The 101 Guide to Getting an Investor Deal Done

Posted by anamaria

Fri Feb 12th, 2010 05:59 PM

We thought we would share a bit of what we’re seeing on the investor front at this time. In this market, we’re speaking with lots of groups with cash galore (particularly foreigners), looking to capitalize on this “depressed” market that we’re in. News are a’buzzin’ over in their respective countries that Manhattan is THE place to buy right now, and all of them want to get in on the action before their competition does. We’re finding that many of them are stepping into the NY market for the first time based on this buzz, with little local experience and much hearsay upon which they’re hanging their hats.

The issue is that many believe that they can purchase property at distressed prices and still get out of the investment in the next few years. While this can happen, it is far from the norm, with the plan generally executed by heavy hitters versus first time investors. Further, many are looking for “opportunity”. Who isn’t? It quickly slides into a question of which came first: the chicken or the egg?

The conversation usually goes something like this:

Agent: What are you looking for in terms of an investment?
Investor: I want to see properties that offer great value.
Agent: What does that mean to you?
Investor: You tell me, where is there opportunity in this market.
Agent: It depends on your needs, financing and exit strategy
Investor: We are in this to make money, and will tailor the strategy according to the opportunity.


So for those of you looking to wet your feet as a newbie investor, (or merely if you’re interested in that side of the coin) here is what it takes to make a deal happen today.

Keys to getting a deal done:

- Understand the basics: let’s look at very round numbers to make the point. Assume that you’re looking at a $300-$500 sq. ft. purchase price to acquire a building. Add on to that another $350-$400 in construction costs. Add on 5%+ in transaction costs. We’re now already nearing the $900/sq.ft. mark, and this doesn’t even take into account other soft costs associated with completing the project. Considering that condominium apartments are selling at an average of $1000/sq.ft. in the city, we’re talking razor thin margins for a re-sale opportunity, and long time-frame for renting the apartments out. Compare this to the ability to purchase in bulk new construction at less than $650/sq.ft. and you have to really wonder.

- Realize that it’s all scalable: “Yes but what about Harlem, Brooklyn or LIC?” you ask. Sure, most of the related costs are scaled down to be cheaper, but so are the prices on the way out, meaning there’s only a slight marginal benefit for investing in less expensive neighborhoods for the near term.

- Have your financing lined up: Understand that financing for acquisition needs is a max of 50%, and for development it’s close to non-existent. No longer can you rely on leverage to make a project worthwhile, refinancing just one or two years down the road as your exit strategy.

- Know your investment strategy: what does “opportunity” mean to you? Yesteryear’s mom-and-pop developers are this year’s vulture investors. You are not alone in trying to find a deal; chances are the bigger players have already scoured through the existing market opportunities. What is your time horizon? How realistic is it? Be disciplined about what your needs are, and then diligently work to find situations to meet your needs. If you do happen to work it the other way, be ready to work quickly and with all cash (further about that below).

- Are you an investor or not? We find it interesting when so-called investors get wrapped up in location, views or the quality of finishes. Unless you have a large portfolio you are trying to diversify, what should matter most to you is your return on investment. There is a buyer or renter for every apartment out there; don’t use individual standards to judge institutional opportunities.

- On the down low: As banks continue to extend and pretend, and developers maintain their pain, no one wants to make distressed opportunities too public. Most of the good deals taking place happen via relationships, conversations and quiet negotiations. Don’t expect to have 10 opportunities in front of you at any point in time. You need patience to allow the opportunities to surface; any public deal with readily available information is likely not going to give you the returns you seek.

- Speed: parlaying on the above, when deals do arise, be ready to move quickly. Speed to closing is absolutely key, and making the process easier on the bank or distressed owner/developer will be a significant competitive advantage to you. The window you will have to move on the deal will likely be tight, which is why having your ducks aligned in terms of your required returns is so important. That will NOT be the time for you spend weeks upon weeks determining if the deal makes sense or not. You will need a turnkey system in place, along with a team of trusted professionals, to help you quickly ascertain the situation to be able to jump on it.

- Cash rules: ‘nothing new here, but we couldn’t emphasize it more. All cash deals enable you to have the speed and ease of closing that any distressed seller will be looking for.

- Have realistic market expectations: don’t expect to get out of the project in the next 1-3 years; although the flip mentality should be long gone by now, many investors still believe that they can enter an exit an investment in the blink of an eye. Long term money may well be waiting to be made, but the short term bets are riskier than ever.

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