Off-market properties for development- cold calling questions

jcre17's picture
Rank: Senior Chimp | banana points 21

I work for a mid-size MF developer and I want to start cold calling to source off-market properties/ deals. What are some of the talking points/questions to address when first calling property owners who may or may not be looking to sell?

Private Equity Interview Course

  • 2,447 questions across 203 private equity funds. Crowdsourced from over 500,000 mem.
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (9)

Aug 31, 2018

Three tips:

  1. State the experience of your firm. Establishing credibility is the best way to advance the conversation.
  2. Inform the owner your firm can pay above market rate for the land. They need to understand they can receive a premium in order to motivate them.
  3. Make it clear that your firm has the ability to close. A seller/owner wants to know the deal will close. That said...you need the seller to fully understand the first two points...because they might be hesitant once they learn the sale contract will have several contingencies and it might take a year before you can actually close (due to IP period...entitlement period...and financing period).

This is a very slow and often frustrating process. However it's the best way to create real development value. Good luck.

Oh...one final thought...you can also inform the seller that by dealing directly with you (developer rep) they don't have to pay a broker commission on the sale...which they otherwise would need to pay if they placed their property on the market. This means an even larger net for the seller.

    • 2
Aug 31, 2018

Great answer. Whether for development or just trying to source off-market, existing properties, the hardest and most important thing is getting someone in the mindset that they actually want to sell. In a brokered / broadly marketed transaction, the owner has already decided to sell; not the case in off market transactions.

Aug 31, 2018
larrison34:

2. Inform the owner your firm can pay above market rate for the land. They need to understand they can receive a premium in order to motivate them.

Is this really a thing you say out of the gate?

I can see this point making sense farther down the line if there are contingencies etc. My question is more from an immediate negotiating standpoint.

Aug 31, 2018

Agreed...

Aug 31, 2018
babybaboon:
larrison34:

2. Inform the owner your firm can pay above market rate for the land. They need to understand they can receive a premium in order to motivate them.

Is this really a thing you say out of the gate?

I can see this point making sense farther down the line if there are contingencies etc. My question is more from an immediate negotiating standpoint.

Absolutely.

Think about it from a different perspective...say someone contacts you and they say they want to buy your house. Now...you like your house and have no interest in selling or haven't thought about selling. So why would you have an earnest conversation with someone about selling your house? You would view it as a waste of time.

But what if someone contacted you and said they like your house a lot and love its location...and as a result they are prepared to offer you 1.5x market value for your house? Would you be interested in at least speaking with them a little more?

You don't need to share with them immediate pricing...but tell them that you value the land for more than what the current market value might be. Also...keep in mind that once you submit an LOI...the owner will know that you are a developer or professional...so there's no point in keeping it a secret. In other words...the owner will know at some point you can pay more than what the land is generally worth...so there's no downside in telling them you can offer a premium.

For some sites with a high development value...I'll even send people an unsolicited LOI. That's another way to capture some people's attention. You can leave out the majority of the contingencies (or at least simplify them) when doing this and don't send your best offer. And have the LOI valid for only five or seven days. People won't sign an LOI that quickly...so it's just a creative way to jump start a dialogue with a potential seller.

It's not easy to get an owner of a non-marketed site to sell. You have to motivate them. I would also add that you should follow up with people every six months or so. A lot of people who initially say no will eventually be interested in selling. It depends a lot on catching them at the right time...and their situation in life can change.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Aug 31, 2018

Okay. Yeah I see your point.

To further, I would assume said current Owner doesn't have the means or desire to develop and enhance the property beyond it's current state. You, working for a developer, obviously are reaching out because you do. Or, to one of your final points, maybe it's just the right time and you need to motivate them.

Aug 31, 2018
babybaboon:

Okay. Yeah I see your point.

To further, I would assume said current Owner doesn't have the means or desire to develop and enhance the property beyond it's current state. You, working for a developer, obviously are reaching out because you do. Or, to one of your final points, maybe it's just the right time and you need to motivate them.

Correct. Most owners aren't savvy enough to develop their own properties.

But that also raises another point...you could always offer to include the owner as a JV partner on a deal if the site is of great interest to you and the owner doesn't want to sell. The owner's equity in the deal is the value of his land. That would lower the amount of capital/equity needed for the overall deal and also could put you in play for a site that you otherwise wouldn't be able to obtain. Win-win.

One other thought...sometimes owners are sentimental and just don't want to sell. This can happen with land that's been in a family for generations. However you can offer to do a ground lease with them. That way, they get to retain ownership of the land...while you own the physical development. This is a positive for the owner as they won't get hit with a huge tax bill on the sale of the land...get annual payments...plus they get to keep the land. The upside for the developer is a reduction in the amount of equity required to do the deal (no land purchase price) and the annual lease payments are fully tax deductible. Win-win.

Most Helpful
Aug 31, 2018

for the sake of adding another viewpoint, I don't agree with the aforementioned strategy. I usually prospect from a personal email address, not my company email. I never disclose what my product type specialty is, and avoid throwing out an anchor number if I can. The only pieces of information I will offer up is that I am a cash buyer and can provide proof of funds to get them comfortable with my ability to close, which usually works if it is a not a broker.

Once an owner knows you are a big company with money, you lose an advantage. If they know your product type, you lose an advantage. If you anchor a number, even if that is "above market," you lose an advantage.

This is especially true for development deals. How are you quantifying that you will pay "above market"? The existing owner may not even be aware of the zoning potential of their property. Are you defining "market" as the value based on existing income? The true market value based on development potential could be 10x that number. You never know if they know that.

By and large, if you speak to an owner directly and they return your call or email, they are interested in selling. This strategy may get less hits, but in this market environment where cold calling is even less effective I'd rather start from a position of strength than being willing to overpay for an asset. Isn't overpaying what buying deals from HFF and Eastdil is for?

    • 3
Aug 31, 2018