*Adjusting to a softening market

One of my RECON 2018 goals was to leave the convention with a measured collection of opinions on the market’s direction. In every meeting and many conversations, I asked attendees if they believed cap rates would increase, decrease or remain stable over the next 12 months. I am not predicting what the market will do but, the results of my simple poll revealed that 88% of the people I spoke to (developers, brokers, lenders and tenants) believe that market pricing over the next 12 months will soften.
I hope you find some of the lessons that I learned working in softening markets helpful in navigating changing market conditions.

Assess potential seller’s motivation thoroughly:
In all markets, understanding your seller’s motivation and goals is important. In a declining market, it is critical for continued success. Ask questions such as: why are they considering a sale right now? What time frame would they like the asset sold and why? What will they do with the money? What are their pricing expectations and why do they think that? What happens if the property doesn’t sell? Do they have other sources of capital available (besides sale proceeds) to meet their needs….. These questions will help you understand your client’s situation and help you determine if/how you can help them. In a declining market, finding and helping people reach achievable goals for their disposition is essential.

Price your listings wisely:
Most sellers (myself included) are very aware of aggressive cap rate sale comps to help push pricing higher. Unfortunately, the buyers of those properties have already purchased (especially exchange buyers) and are no longer in the market. Your current buyer pool will compare your listing to other “on-market” deals that they can choose today. You are competing with these deals for the buyer’s attention (and money) so using “on-market” comps to educate your seller about a proper pricing strategy for their asset is a wise decision. Appropriately priced assets attract the most motivated buyers and will sell. A growing group of assets that are priced beyond current market demands will receive almost no activity and, will sit on the market for long periods of time losing value. Pricing a property too high in declining markets can be a very costly decision for your sellers.

Qualify and choose your buyers carefully:
Having to re-market your listings will cost your seller money (and you time) as prices erode. Asking questions to understand your buyer’s motivation, level of commitment, money sources and why they are attracted to your listing is a necessary practice. Determining if they’ve seen the property, or when in the process they will see the property is always relevant. Ask questions about their due diligence process, finance requirements, and always ask what other properties they are looking at or have offers on. If they are in an exchange, ask for confirmation of the proceeds and what their deadlines are. Once you give them control of your listing by signing a contract, you can’t take it back.

Never, never stop “selling” your deal:
This may seem obvious but, so often, I see brokers switch from selling the deal to “managing” an escrow after they sign the purchase contract. In a good market, you may get away with this strategy because buyers may be operating with some degree of fear that they could lose a deal. As the market moves to the buyer’s favor, every conversation and every communication with a buyer should be viewed as an opportunity to re-sell them on the value of this asset and why they chose it.

Prepare your seller for re-trades from buyers and if/when faced with renegotiations, use that as an opportunity to get a buyer’s contingencies released:
Unfortunately, buyer renegotiations become fairly common as market pricing weakens. Buyer’s are aware that prices are dropping and are hard to get to the “finish line.” Frequently, they will want to sweeten the deal before being committed and you will be in the middle of another negotiation. Frequently, convincing your seller to accept a price modification will yield a better result than going back to a sliding market. Use these times to force your buyer to release contingencies so, at a minimum, if your seller is giving up some dollars, they are buying a firm deal.

Negotiate a clean contract with clear deadlines for performance:
Insuring that your contract has narrow contingency and closing deadlines will help insure that your Buyer focuses on getting through due diligence rapidly and does not have excess time to keep shopping for deals. Also, the shorter the deal the less time the market has to decline. Eliminate language that ties due diligence to dates that are not fixed. If there is financing, create specific dates that insure the loan application package is signed and submitted with required fees by specific dates. When possible, build into the contract an agreement that the Buyer agrees to accept a loan with specified interest rate, amortization and fees to insure your buyer is pursuing an achievable loan.

Creating habits from the above items in your brokerage can help you become more successful in every environment but, in a declining market, implementing these steps will save your clients money and, will help you remain successful.

Happy Hunting!

Joe

Joe Faris
KJF Partners, Inc.
Cell Phone: 949-275-5038

Email:  jfaris@kjfpartners.com

Website:  www.kjfpartners.com