How Real Is That Buyer Bidding on Your Property?
Robert Knakal April 8, 2015, 5:48 p.m.
One of the most tangible trends in New York’s investment sales market since the recovery began in 2011 has been the influx of new buyers looking to purchase properties here. These investors have come to the Big Apple from across the United States as well as from every corner of the globe. And, yes, there are always new buyers entering the market, but it is the magnitude of this influx that has been so vivid this time around.
While this massive wave of newbies is positive for sellers looking to take advantage of this seemingly insatiable appetite, the flip side of the coin is the work brokers have to do to qualify these newcomers to determine if they actually have the capability to close a transaction. Not all can. In fact, we estimate that less than half of the folks who hold themselves out as potential buyers actually have the ability to make a purchase. Determining who’s got the goods and who doesn’t, is a critical skill.
As a broker who only represents sellers, it is imperative for me to provide guidance to my clients regarding the probability that a sale will close. A key dynamic to consider here is the relationship between the probability of closing, the price being offered and the likelihood of a better buyer coming along. The biggest dilemma is when the unknown buyer is offering the highest price and the known buyer (who offers certainty) is offering a slightly lower price. The overwhelming majority of sellers chose the unknown buyer. However, the broker must do all that is possible to determine if that unknown buyer is for real.
As brokers, all we have is our knowledge and our time. Spending any time with buyers who can’t pony up is time that can never be recovered. Here are some ways to qualify new buyers.
First is to obtain proof of funds. What is the source of the buyer’s deposit and equity contribution? We never feel uncomfortable about asking this question. After all, we are not at a social event; this is business. A real buyer is never offended by these questions. Investors who have the money tangibly demonstrate it within hours. If they don’t have the money, you will hear every excuse in the book as to why they can’t get you the backup. Even college kids get monthly bank statements, or investment account statements if they own even one share of stock, so there is never a viable excuse for not being able to substantiate funds.
Second, determine how the buyer is going to finance the transaction. What banks has the buyer worked with in the past? Do they have a banking relationship locally and will they provide that banker’s contact information? Having the buyer illustrate what they envision for their capital stack can speak volumes about their capability.
Third, find out which third-party professionals the buyer is going to use to help them with the transaction. Knowing which attorney they are going to use says a lot. Experienced brokers know the dealmakers from the deal-breakers. Other professionals include the engineer and environmental consultants that will be retained.
Fourth, determine how well the buyer understands the property and how it fits into the local market. To some extent this is less important than the others. As the anti-Sy Sims would say, the uneducated consumer is sometimes our best customer. As a seller representative, how well a buyer is going to do with a particular property is not a concern. But the better the buyer’s knowledge, the more likely the transaction will close.
Fifth, who does the buyer know that you might know? Can they provide names of sellers they have purchased properties from before in other cities/countries? Speaking to those sellers can tell you a lot about the buyer. We were negotiating the sale of a development site to a buyer who had a reputation as being very litigious. We told the seller that they should only agree to make a deal with that party if they paid at least a 10 percent premium above any other purchaser. We explained to the out-of-town seller that the extra proceeds would be necessary for the anticipated legal fees associated with getting the deal closed. Sure enough, during the contract period, the buyer started litigation with the seller and half of the premium the seller extracted was ultimately given to the seller’s lawyers. The transaction closed and the seller was very thankful for the insight into the buyer’s reputation.
Clearly, the better the market is, the more likely it is that a buyer who appears to be a risky bet can pull off the acquisition. However, conducting investigative work into the background of the buyer can greatly increase the probability of closing the sale. And sharing this information with the seller enables them to make better decisions about with whom, and how, to proceed.