How We Develop an Off-Market Pipeline
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Joe and Ryan discuss the firm’s philosophy and strategy around building off-market pipelines in secondary and tertiary markets.
Episode Transcript:
Well, and let's start by talking about a little more about what off market is. Off Market does mean sometimes that you're in that initial call list. Off market does mean that the property has been listed or gone stale. Mm-hmm. Off market means buying it directly from a seller Off market means a broker is leading a charge around you specifically to reach some sort of seller.
So off market is all of those things. And picking which deals to invest on investing is a matter of just the opportunities that pop up through those various things. This is durable value. Get investing in business insights from industry experts and successful entrepreneurs every week, like and subscribe.
Now, one thing that's unique about our firm is that 90%, sometimes closer to a hundred percent of the deals we buy are off market. And what, let's talk in this episode about what that means and how we do it. Yeah. And just to provide a little bit of context, we operate in inefficient markets, which does lend itself to a better ability to do that.
But it's still not you know, a default setting, so to speak. And I would also add some context that during the last, call it eight years of upmarket that we were working in it kind of became a bastardized term because people would say off market and what they meant. The brokers had gotten smart, and so what they had done is they had said, okay, well I'm, I'm, I may not be listing it, but I'm calling 25 of the logical buyers, and I'm effectuating a, a bidding war between those logical buyers.
And so I think it's important to differentiate that that's not what we mean by off market. But I'd love if you could give a little bit through the process, Joe, heads the acquisition team, and how, how do you guys, how does your team go about getting truly off market?
Yeah. Well, and let's start by talking about a little more about what off market is.
Off market does mean sometimes that you're in that initial call list. Off market does mean that the property has been listed or gone stale. Off market means buying it directly from a seller Off market means a broker is leading a charge around you specifically to reach some sort of seller.
So off market is all of those things. And picking which deals to invest on, invest in is a, a matter of. Just the opportunities that pop up through those various things. Well, and off market fundamentally means that it is not a fully marketed bidded type of environment. Oftentimes it means a one-to-one negotiation where it's us as one buyer and one seller versus, versus the best versus, versus five or 10.
And that's, that is. I would say that was helpful in the up-cycle because a lot of the market was very frothy. There was a lot of bidding activity. We would, we often get outbid had we participated in a bidding process. Yeah. But then what's interesting is during this time of dislocation, it has also been really valuable because we're able to find those sellers that have adjusted their expectations.
And a lot of it has to do with trusted advisor on the seller side, helping them through that process to recognize where the market has moved. Something that doesn't necessarily happen as well in a, you know, fully bidded environment.
Well, and that's one of the challenges of off market. And let's speak a little bit to the, to those challenges.
Some of the challenges are that sellers have unrealistic expectations. Mm-hmm. Chalker hard, hard to believe. I know. But especially now, they have unrealistic expectations of price and they have to go through a process of, you know, sort of coming down to Earth. And in an, in an off market scenario, often you're dealing with a, you're starting with a seller that has an unrealistic expectation on price.
But what that means is buying off market is a six to 18 month process where you build trust and they build a sense of what realistic pricing is. And some other, so some challenges are having sellers that need to come back to earth on price. Timeline, you can't quickly go and buy an off market, pro, pro property.
We often call it a Ferris wheel where you're putting in lots of offers and you're letting them go through the, the steps. And then so you'll put in an offer, it'll go silent, and then they'll, you know, a few months later they call you back or, 'cause they're looking for various off ramps and selling process.
And then eventually, about a third of the time or 20% of the time, we are the right buyer and it, it circles back to us. So also some other challenges are usually you don't get great financials or information. Mm-hmm. Usually in an off market process, the property was not run well. Mm-hmm. And the financials are not really clear.
There's more assumptions. What's interesting too is often you don't actually get to a much better price than an on-market property. You know, they have advisors. They're finding their way to something that looks like market. Usually it's a little bit better. Yeah. Maybe five, maybe 10% better.
Yeah. So those are, those are some of the things. So how do we find off market properties? Well, especially as we're entering once you're already established in, in a market or sub-market, you'll get inbound leads, but most of what we do is through brokers, but it's not through a traditional brokerage process.
So if we're entering a new sub-market, step one would be. Look at the, the deals have transacted in the last six to 12 months. Look for the brokers that have been on the buy side ideally, but maybe on the sell side. Different firms have different ways of doing things. Some firms and some brokers like to control the process very tightly.
Those are usually not the right ones for us. Maybe on the sell side they are. Yep. But on the buy side, we're looking for more relationship oriented brokers who have been there a long time know, know all the sellers in the market. And then we're, we're looking often not for that top highest producer.
We're looking for that middle or junior person. Someone who's looking to make a mark, someone who is in the middle or, you know, earlier part of the crew. Not at the earliest part. Yeah. But they're, they're aggressive and they're ready to, to move up the ladder. And the next step after that is to make a relationship with them.
Both you and I were brokers for about a decade. We, we, you know, we speak that language. Yeah. The people in our firm speak that language. We can establish trust and rapport. They're looking to develop a great customer. They're looking to get paid for a long period of time, and it's our job to show them that we can be that person for them for the next 3, 5, 10 years.
After that, it's entering the market. It's touring with that person. Usually there's two or three that we try to work with in a market to create a little bit of competition. But it's touring with them, seeing the world through their eyes. It also provides a little more market knowledge too, right?
Yeah. You have two sounding boards of, okay, is this market, is this not, what do we, you know, what feedback are we getting? So they're trying to see the world through your eyes, and you're trying to see it through their eyes, and you're trying to marry this up because when you first start talking to someone, they have a sense of what it is that maybe you buy, but it's not you, it's not easily explained.
