Off-Market Commercial Real Estate Explained for Investors

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Key Takeaways

  • Off-market commercial real estate refers to the practice of buying or selling real estate properties without using a licensed real estate agent.  Off-market properties are not listed for sale on a multiple listing service.
  • The biggest thing that draws real estate investors to look for off-market deals is that there is no or limited competition from other investors.
  • The biggest hurdle that investors face when searching for off-market real estate deals is that they have to figure out how to find property owners who are willing to sell.
  • It is a lot of work to find off-market properties, and many investors find that investing passively through a commercial real estate syndication allows them to achieve their investment goals without the hassle and time commitment associated with finding off-market properties.

Get Instant Access to All of FNRP’s Real Estate Deals

One of the most important things about real estate investing is finding great deals before the competition. Real estate investors go to great lengths to uncover hidden opportunities, special situations, and any leads that might result in the ability to acquire property with less competition. Most investment property is purchased on-market using real estate agents, however, some savvy investors have had great success by finding off-market deals.

At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers and understand how to effectively source deals both on and off-market to find the best investment properties for our investors. If you are an Accredited Investor and would like to learn more about our current investment opportunities, click here.

What Does Off-Market Commercial Real Estate Mean?

Off-market commercial real estate (CRE) refers to the practice of buying or selling real estate properties without using a licensed real estate agent. Off-market opportunities can take on many forms including properties that are for sale by owner (FSBO), distressed properties that are better suited to off-market transactions, or real estate auctions where investors compete for properties (often foreclosures) against other bidders.

Why Properties Are Sold Off-Market

New commercial real estate investors often wonder why a property would be sold off-market if it can be sold on-market by a real estate professional. There are a few reasons for this.

First, the seller might not want to pay commission to a realtor for selling the property. Real estate agents charge the seller a commission, which is usually calculated as a percentage of the sales price of the property. A 6% commission on a $1M sale means that the seller pays the real estate agent $60,000.  Some sellers feel that they do not need to pay this commission in order to sell their property successfully.

Second, a distressed property might not be suitable for an on-market sale. For example, if there is a multifamily commercial property that has been badly neglected by the owner for many years, the property might be uninhabitable until the defects are addressed. Many lenders will not lend against a property that is in poor condition and is not usable. This makes the property a better candidate for an off-market sale where cash buyers or buyers backed by private lenders are common.

Third, properties that sell though special situations like foreclosure auctions or other alternative formats are considered off-market transactions. Some investors focus their investment strategy on these types of purchases, but it requires a lot of experience because the buyer is usually limited in how much due diligence they can do. For instance, foreclosures might not be accessible until after they are purchased.

On-Market vs Off-Market Properties

On-Market: The term “on-market” refers to properties that are listed on a multiple listing service. Investors who choose to search for on-market investment properties work with real estate agents. Realtors have access to the multiple listing service, which refers to many local databases of properties that are formally listed for sale by licensed realtors. There are several benefits of searching for on-market investment properties:

  • The multiple listing service is the one place where an investor can go to see plenty of listings in one place. Most investors find that the majority of properties listed for sale do not make for good investments, however, some investors choose to focus on finding on-market investment properties and have great success with it.
  • Buying on-market deals, whether residential real estate or commercial real estate, usually means that the investor will work with a licensed real estate agent. Realtors can help with the property search, negotiate on behalf of the buyer, and also provide guidance and advice during real estate transactions.

There also cons to searching for on-market deals:

  • The biggest drawback of looking for on-market deals is that a lot of other investors are also looking. There is actually even more competition because investors sometimes have to compete against potential owner-occupants in the case of residential real estate.
  • Investors are less likely to find distressed properties on the multiple listing services. Usually real estate agents focus on selling properties that appeal to the widest segment of buyers, so it makes sense for them to list properties that are in good condition. From an investor’s standpoint, these properties might require little upfront investment in capital improvements, but they are likely to come at a price premium.

