October 14, 2021
How to sell my multifamily property? Selling a multifamily home is a more complex process than selling a single-family home. This is typically because you have to deal with current tenants in addition to making sure all rules and regulations are followed. Here are some frequently asked questions about how to sell a multifamily property.
1) How is Selling a Multifamily / Apartment Property Different?
Effectively selling a Multifamily / Apartment property can be a delicate process that requires a bit of finesse! Unlike selling a home or commercial space with for sale signs out front, where it is abundantly clear that the property is for sale, selling a multifamily property is more of a secretive process. With Multifamily, for sale signs are RARELY ever used, if at all! Reason being… the TENANTS! From the tenant’s perspective, putting a for sale sign out front an apartment building, is nearly the equivalent of having a sign stating… “significantly rent increase & uncertainty coming soon!!”
Along with no signage, multifamily marketing is predominately performed online, in a controlled and professional format. With a single-family home, traditionally the first step in the process is to go see the property, however, with Multifamily, it’s the complete opposite! The first step in the process with Multifamily, is to sign a confidentiality agreement, then thoroughly review the property details and financials exhibited in the property Offering Memorandum document. From there, if the Offering Memorandum is done properly, an investor can determine if the property meets their investment needs. With Multifamily, only after this point, are property tours / showings conducted!
2) How Should I Handle the Sale My Multifamily Property with My Tenants?
The conventional process for handling the tenants during the marketing & sale of a multifamily / apartment property is keep it a secret for as long as possible. Although it might not be the most honest approach, it’s often the most effective to avoid disrupting the operation of the property. However, some owners with long-term tenants that they’ve developed trusting relationships with often elect to inform those specific parties. In these instances, owners will often provide incentives for these parties, in return for their cooperation with the sale and letting the owner show the unit during reasonable hours from time to time.
Despite the tenants being protected by the lease and Florida law stipulating leases transfer with the sale, most tenants are unaware of this. Therefore, the discovery of the property being for sale can create fear & uncertainty, prompting some to vacate vs renewing and causing numerous other headaches for the seller. To avoid this, most sellers elect to keep the sale a secret until just before closing. Ultimately, upon the sale the seller is required to provide notice, however, those notices are usually merged with notices from the buyer to assure a smooth transition.
3) How Are Property Tours / Showings Handled with Multifamily / Apartment Properties?
As stated previously, property tours / showings for multifamily are only conducted AFTER the prospect has thoroughly reviewed all the details of the property and the financials. When requested, the prospect should be well beyond initial interest and almost to the point of submitting an offer. The fundamental reason for this is to limit on-site traffic to mitigate the risk of tenants finding out about the sale, therefore reserving tours to ONLY qualified prospects.
The normal timing protocol for coordinating a tour/showing is to provide at least 48–72-hour notice, but it’s highly encouraged to provide as much notice as possible. Traditionally, tours/showings occur on weekdays, during normal business hours and last about 30-45 minutes in duration. Weekend tours are rare and largely discouraged, as on-site tenant traffic is usually higher on the weekends.
The typical interior unit viewing process is to see one to three units, with the ideal scenario being one of each unit type/floor plan. Viewing ALL the units prior to being under contract is very rare, as the process can be extremely disruptive to the tenants and increases the risk of tenants getting wind of a potential sale!
4) What Are Some Best Practices for Managing Multifamily Property Tours / Showings?
The general goal of a multifamily property tour is to showcase a sample size of the property to give the prospect a better feel of the condition / layout, while simultaneously trying not to alarm or disrupt the tenants. Therefore, when lining up units for a prospect to see, always show any vacant units first and most times that will be enough of a sample size! If the property is 100% occupied, try to show a unit with a tenant not home, but ONLY do so by strictly following the notice to enter terms outlined in the lease! If all the tenants are home, try to alternate units as much as possible to limit each tenants’ contact with investors.
With respect to unit condition, try to show units that are most representative of the other units. If some have been updated and some have not, try to show one of each. Being that the prospect is NOT seeing all the units, they must rely on what is relayed to them and use that assumption to generate an offer. If it is conveyed that all the units are updated to a certain level and they discover they are not once under contract, it will cause big problems with the deal! Therefore, genuinely communicating unit updates and managing expectations by showing units most representative of the rest, is a CRUCIAL part of the process!
5) How Do Investors Determine the Value of a Multifamily / Apartment Property?
Multifamily / Apartment properties are predominantly purchased by investors as investment vehicles to generate consistent and reliable cash flow. Therefore, the value and/or price an investor is willing to pay to acquire that property is directly connected to the cash flow it produces. On a basic level, the higher the cash flow, the higher the value. On a more complex level, the dependability of that cash flow, the capability to increase that cash flow and the threats/risks to that cash flow. The impact of each characteristic and how it effects the value will defer per investor, however, from a market perspective it is ultimately the combined total of all characteristics that determines the value!
To establish a price, multifamily investors primarily use two investment metrics… CAP Rate and Cash on Cash Return. Expressed as a percentage, both metrics represent an investor’s return on investment at a specific price. Simply put, what you get for what you paid! The higher the CAP Rate/Cash-on-Cash Return, the lower the price… the higher the price the lower the CAP Rate/Cash-on-Cash Return. Therefore, the price an investor is willing to pay is based on the return/yield they expect to achieve with the acquisition.
The perception of an investors expected return is continuously changing depending upon the market, as well as numerous global economic factors such as interest rates, the 10-year US treasury yield, the stock market, and several other external factors. In addition, yield is also driven by the finer details of the property, such as the location, condition, age, construction, unit mix, unit sizes and number of buildings. If these details are highly favored and further support the cash flow or provide the opportunity to increase cash flow, investors will accept a lower return for that stability. Conversely, if the details negatively impact cash flow, investors will want a higher return to mitigate that risk.
In addition to yield, investors will also look at recent sale comps in the area to see how the property stacks up on a price per unit and price per square foot basis. Yield/return usually trumps sale comps data, however, investors will use these metrics to confirm they are in line with market pricing relative to their expected return.
All said, the price/return an investor is willing to pay for an asset is ultimately determined by market supply & demand and the combined total of all the characteristics of the property. Being that each multifamily property is unique in this aspect, determining the value of a multifamily asset should always be looked at on a case-by-case basis!
6) How Can a Multifamily Broker Help Me Achieve Maximum Value?
The method in which a Multifamily property is presented to the market and/or an investor has a DIRECT impact on the sale price! For example, an owner managed property occupied with long-term tenants and rents significantly below market. If presented poorly, the property can easily be perceived as being overpriced, because the yield/return on the surface will appear too low due to existing rents. Like sharks smelling blood in the water, investors will pick it apart and smash the value down once they see it presented poorly.
Conversely, a broker specializing in Multifamily, already knows that these types of deals are very highly demanded and has an established database of multifamily investors around the Country eagerly looking for these types of opportunities. Having sold numerous properties just like this, an experienced Multifamily broker knows exactly how to spin the presentation to maximize value! Presented properly with a professional Offering Memorandum exhibiting favorable surrounding rent comps and a detailed financial analysis emphasizing the property performance at those market rents, over the next 10 years, the value perception completely changes! The emphasis shifts from the current operation to the lucrative future operation, resulting in increased demand and ultimately a higher sale price!
In addition to this, a multifamily broker knows what to listen for with prospective buyer to identify which are the most qualified and have the highest probability of close! An experienced multifamily broker understands that is not just about finding a buyer, but rather the buyer with the highest probability of close, with the most compressed timelines!
Contact us directly if you have any questions about how to sell your multifamily property.