What are some reasons that make sellers want to sell their investment property?
Obviously there are many transactions that occur each day.
I am just curious to why all these "smart" people in the industry would sell a property that they think is "good."
Based on your experiences, did your firm ever question why a company was selling a particular property, and if so, why?
Should one be hesitant to buy from a seasoned owner? Thanks
1 Example - selling/buying involving larger institutions: Buying a building from Sam Zell(800 6th ave), Selling to Blackstone & Brookfield (why not keep it if they want it?) Eyal Ofer buying from Jamestown, basically any big transaction as one example. Who wins at the end of the day? How much of it is fund related?
My opinion: 1-3 main reasons, maybe 4-5 others
You buy it for your fund objective, you meet the objective returns. Example, you have a value-add fund, so you underwrite 10% returns, 3 years later you achieve business plan so you get out. Anecdote here: I've been at a very large firm that had portfolio managers from different strategies wanting to bid on assets from another portfolio manager as they became stabilized.
You're a family office and the head of investments suddenly decides he/she doesn't like this sector/market/asset, so you sell.
Best case scenario, you're a PE fund with limited capital and your're willing to trade out of a 20% return asset to get cash for a 30% return asset without having to call capital.
A few other reasons, but theses are tops that come to mind.
Adding on more granular ideas - glut of competing properties coming online in the future, offload of significant deferred maintenance to new buyer, and (of course) note is coming due and you don't like the refinance options.
If you never realize the gain then you're just going to be coupon clipping the building. Unless you're just interested in yield, at some point most firms want to realize the gain from market appreciation and gain from the equity caused by the pay down of the principal on the note. This is so they can 1) receive their promote, and 2) meet the return requirements of their investors. Usually this is between 3-7 years after acquisition, but it is firm/asset specific.
If you've already squeezed all the juice out of the lemon it is probably time to move onto the next lemon.
But who wants to buy the dry lemon with no juice left?
These things don’t really exist in a vacuum and it’s really relative. One of the main characteristics of real estate is that it is a non-homogenous product. Different firms have different inputs and investment strategies. One firm may be focused on value-add investments and view the lemon juiced when the property is completely stabilized. Another firm may see that they can buy that same property that is stabilized below replacement cost, coupon clip for 5 years, and then dispo to recap all the equity out of the deal from the pay down of the mortgage. Maybe the seller doesn’t have the capital to replace a roof, and the buyer has a connection that can replace the roof for $0.50/sf below market.
Ones man dry lemon may be the juiciest to the next...
For example, a small PE fund may turnaround a small company, realize a large gain and sell it to a larger PE fund who can take that mid market company and grow it even larger with their expertise and capital backing
Real estate moves in cycles just as any other market, being able to sell to dumb money at the top of the market, and buy from dumb money who over-leveraged at the bottom of the market is why a lot of us are here. Volatility is our friend.
Buy some of these buyers aren’t so “dumb.” That is my point.
Because, like with any type of investing, at the end of the day it's speculation. It's no different than someone calling in Poker when they technically 'shouldn't' from a purely odds/math perspective. Lots of money has been made by taking contrarian plays in the industry, such as buying at the perceived 'top' (obviously money has been lost this way, too). There were people buying in 13-15 that people pegged at the 'top' of the market and were wrong. In those instances, the sellers left money on the table and the buyers have realized big gains. It's harder to time the market than you think.
There are obviously other, more standard reasons to sell; like mentioned above, tax reasons, fund maturity, diversification, etc.
I really enjoy your take on real estate investing. I suggest looking at Blackstone's EOP and Hilton purchases to see that you can buy late in a cycle and still have a profitable exit. The beauty of income producing real estate is that we can buy cash flow and not be at the mercy of valuations.
A big reason could be your fund is on an IRR driven model and the longer you hold your IRR typically isn't going up/your fund is winding down and its just time to sell.
Or sometimes your equity is just ready to realize gain and has something else in mind for another deal.
To piggy back off of my original comment:
The developer's return matrix does not look anything like the core/core plus buyer who buys it from them. A good sale for the seasoned developer doesn't mean doom for the seasoned core buyer.
Fund life has a ton to do with this as others have indirectly mentioned. Most REPE funds have an investment period that is less than 10 years.
Assuming nothing is wrong with the property or the area: -You could sell to pay back investors (rather than refinance). -Or as you pay down the principal, you have a ton of untapped equity and you want to use it. You could diversify by selling it and 1031 into multiple properties (I think the max properties you can do is 3, but I'm not certain). There's lot of reasons honestly.
As others have alluded to, most of the monetization comes at sale. As a developer, if I want to realize my promote, it essentially must be at sale; refinancing is great but rarely gets you to, and certainly not meaningfully over, my promote hurdles.
I may not want to put years or decades into a building, no matter how profitable, if all I'm getting is a small developer fee, maybe an asset management fee, and whatever small portion of the free cash flow is allocated to me.
And yes I know there are ways to get around this for long-term owners, just giving it as another answer.
Why does refinancing barely get to you? Can you explain? Isn’t that the move. Tax free money?
Refinancing is great. As you say, tax free money.
But here I am, a developer. Lets say I have a promote structure where I get a 20/8 (so, 20% of the cash over and 8% return for my LPs). If I refinance in Year 3, maybe I return 50% of capital, hypothetically. That's great, and I'm probably killing it on my execution in that case. But I still only get my money back parri passu. Because I need to return all capital, plus an 8% return, before I start making that 20% of the cash flow. It is very difficult to return 108% of capital in Yr1 without a sale event (or carry it out as many years as you like). Essentially, for me to hit my promote, I need to sell. Or rather, to really monetize my promote structure, I need to sell. If all I'm doing is clipping my coupon, I'm basically buying an asset and treating myself as an LP. GPs make their money on the promote, so until you get to that point you are essentially wasting time.
Yeah, I know the last sentence has a lot of problems. It's a general point
Because I want to get fucking paid. My % of profit isn't realized until sale. None of that monthly cash flow goes to me.
Close ended funds play a big part in this too. Think about it if a fund is a 5 year fund with a 10% target IRR they can take a 1.6x in 2 years and that money already hit the 10% 5 year return number and they can just put it on the sidelines and investors will be paid.
Can't believe no one has mentioned this yet... In today's environment, it's often because the debt is coming due. If you have bridge financing, you're looking at a quick flip. If you did a bank note - probably a 5 year term. The agencies will lend 7 to 10 year money.
If you liked your deal in 2014 and got great pricing on your debt, it's very likely that the interest rate you had can't be replicated today. Rising interest rates and such... It may be that you just can't make sense of refinance because of basis, cost, proceeds, a combo of the three, and need to sell.
We pick deals like this up all the time. The owner says "hey, I like my real estate but can't pay off my fat principal balance and don't like my returns with new debt." It's a great position of leverage on the buy-side.
How big are these properties? I would imagine these are more of Mom & Pop owners or have you seen institutions doing this?
Primarily sub-institutional owners... However, a $100MM office deal still has debt on it and that debt still has a term that comes due. If you don't like your returns under the refinance and hold scenario, you'd likely be inclined to sell.
“The future does not exist. The future is only a range of possibilities.” - Howard Marks
People have different interpretations of what will happen in the future, and their probabilities. This leads people to think that an asset will have a higher or lower value. Only one outcome is ultimately true, and it is driven by a lot of factors that are unknowable and random. All of the other respondents on this post gave some great factors. I just want to bring attention to the fact that there are a lot of smart people in this business that can come to different conclusions with the same exact information.
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