Acing the Buyer Interview
Ask enough active real estate investors what they daydream about, and you’ll hear some version of the elusive off-market deal, where they swoop in to buy amazing properties with no competition. And many investors pride themselves on avoiding auctions, instead relying on relationships and reputation for deal flow. But in practice a buyer is always competing, if not with other buyers than with the seller’s expectations – which might be even tougher to beat.
Every acquisition requires the buyer to prove to the seller (and seller’s broker) that they can and will deliver on their promise to close the transaction at the terms they are offering. To the seller, the downside of picking the wrong buyer is at best time wasted (weeks if not months) and at worst a broken deal. For the broker, recommending the wrong buyer to their client means a potential lost commission and a certain loss of credibility. With so much on the line, neither sellers nor brokers want to make a mistake.
Let’s assume that as a buyer, your offer is tied at the top of the pack with another group. Your pricing, proposed timeline, financing, deposits, and other key business points are all essentially the same. The broker and seller are inviting both groups to participate in a buyer interview before making a decision. How can you ace this test?
Do your homework! Know your seller. Are they an institution or private owner? Why are they selling now? What are the risks of a failed transaction to them? It could be an institutional closed-end fund that has reached the end of its life and needs to close out. Or it could be a family that has owned for decades, with no particular pressure to transact today.
What about your competition – are they an institution or private capital? A fund or family office who can pay cash and close quickly or a syndicator that needs to raise equity? Knowing who you are up against allows you to play up your strengths while proactively addressing any weaknesses in the interview.
One of my favorite questions to ask a broker is “Besides price, are there any terms that are particularly important to the seller?” This could be a desire to close quickly, or to extend closing so they can find an exchange property. It might be surety of close in an uncertain market as opposed to getting the last dollar. It might be getting all or a portion of the deposit non-refundable as quickly as possible. If you can get a sense of what’s important to the seller, you can make sure you address those concerns in your offer and interview.
Let’s look at two real-world examples.
The Institutional Auction
The property is a newly built, 100% leased, single-tenant warehouse in a core location in a major market. It is fully marketed by a national broker, with multiple rounds of bidding. The price point appeals to both larger private buyers and smaller institutions.
The seller is an institutional asset management firm with insurance company clients (and internal processes). The portfolio manager on the call will make the decision on buyer selection.
With multiple credible bidders, the risks to selecting the wrong buyer are not monetary. Instead they are lost time and, for the portfolio manager, lost credibility both with their Investment Committee and client. After the initial approval, the next update the portfolio manager wants to give is that the sale successfully closed, not that they are starting over with a backup buyer and the closing is delayed by months.
Your job in the interview is to get the seller comfortable that you aren’t going to cause any problems. You will be responsive, hit your deadlines, and do everything you can to ensure a smooth transaction. You have done your homework, lined up your financing and third party inspections, provided references, and have your equity secured. You understand their processes and will do what you can (within reason) to work within their framework. Absent a material issue uncovered in due diligence, you won’t come back for a last-minute price reduction or closing delay. You are all on the same team.
This isn’t to say you should roll over and make commitments you can’t keep. If you can’t close on their preferred timeline, can you commit to try with a pre-negotiated extension option? If a material issue comes up in due diligence, it needs to be addressed with the seller. But in general, you are going to let them “win” on process so you can get the deal closed.
The Private Seller
The property is a fully leased, multi-tenant retail center in an irreplaceable location that has been owned by the same family for decades. Every investor in town wants to own it and every broker has tried to get the listing. One day, the seller wakes up and decides it’s time.
The seller doesn’t want to go through a big marketing process. You are in the right place at the right time and have an opportunity to put in an offer. If this ever hit the broad market, it would be a feeding frenzy.
After owning for decades and with no pressure to transact, the risk to the seller of choosing the wrong buyer is minimal – there are plenty more out there and time is not a factor. Instead, the risk is to the buyer, because if you don’t convince the seller that you are the right fit, you’ll miss out on a truly off-market opportunity that may not be available again for decades.
Your job throughout the process is once again to get the seller comfortable with you as a counterparty. Arrogance will be treated with suspicion and your process is your problem. They might not transact often so property information may be spotty or not readily available. They don’t have pretty reports or detailed financials to provide you in due diligence like an institutional seller would. Their rent roll may be outdated and leases sloppy. They may want an option to extend the closing to allow them to identify a 1031 exchange property. You are not going to complain about any of this, but instead will convince them that you are the right steward for the asset and, once awarded the deal, find solutions and workarounds to get your due diligence done and the transaction closed.
To be clear, no one is going to sell their property for a meaningful discount just because they like the buyer, and in both examples above getting to the highest price is a prerequisite. But like applying to college these days, meeting the prerequisites doesn’t guarantee you get what you want. By knowing your seller, doing your homework, and being flexible, you can ace that interview and get to work on closing the deal.