Leverage has swung back in favor of sellers, especially within the multifamily sector. All too often these days, anxious buyers find themselves bidding on a great property and expect a draft contract from the seller shortly. But their broker mentions to them that the deal is strictly “as is,” that there is absolutely no due diligence and that there are other buyers actively competing for the same property.
While brokers may sometimes contribute to the feverish pitch around a deal by working buyers into a frenzy, the days of buyers squeezing sellers for healthy due diligence periods and having the luxury of time to fastidiously negotiate all their demands are gone.
Lawyers, too, may contribute to the drama. Sadly, it’s not uncommon to hear an owner or a buyer gripe about how their attorney is “over-lawyering” their deal—throwing as many obstacles in the way of the deal as possible in an effort to generate billable hours and drag out negotiations. And while that kind of counsel may traditionally be viewed as counterproductive, today, in the face of bidding wars, where timing is of the essence, this style of lawyering is often a major determinative factor in whether deals are won or lost and can have a negative impact on the overall strategy of a real estate owner or investor.
Given this particularly frenzied environment, here are some suggestions to help multifamily investors not only survive but thrive in the multifamily bidding wars:
1 View what the broker tells you with some healthy skepticism.
For obvious reasons, brokers are incentivized for the parties to move ahead at lightning speed. This is often a good thing for everyone so that a deal does not get stalled. But brokers come in many shapes and sizes. Just as with attorneys, some are more ethical than others. Sometimes a buyer may be told it is a bidding war by a broker to provide that extra spark of anxiety, but you should ask your attorney to speak with the seller’s attorney to get a better feel for what is really happening. For example, the seller’s lawyer may reveal that “two other parties recently backed out,” which the seller’s broker may have positioned as “two other interested parties.”
2 Regardless of the competition for a property, all competing buyers including YOU need basic information to underwrite the deal.
For example, a seller was refusing to provide leases for a property, leaving the buyer to question whether he should forego the requirement since there were other bidders. EVERY SINGLE OTHER BUYER would want a copy of the leases to verify the property’s income. Don’t forgo common sense just because your emotions are heightened in a bidding war.
3 When the deal is moving at much speed, your attorney’s job is to flag the serious issues and then get out of the way.
I recently was involved in an off-market transaction that a client bought from an estate and then flipped within 90 days for a roughly $10 million profit. When the economic drivers of the deal are so compelling, many nuances of the contract that are ordinarily negotiated are sometimes plainly irrelevant given the deal value. You must still flag every issue for your client, but use common sense and don’t heavily negotiate a highly theoretical condemnation provision to the detriment of killing a deal.
4 In a competitive bid setting, if at all possible, try to set up a “sit down contract signing.”
Although we live in a technological wonderland where efficiency is almost always facilitated by email and conference calls, this is a major exception. You simply cannot replace the dynamics of sitting down in a room with both the seller and buyer and their attorneys to quickly hammer out (and win) a deal.
5 Fight for your right to assign the contract.
In a frothy market, if there are truly competitive bids on a property, a buyer may have actually made money by simply signing the contract if they’ve retained the right to assign it or “flip it.” While most sellers and their counsel will heavily resist the right to assign (and the request for the right to assign has to be marketed carefully so as not to appear as a “flipper”), in a rapidly moving and rising market, it is too valuable an option to leave on the table if at all possible.
Aaron Y. Strauss is the founder of, and a partner at, A.Y. Strauss, a commercial real estate law firm with offices in Roseland, N.J. and New York City.