I often find that, I'll say it. Mm-hmm. And then I'll tour with them, or they'll bring some deals and they won't look like what I said. Mm-hmm. Or what the mm-hmm, mm-hmm. Or what, you know, people on our team said. Yeah. They, it takes a while for, for them to get it. Yeah. But also it takes a while for us to adjust a little bit too.
Because each market has its own sort of nuances to it. Yeah. But ultimately what we're trying to do is get to off market. We're trying to put out lots of Lois. So what I'll hear. Great clues I'll hear is, oh, that building hasn't sold in 10 years, but I think that might, those sellers might be ready or, oh, I know this group's thinking of this, or, oh, that building's had too much vacancy.
And, and what I'm saying is, let's write some offers. Let's write some offers. Mm-hmm. And so if we write, you know, 5, 10, 20 offers and we get 2, 3, 4 responses or, or pieces of interest, what we're doing is we're adding those to the Ferris wheel, so to speak. Mm-hmm. Mm-hmm. And over the next two to 12 months Things will start to shake out.
We'll get a call, someone's ready to do a deal. And so you're, you're building up a, a base. I I also find usually with that same group of brokers that there's, that I'll hear something like, oh, well I have this other deal and it, it fell out. Would you guys be interested in that? And alright, great.
That seller's already gone through one repricing in their mind. They might be more ready to sell. Now, can we yeah. Can we step in? And an important part about that is doing what you say you're going to do and executing quickly. Yep. We see those brokers as our customers and when they send this information, number one, we're super confidential about it.
Mm-hmm. If we're working with two or three brokers, the other two or three will never, ever hear about it. Yep. We, we do not talk about it. Number two, we are gonna analyze that property in two or three days and have an offer in on the third day. Mm-hmm. And it's gonna be, It's not gonna be a low ball, it's gonna be something we really meets our underwriting.
Yep. But that we really seek to transact on and is not gonna totally blow the other, the seller's mind. So, and then here's the other thing. Once you go into escrow, or once you close on a deal wow. Now, I mean, brokers can smell it and blood in the water, so to speak. Yeah. The deals start to come at you.
Yeah. And now you have to My experience at that moment is you'll start to get attention from more senior members of the firm. That is the time to stick to your guns, stick with your people. Yeah. And seek to get more and more active and to follow that up with more offers and more deals. Yeah.
And let's speak a little bit about why those particular brokers and, and the sellers ultimately work with us, because I think that's an important aspect of, of how we go about it. Mm-hmm. Number one certainly is a track record. I mean, you know, we, we demonstrate a track record and if we're moving into a new market or a new submarket, then it's also just the demonstrated track record in the other markets that we've operated in.
But it goes deeper than that because, you know, you check a box. Obviously a broker wants to know there's more deals after this. Yeah. The seller wants to know you have a history of closing on properties and moving forward. But there's more to it because it's, it. Let's speak a little bit to that relationship component and our values.
The first thing is values. When we submit an offer, when I'm I people, our team are talking to new brokers. We attach our deal sheet and it's got the last few years worth of deals. It's currently, I don't know, about half a billion dollars in, in deals. It's got the address, it's got the size, it's got the location.
I mean, when that comes to the back of your offer and you see the most recent 500 million in closings, yeah. The, the deal, the offer gets taken seriously, especially when you're up against other local players. They're like, yeah, okay. But the relationship is super important. All, all business deals happen on trust.
Sellers are looking for you to execute. Brokers are looking, they're will, they're going to trade their reputation and their best market knowledge. And they're, they're, they're gonna sell that in a sense, for you to come in and transact. And to the extent that they can make a, a efficient trade of knowledge and relationships, relationships, and that you do your part, they'll see this as a wonderful thing.
Our core values are our number one core values is being positive, caring, and humble. And this is not particularly a positive, caring and humble industry. And the brokerage business is far from positive, caring, and humble. But I find that that's a good. Trade. Yeah. And that brokers can be how they're going to be, and they love it when we approach from that perspective, they enjoy that we operate from that point and that they can be leaders to us.
And so it's a, it's a great trade because they're, they're used to oftentimes sellers, buyers you know, being higher on the ego spectrum.
They're used to dysfunction. They're used to family dysfunction. They're used to corporate dysfunction. Yep. They're not used to great execution from nice people. Yep.
And I think that really is kind of a hallmark of how we do business because number one, it's just kind of our programming where we, we we kind of have a no jerk policy in the office. We don't accept high egos. No matter how good you are if there's a high ego that go, that goes along with it, you're not a right fit for our company.
And so then that emanates out any interactions that, that, that. Broker or that seller or the market participants have with us is predicated on those core values. And we don't do it because we get results from it, but we do get results from it. It's, it's like, it's like a byproduct of, of just, you know, doing what you say and saying what you do and Yeah.
Doing it in a nice, authentic, you know, manner.
We often say we want to get, we don't wanna get paid in ego, we wanna get paid in money. Yeah. Yeah. What's the, what's the purpose in getting paid in, in ego? It's a, mm-hmm. It's a waste, it's inefficient, it's friction to deals. Mm-hmm. If we can be firm and direct in how we deal, but nice.
Like those two things can coexist. You can be a, a great person and drive great outcomes, but in a transparent high integrity way, and there's less friction. And, and as a result, we get more deals and more people wanna work with us.
Summary
Joe and Ryan discuss the firm’s philosophy and strategy around building off-market pipelines in secondary and tertiary markets.