Acquisitions: What are some creative ways to win a deal?

For those that work in acquisitions: what are some creative ways to win a deal? The obvious main items are:

  • Purchase price
  • DD period
  • Amount of hard money

But are there other levers to pull? Would going in without a financing contingency help? Any ideas to stand out against these crazy buyers tolerating low returns and pitching up big hard money would be appreciated. It's a bloodbath out there.

 

As a seller, when we're doing buyer interviews, no financing contingency is definitely a plus on our end. At the end of the day though, price is by far the most important factor. Reputation matters as well, have you done deals with the broker or their colleagues, do you have a reputation for closing without re-trading on price, etc. It definitely seems like it would be a tough environment to break into right now without a strong reputation as you'd be forced to overpay for a lot of deals imo.

 

We have the reputation and broker relationships, it's just hard to compete against family money that throws up $2 million hard and is $1 million above our offer. Sometimes when we are within a competitive range on purchase price, the hard money that these guys throw up can still crush us. So just looking for other minor levels that may tip the playing field.

 

Yeah you guys have hit the nail on the head basically. Compressed DD time-frame has become more and more important on some of the stuff i'm seeing.

"Who am I? I'm the guy that does his job. You must be the other guy."
 

One thing I've seen to give your underwiting a little extra powder is to model static vacancies instead of an allowance. So if you're uw to a 5% vacancy, turn your allowance off and instead find a suite or two that add up to roughly 5% of your SF. The way this works is that you'll be shaving off 5% of your income but you won't be paying the TI/LC on 100% of your space. May not win you a deal but gives you a little lift.

 

Not often, but lately I have been seeing people really shorten their DD time to very aggressive time periods, which is really a function of differentiating oneself in a very competitive / frothy market with very few "good deals" available.

The complete waving came out of left field. However, when you look at the firms background, it makes more sense. Firm was just coming out of a 1031 exchange, is a family business with deep pockets, and can just pay more because in the long term, a million or two more means nothing to that type of investor who is less sensitive to IRR and more concerned about parking cash.

 

Best Thing to do is stay the course and stick to your acquisition guidelines and fundamentals….removing finance contingencies is always key, most credible shops will have this lined up anyways so its usually a non-issue………………….. 1031 exchange dollars are what is keeping the cap rate compression ongoing (think wealthy family / family trust money - selling multifamily assets in primary gateway markets (NYC, CA, FL etc) at a 4% cap and buying retail in other markets at a 5-6 % cap and putting no debt on the deals. REITS won't touch those cap rates (they need 7 caps to pay dividends), so they are out…..value-add REPE and Investment Groups are out as well (need 8 caps). There is a lot of money still being thrown around, and a lot of it is stupid money.

 

Use your broker relationships to your advantage. Before a deal comes to market push for a pre-emptive shot at it. It either works at the proposed price to waive the process or it doesn't. Atleast you take a shot at it without a pool of bidders - it will head in that direction anyways if the asset is in a core market and of institutional size. Sounds like you're in NYC. Good luck and as someone noted above, stick to your criteria and be patient.

 

Surety of close is #1 on my list. Deal flow (both number of deals and size), tendency to re-trade and extent of such, and your capital source are informative as to your reputation as a buyer and thus the likelihood of you showing up to the closing table.

If I take another girl to the dance and get stood up, this is no bueno. When this happens, I have to go back to the buyer pool with my hands around my ankles. These buyers are very likely to back off their original numbers. Worst case scenario, I may no longer be able to get a deal done as (i) prices drop below that magic number for our partner, or (ii) our partner becomes fixated on the original price that is now gone and won't accept a lower number. I am now stuck with an asset. Profitability for my firm, and in turn me, will suffer.

Sellers should evaluate offers through a risk adjusted lens. With this in mind, highest purchase price does not always equal you getting the deal. Moreover, think about human psychology and the incentives of the folks sitting across the table from you.

 

As OP had mentioned, we are seeing buyers with wayyy less surety of close putting up as much as 5% higher in their offer price, with less DD (mostly smaller, family offices with cheaper capital). How can more reputable buyers combat this?

 

I am seeing similar price escalations, only it has to do with the price of dirt when we are chasing a deal. The underwriting by most established developers is close; we are right on top of each other and well below a 5% differential. We've gotten rocked several times when HNW money comes in at 10%+ above the pack. Needless to say, I get it.

To your question, there is very little you can do in the short term to combat someone coming in 5%+ above your price on a shorter clock. More longer term, the answer would be to find your own source of patient capital that is willing to accept these lower returns. You can then move across the risk spectrum as you see fit and close/eliminate the pricing gap.

-SD

 

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