2020 with tepid rent growth…a trend that will likely linger by the end of the year.”

Cratering apartment demand, a halt in housing formation, and deceleration of growth – it sounds ominous. What does it mean for owners and operators of multifamily housing?

 

A return to normal

According to Multi-Housing News, “While record rent growth in 2021 was the result of record-high absorption (580,000 units), the softening in absorption—roughly half that pace in 2022—does not send negative signals but is instead falling into values representative of a typically solid year.”

RealPage’s Parsons also sees normalcy in the recent leveling out of apartment demand. According to RealPage’s analysis, leasing traffic slowed in the third quarter of 2022 (typically seasonally a strong leasing period), and effective asking rents fell month-over-month for the first time since December 2020. Despite that, Parsons says this marks a return-to-normal seasonal pricing. “To be clear, the U.S. apartment market remains on firm footing,” explains Parsons. “Apartment vacancy jumped 1.0 percentage point in 3^rd quarter but remained low at just 4.4%.”

Realtor.com’s chief economist Danielle Hale spoke to CNBC about her predictions for multifamily rents in 2023. Said Hale, “My expectation is that rent growth will slow, but we may not see it go back to what was typical before the pandemic.” Instead, she anticipates rent price growth, while not as dramatic as in 2021-2022, will likely remain elevated well into the New Year.

 

Impact on multifamily transactions, construction starts.

Rising material costs, higher interest rates, and ongoing economic uncertainty have a big impact on the new construction of multifamily apartment communities and build-to-rent single-family homes, as well as sales of established rental housing. According to the Freddie Mac Multifamily’s 2022 Midyear Multifamily Outlook, “a steep rise in Treasury rates may push potential deals to the sidelines as borrowers wait out the volatility.”

Similarly, RealPage’s Parsons anticipates a drop in new construction starts of multifamily communities. “New apartment starts are expected to soon drop from multi-decade highs due to higher financing costs and softening fundamentals,” says Parsons.

A reduction in construction starts may keep rents and occupancies high. That’s because the U.S. is already facing a dire shortage of rental housing. A recent study commissioned by the National Multifamily Housing Council and National Apartment Association and reported in Multi-Housing News reveals that the U.S. needs to build 4.3 million new apartments by 2035 to address demand, deficit, and affordability. Put simply, demand for rental housing is outstripping supply which keeps both rents and occupancy rates high.

 

Continued optimism for rental housing as an investment and employer of choice

While rising inflation can be both disruptive and worrisome to multifamily owners, investors, and employees, the outlook for rental housing remains favorable. Real estate investment expert Adam Kaufman sees abundant reason for optimism. “Multifamily assets in particular, tend to perform well in an inflationary period,” he tells Forbes. “Economic growth fuels employment and higher wages, which in turn drives demand for housing. At the same time, the housing market, in general, faces a chronic shortage of some 5 million units. Together, those conditions give multifamily owners the ability to raise rental rates and offset higher construction, labor, insurance, taxes, and other costs, potentially allowing multifamily properties to hedge the effects of inflation.”

RealPage’s Parsons puts it even more plainly: “At the end of the day, people need a place to live. You can work from anywhere and shop from anywhere. But you need a home. That’s a long-term tailwind for housing of all types.”

Those are reassuring perspectives for multifamily professionals, whether they are building communities or building careers.

 

Source: Inflation and Multifamily Real Estate: What to Expect for 2023

https://www.creconsult.net/market-trends/inflation-and-multifamily-real-estate-what-to-expect-for-2023/