You have a unique opportunity to learn all there is to know about multi-family investing from some of the brightest minds in the country.
We asked renowned NYC attorney, Edward Mermelstein to share with Real Estate U his insight into off-market transactions.
In this video you will learn what is an off-market transaction, the misconceptions regarding these types of transactions, and what you can do right now to improve your chances of doing an off-market deal.
My name is Edward Mermelstein, I am a principle at Rheem Bell & Mermelstein, I’ve been practicing law for the last 17 years, I have also been in the real estate profession for over 20 years both in the capacity of an owner, manager, as well as brokerage, commercial, as well as residential.
Q1: What is an off-market deal and how is it different from a typical transaction?
An off-market deal has many misconceptions strowing it and one of which is that you can get an off-market transaction at a lower price than what typically would pay for a transaction that is on the market. Off –market transaction tend to come from anyone associated with the property whether it’s a broker, an owner, or an attorney that represents the owner.
So off market transactions are not necessarily transactions that will save you money but will provide you an entry into a situation that will lead to less competition.
Q2: Why should an owner or broker show a deal off market?
Off-market deals will come in many different variations. Some off-market deals are there simply because the owner does not want anybody o know that they are selling the property. They will test the market by going to certain brokers or going to their attorneys or friends and saying ‘I’m thinking of selling a property, what are your thoughts’…and the feedback generally revolves around the fact that somebody who is looking to be in a situation where they don’t want either competitors or friends or family or even the newspapers knowing that they are looking to sell something. It’s a way to do something very quietly, but not necessarily at a lower price than it would normally get on the market.
Q3: What are the owner’s price expectations when selling off-market?
In today’s world off-market transactions typically mean that you are going to be paying either market value or above market value, and that is simply because pricing on the market where there is an upswing, tends to dictate where final sales price is going to be. So, today most property owners are not going to start an off-market deal without an expectation that they will get at least what the market is paying for this type of property or even higher than what the market would pay…and again that is a premium associated with exclusivity, it’s a premium associated with the fact that you are not going to have competition for the deal and in many cases, especially when it’s a class A property, there is great value associated with not having it go to all the brokers or all the buyers, whether there is a city, state or a country. So, that is a good place to be if you can afford to pay the market price for the property.
Q4: What are the pros and cons for buyers looking to buy off-market deals?
The exclusivity you are given when a property is off-market, and in certain case that means you have extra time to do your due diligence. But, the other side of the situation is that the owner may say, before I put this property on to the market, you have 2 weeks or thirty days to make your decision. So, sometimes the flipside is that you may have less time as a result that somebody is giving you only a certain period of time before they do go to the market. Again, that is usually associated with the relationship that you may have whether its with the owner, the broker, or the attorney, a friendly relationship where they know you have high certainty to close, provides you a ‘free look’…that would normally require you to enter a contract and put down money deposit. So, off-market transactions tend to be friendlier transaction, again those are based on the fact that there is a relationship; typically you are known as someone who can close, or your friend, or you have prior business dealings with the person who is selling and we’ve seen these types of transactions getting completed very quickly in certain cases where someone doesn’t want the property to go to the open market because they’ve been told that you have a certain period of time to do it. The fact that you can close whether it’s a week or two weeks, it’s very important! And typically the seller is aware of that.
Q5: What advice would you give to someone who is just starting out and looking at off-market deals? …perhaps in NYC
There typically are no shortcuts for these types of situations. I would say that anyone who is looking to be in the New York real estate world has to expect that they will need to spend quite a bit of time building relationships, getting to know the real estate world in which ever market they are practicing.
So the first thing you need to do is to have expectations that this is going to be a long term commitment. It’s very rare that you’ll find situations where a broker or a buyer gets a off-market transaction when they are first starting out…that’s very mush atypical. The more likely is the scenario where you are working with someone who is very experienced, whether it’s a broker or attorney, or a buyer, and the fact that you are partnered up with somebody who has a reputation in the market, increases your chances of getting an off-market transaction.
So, if we are talking about a partnering up with a buyer who has a high certainty of closing that’s very important to a seller. And if you convince someone to come into a deal with you because you have access to something that someone may not have access to you are normally more than several steps ahead. Now, in return you will have to give up more than you would normally have to give up if you didn’t need a partner. So brokers that are starting or attorneys that are starting out in this business that want this type of exclusivity should try to build relationships ahead of time and also build an understanding ahead of time where if they do find a transaction that does make sense, what typically that would look like.
