Why would a seller decide on a direct deal vs. a third-party (broker-)targeted buyer approach?

Sometimes it’s a matter of privacy (however, MLS is no longer required for a vendor to obtain the top price for such transactions).

Sometimes it’s a matter of ennui and complacence (sell to the first or last buyer who approaches you). Finally, it could be that sellers believe they are “saving” the brokerage fee.

However, if any of these are the reason, think again.

The market has changed dramatically in the last two years and not exposing an apartment asset to the right buyers could mean multi-million-dollar losses to private sellers. Let’s take a closer look at an example of a significant loss based on a real deal.

An owner we know sold a building about five years ago to a private buyer for approximately $6 million.

A direct deal . . . at a discount

The family owned one other similar, slightly smaller building not included in that transaction. The time came to sell that property a few months ago, and although we chatted several times we were finally told they were “selling direct.”

The deal details came through after the closing – they had sold the building to the same buyer who purchased their first asset five years ago for a price of . . . ready? About $6 million.

This is an outrageous discount based on current market conditions, and, of course, the initial buyer was more than ready to capitalize on it. We calculated an approximate market discount of $2 million.

But, alas, there was no brokerage commission payable.

Sometimes the savings on the costs of a sale are not worth it based on a shifting market.

Unfortunately, apartment building owners, especially those who have held the assets for many years, are not in tune with the quarterly shifts which occur now in terms of price per unit, best buyers for certain areas and new buyers aggressively entering certain markets.

The only respectable reason for concern, of the three reasons listed at the start of this article, is privacy.

If privacy is your concern . . .

You should know though, you do not need to put your building on MLS or even advertise it on a public website or the brokerage website, to get a successful sale in this market.

The best way is to choose a well-known and respected brokerage team with a track record in apartment building sales and have them prepare relevant marketing material for a proven (closed) database of buyers.

The second-best way to obtain top price is to have the same brokerage team show it to the top two or three buyers and have one or more of them bring an offer.

Finally, the third option would be to have the brokerage bring just one buyer – but be absolutely sure the broker can bring the top buyer for your given asset.

Remember, the “last” buyer in the area or the “top priced” buyer from a year ago might not be the best buyer now, or for this specific asset.

Here is what you should be comfortable with before hiring a listing broker:

* MLS: not required for apartment building sales if listing with a top brokerage which has a proven database of closers. Ask to see a demo of this database;

* Comparables: You should see all legally registered trades for the area in the last year, not just the MLS ones. If your broker only brings the MLS ones, they do not have a proper database of information. Larger deals never make it to the MLS system and therefore the top price-per-door buyers will not be included in the data;

* Down payment requirements: Your broker should be able to show you exact calculations of the down payment required (cash the buyer must have available in order to receive a loan) based on several amortization scenarios and a cap rate range that is pertinent to the market;

* Environmental: Most assets these days come as “contaminated” based on new environmental thresholds. Contaminated properties do not get insured loans and therefore at least half the buyers will be eliminated based on the property not being “clean”. Your broker should provide a game plan and be familiar with the costs and delays of having environmental reports ready;

* Track record: Most brokers will be ignored by institutional buyers. Why? A corporate buyer would invest a significant time and staff effort to analyze each deal, and, if in the end this does not lead to a close, the fund performance is affected. If you have a property that may qualify for an institutional purchase, use a team that has a track record of closing deals with such buyers;

* Last test: Finally, once the broker presents you with the price data, ask them to list for a price significantly larger (let’s say a 20 per cent premium). If they agree to “see what happens,” do not hire them. A good brokerage team will only be taken seriously by the relevant buyer market if they bring forward assets priced according to what the top buyers can put forward on paper today. This requires a lot of recent and diverse selling experience.

We only work with proven buyers, who generally can put forward offers that are not conditional on financing.

Baron Realty specializes in matching buyers and sellers of apartment buildings. Ramona works in partnership with Mikael Kurkdjian and a team of real estate professionals to bring the best boutique- brokerage services to the apartment transactional space in Ontario and Quebec. ramona@baronrealty.ca