27 May On-Market vs. Off-Market Transactions
By David Corley
Senior Managing Partner – Longstreet Worldwide
Over the past thirty-years of dealing in commercial real estate transactions, I have had the opportunity of performing a variety of on-market and off-market transactions both as an owner and a broker. Both methods have their advantages and disadvantages.
On-market transactions take the shotgun approach to selling. Market analysis is performed and an asking price is usually set. A formal listing agreement is signed between the property owner and the broker. Marketing materials are prepared showing all the relevant information a buyer would need to determine their interest in the property. A brokerage “For Sale” sign is usually displayed on the property in the most visible location. The property is usually listed on the listing broker’s website and possibly on a national database like LoopNet or CoStar. The broker may discuss the property with a few of his key buyers and some of the local brokers that deal in that specific product type. After a period of time, the phone will start ringing and the broker will spend his time fielding questions, arranging for on-site visits and hopefully negotiating offers and eventually closing the sale. The great thing about on-market transactions is that the broker covers the entire market quickly and efficiently. Anyone in the market for that type of property will know that the owner’s property is available for sale. I have sold dozens of buildings using this method.
Off-market transactions take a rifled approach to selling. While a fee agreement between the property owner and the broker is still usually signed, there is no “listing” agreement. In fact, the objective is not to show the property to the entire market, but rather to a handful of “very qualified”, targeted buyers that the broker knows personally. Marketing material tends to be sparse and often excludes many of the key facts that a potential buyer would need to fully determine interest in buying the property. A confidentiality agreement needs to be reviewed by attorneys and signed before sensitive information like financing, appraisals, market studies, operating statements and rent rolls are turned over to the potential buyer. In an off-market transaction, a broker’s role is to identify and discuss the property with the “best” buyers for that particular property rather than the entire market. In many cases, a seller will restrict the list of potential buyers or require that the broker register each potential buyer. Again, I have sold dozens of buildings using the off-market method.
So, which is method is better? It depends on what you are selling and to whom.
Local buyers are best found using on-market methods. Buildings attractive to local buyers would include owner/users-type buildings, buildings located in rough neighborhoods or low traffic areas, special use buildings, buildings occupied by local businesses and smaller buildings slated for redevelopment. For these types of buildings, local buyers are the best buyers because they understand local issues and the local market. In addition, big buyers shy away from small buildings. It takes roughly the same amount of resources to manage a small building as a big building and they usually have a limited number of asset managers. In many cases, large buyers like sovereign funds, insurance companies and pension funds have very large pools of money to place “on-the-street” that they just can’t spend the time to even look at a smaller deal. Really large buyers will only be interested in individual properties or portfolios with values over one hundred million dollars. Big buyers also have very narrow criteria for what they will and won’t buy. They also require a large amount of due diligence that smaller building sellers may not be able to provide.
While institutional buyers, REITS, and large real estate management firms will look at any property that fits their investment profile, they are more likely to be interested in an off-market deal versus an on-market deal. The reason is simple. They want the respect that they believe they deserve because of their legitimate ability to close. They don’t want to compete with unqualified buyers that will drive up the price of a property with unrealistic offers. They would much rather wait until the seller has spent months falling in and out of escrow, then go in with a reasonable offer backed up by their unquestionable ability to close. Buildings priced under twenty-five million dollars are better sold using the on-market method and buildings or portfolios priced over twenty-five million are better sold using the off-market method. Buildings with difficult issues are better sold off-market where the broker has the time to explain to each buyer the idiosyncrasies of the deal. In this manner, the buyer that goes into escrow is fall less likely to fall out because of an undisclosed issue. The broker also has the ability to target the buyers that are familiar with handling the types of issues associated with that particular property. Lastly, the “best” buyers are more willing to spend time analyzing a property and running past their investment committee if they know they have a real shot at the closing the deal. It takes time and resources to analyze a building that an institution or publically-held real estate firm is interesting in purchasing. Nothing is more frustrating for a big buyer that to go after a deal and lose it to a smaller, no name buyer that has no ability to close.
One last point. Many of the national brokerage firms have requirements for how their listings are handled. Some require that all properties are listed on the company website within a certain amount of time from signing the listing. So firms also require that affiliate agents are allowed to sell those listing no matter what their qualifications. Many firms do not allow off-market listings.
Whichever method an owner chooses, it really gets down to selecting the right broker to manage the sale of their particular property. Remember, when it comes to commercial real estate ten percent of the brokers sell ninety percent of the property.
ABOUT LONGSTREET WORLDWIDE:
Longstreet Worldwide (http://www.longstreetww.com/) is an international investment bank with a focus on institutional quality projects and portfolios. Since its inception in 1981, Longstreet has provided both equity and debt to owners and developers of energy, infrastructure and commercial real estate assets. With decades of capital markets experience, the partners of Longstreet are committed to finding innovative and practical capital solutions for the strategic financial goals of their clients.