How To Sell Your Multifamily Deal

Picture this: You and your partners owned and operated a multifamily deal for some time. You were able to meet your projections and now you are considering a sale. If you are within your hold time projections and still meet your targets to get your investors their returns, that’s great!

Now, you need to understand the way you are going to unload the property.

As an asset manager, it’s up to you to keep an eye on your market and understand the valuations of the deals in their respective locations. After that, you can calculate the value of your assets based on the Net Operating Income or NOI.

There is no need to sell if the returns and valuations are satisfactory to you and your investors and everyone wants to sit tight. But if the investors are fine with selling, these are the typical steps taken to sell your multifamily deal:

1. Consideration of the Sale

As you begin wrapping up your business plan, you need to consider whether it is financially viable to sell. If you are doing a typical syndication, there is usually a refinance in Year 3 to 5 and a sale event in Year 10. You need to evaluate the value of the property on the basis of NOI and the market capitalization. You don’t have any control over the market, but you can control the NOI. 

If you’ve been operating the property properly, you and your team worked to drive a higher NOI by reducing operating costs and increasing income. If occupancy dropped, invest time in marketing on social media to drive occupancy up if possible. You want to show occupancy greater than 90% as it improves the valuation of the property. 

If your property is in need of some renovation or other work, keep in mind that there are people looking for this type of value-add property and they will appreciate that there is still some “meat on the bone” for them to make improvements, reposition and drive rents post-purchase. Just be sure to price it according to the market or it will be sitting for a while.

2. Prepare for Your Loan Exit

Depending on your loan, you may need to pay a prepayment penalty if you are exiting early. As a side note, if you are planning a sale in the short term, make sure you don’t take on a loan with a prepayment penalty unless it’s a great term and rate that the next buyer can assume. Depending on where the market cycle is, your low rate and long amortization could also be a value add if the loan is assumable.

Also, depending on the terms of your loan, you may need to send your lender a ‘Notice of Disposition’ up to two months prior to listing the property for sale. This is relevant to properties that are HUD-owned or secured by a HUD-held mortgage. Your attorney can draft this notice if you do need one.

3. Consult A Broker For Evaluation

Assuming the deal is positioned where it should be and you are armed with the proper valuation, you can now set the price you want by working with your commercial broker. Do not tell the broker what you are thinking in terms of price until after they tell you what they think they can get. Let them provide you with a Broker’s Opinion of Value or BOV. You may be surprised by what they can sell the property at. A good commercial broker is very active in the market and they know many buyers. They may even have an idea of who would be interested before you start talking about numbers. 

If you already have an aggressive broker, then you are probably set to go. If not, you will need to find a broker best suited to your needs. Primarily, you should be looking at brokers with experience selling the type of property you own. Some brokers specialize in certain areas and asset classes. Make sure the broker can handle the sale of your property and do an effective job of handling the sale from start to finish. You may consider contacting several brokers and ask them for a BOV before engaging one. 

After you have received the BOV, interview them to understand their mindset and if they are best suited for your needs. Ask them if they own any real estate, if they sold similar properties, and their approach for valuing a property like yours. Understand the kind of buyers they sell to and if they have any potential buyers in mind.

4. Manage Incoming Bids

If the broker doesn’t have a seller in mind for an off-market transaction, they will list it for sale to the public. In a market like today, the interest amongst the potential buyers will start to build up quickly. Potential buyers will visit your property and have a look as you did when you bought it. They will submit an offer by sending a Letter of Intent or even a Purchase Agreement depending on your market after looking at the financials and looking at the property. 

5. Screen The Buyers

When you close the window for offers, you will then ask the top three potential buyers for their best and final offer. As part of the submission process, make sure to screen the buyer by looking at their transaction history and financial capabilities. You want to make sure the buyer would be able to close the deal. Go with sponsors that have a track record of closing deals, not newbies who may back out during the due diligence phase.

6. Negotiate the Purchase Sales Agreement

After you and the buyer finalize negotiations on your terms of the deal, it is then memorialized in a Purchase Agreement, with the help of your attorney. From there, it’s executed and followed by both parties.

7. Kick-off the Due Diligence Period

The Due Diligence period typically begins after both parties sign the PSA. Typically, you are looking at a 30-day due diligence and a 30 day to finance and close, but all this should be outlined in the PSA. There may be some retrading by the buyer if there is a valid reason to, so be aware of that. This will mainly happen in cases where there are major issues found during inspection that were not disclosed when negotiation the price or the financials differ greatly from what you presented prior to the purchase agreement. 

8. Close & Distribute Funds to Investors

After you cross the finish line and you close the deal, the cash will be in your account and ready for distribution to your investors. Your CPA will provide you with a distribution breakdown and track the outgoing funds just like they had done while you held the property. Remember, the goal is to exceed expectations as you want these happy investors to redeploy their funds into your next deal. 

Anyway, that is a quick synopsis of how a deal is closed. Have you closed any deals lately? Let me know in the comments.