You want to have your deal points, in advance, to some degree, and every deal it’s going to stand on its own but if you can get at least a global idea of how you would proceed in a certain situation that would make the transaction go much quicker. And again the certainty of closing is very important to a seller, so you want to present yourself in such a way where there are no questions from the seller that you can complete the transaction in a timely manner. Typically when you walk into an off-market deal I would say, HAVE ALL YOUR DUCKS LINED IN A ROW and make sure that any question that is thrown at you, you have the answer for, because if you don’t the likelihood that you are going to be taken seriously by the seller is much less and they will go to the next person.
Q6: Where and with whom should one network with when starting out?
I find that those that are proactive tend to best in this business. So my recommendation is to try to attend as many industry events as you can in the beginning, just to understand who the players are. Start building relationships. Find the people with the best reputation in the business and learn from them. Try to volunteer and work with those who’ve been around for a long time and have a strong reputation in the business.
So even though you may not be making money in the first 6 months or the first year, the experience that you get from working with a profession who has done many deals or has a strong reputation in the business will far outweigh the fact that you foregone a salary for that period of time.
Q7: How can one add value to a deal or the relationship?
If you have an interest in a certain type of deal, or a certain type of property, I would say …Put in the time, get as much homework done before you jump into it. So if you are looking at either a specific market or a specific property try to find out as much as you can about the property or the location. And going to an owner or a broker with the fact that you know much as they do or in certain cases more about their own property, gives them a strong sense of comfort that is likely that you are serious and it’s likely that you can complete the transaction, as a result of giving all this information in front of you, and that also helps build the relationship and creates that comfort zone that you need to create with somebody who may not know you in the beginning. The more you can give feedback about a property or the location to the person sitting across from you, the more comfortable they are going to be with you.
Q8: What paperwork needs to be signed in an off—market transaction?
Again, these types of situations usually are built on relationships and many of the times I’ve seen off-market transactions they will take place without any documents having them signed other than the contract to purchase the property. But, to do it right I always recommend to try to get a Non-Disclosure Agreement signed that gives comfort level to the seller or the party that is across from the table from you. If you volunteer that you’ll sign whatever document that needs to be signed in order to protect the other persons on the other side of the transaction from warring that their personal financial situation is going to be disclosed …that comfort level is very important.
So if you can get that out of the way quickly, that typically alleviates some concerns. And then the other document that typically you would want to have signed once you do have a buyer is some sort of a Brokerage Agreement or a Non Circumvention Agreement, if you have an owner that doesn’t want to necessarily negotiate a commission before they are even ready to sell. So the Non Circumvention agreement will typically protect you where the owner is not going to go around you to your buyer without negotiating a commission with you.
Q9: Can you please discuss a few off- market transactions that you have participated in?
We’ve done more than a few off-market transactions and one of the more typical ones has to do again…relationships. And sometimes off-market transactions are simply transactions that were listed for quite a long period of time and for some reason the owner decide to take it off the market to re-price it or take care of some due diligence items so they can put it back on the market.
But typically our off-market transactions have taken place due to personal relationships with whether it’s the brokers, the sellers and they know us, they’ve done business with us before in some fashion…and that aspect of it is very important because you want to make sure that whoever is sitting on the other side of the table from you has a comfort level that (1) you are not going to take advantage of the situation and (2) knowing that you will complete the deal in a timely fashion. Because the worst thing that can happen to a seller is that they enter into a contract that is going to lead to a protractile closing or worse litigation.
Those are always concerns of a seller and they typically will shy away from someone who is willing to pay a little bit more even though they don’t know him or her. So sometimes sellers will take a lower price because they know the buyer on the other side and they know that they are going to be able to close.
So in terms of specific transaction, we’ve done multiple off-market transactions and more so these days with residential properties than with commercial properties. Again that is simply a factor of there being very strong relationships between commercial sellers and brokers and attorneys, so the contacts between all those parties tend to create a situation where there are less off market transactions.
Now in respect to off-market transactions in the residential world, that’s a little bit different simply because if you have a relationship with an owner, the off-market situation gets created in terms of timing, between the time a property hits the market, where there is typically anywhere from a few days to a few weeks that developers will contact the people they are most comfortable with and say: ‘We have these properties that are going to be sold on the market in the next 2-3 weeks. If you have a client that is interested please bring them in the next week or two before the whole world knows about it.” That’s what I would say it’s more typical today and in a market such as New York which is a very unique market. Having the ability to bring your client to a very desirable new development creates a very unique situation because it give them the opportunity to pick units that will be sold right away or pick units that will tend to go up in price very quickly so there is a great value associated with being able to sell or show residential properties to a buyer that want to have that ‘first look’. That’s in today’s New York market is something I would say has a great value!
Anyone who is looking at off-market deals should expect that this is a long-term venture and is built around relationships. And it is something that they need to partner up with someone who has a strong reputation in the business and patience is very important when it comes to off-market transactions.
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