Off-Market: The term “off-market” refers to properties that are not listed for sale on a multiple listing service. Investors who search for these properties usually do not work with a real estate agent to identify properties. Let’s look at some of the pros of searching for off-market deals.

  • The biggest thing that draws investors to look for off-market deals is that there is no or limited competition from other investors. Typically, when an investor finds an off-market deal it is because of the effort they have put into outreach, networking, and prospecting. While not impossible, it is less likely that another investor will focus on the same property compared to on-market listings that can receive bids from multiple buyers.
  • Investors who specialize in finding off-market properties are able to negotiate directly with the property owner. This can be an advantage for an experienced investor who is good at negotiating. These owners are not represented by a realtor and do not have a real estate professional negotiating on their behalf. Oftentimes, the savvy investor is able to negotiate advantageous terms.

There are some cons associated with searching for off-market properties.

  • The biggest hurdle that investors face when searching for off-market real estate deals is that they have to figure out how to find homeowners or off-market commercial property owners who are willing to sell. This can take a lot of time and money to do.
  • While an investor who is experienced in negotiating directly with sellers might thrive in this situation, a newer investor or someone who does not have strong negotiating skills might be at a disadvantage. In an off-market negotiation, potential buyers usually do not have real estate agents negotiating on their behalf.

How to Find Off-Market Property Deals

One of the nice things about focusing on off-market deals is that there are many different ways that an investor can go about finding them. Let’s look at a few.

Networking

The most successful investors are usually really good at networking with other players in the industry and in their local market. Generally speaking, there are two ways that investors network – in-person and online, usually through social media. Investors use networking events and social media to trade commercial real estate investing strategies, successes, failures, and most importantly, off-market deals. Craigslist and other online marketplaces are another way that investors can find off-market properties for sale and meet investors in their local markets.

Commercial Real Estate Brokers

Commercial real estate brokers specialize in helping commercial real estate investors buy and sell properties. They can assist with on-market deals, but many also choose to focus on off-market deals. One way they do this is by using a strategy called wholesaling. In the CRE world, wholesalers are middlemen who get a property under contract to buy, usually in an off-market transaction. Then they turn around, find a buyer, and put the same property under contract to be sold to the investor who will ultimately end up owning it. The wholesaler never actually takes possession of the property and only earns the difference between what they agreed to pay for the property and what they were able to sell it for.

The other way that commercial real estate brokers can help investors find off-market deals is by offering pocket listings, sometimes known as exclusives. Pocket listings are listings that brokers do not market through a multiple listing service. Instead, the broker markets the listing to investors in their professional network. The investors who benefit the most from off-market listings are those who have the best relationships with the broker and who have proven over time that they have the capital at their disposal to purchase properties with a high degree of certainty. The broker will typically market pocket listings to the most reliable investors first.

Direct Mail

Some investors choose to set up their own marketing campaigns to reach sellers in the markets where they want to buy property. One of the more popular marketing strategies is known as a direct mail campaign. Investors will find or create a list of properties and then send postcards or letters to the owners to express interest in purchasing the property. There are many ways to create lists of properties, including purchasing them from third-party list vendors. Regardless of how the list is created, it will often be based on public records, such as tax records, that include the owner’s mailing address. Some successful investors have large-scale direct mail campaigns that allow them to send thousands of postcards or letters every month. This can be an excellent way to meet potential sellers and acquire off-market properties.

Cold Calling

Another strategy for sourcing off-market properties is known as cold calling. Similar to direct mail, cold calling requires the investor to have a list of properties, owners, and each owner’s phone number. This allows the investor to call the owners and inquire about purchasing the property. Cold calling can work well if the investor is able to get the property owner on the phone. Because it takes a lot of time to call an entire list of property owners, some investors will hire staff to make calls and pass along strong leads to the investor for further outreach.

Auctions

Auctions can be a great way to purchase rental property at a discount. When a property sells at auction it has usually gone through a process known as foreclosure. This means that the previous owner was unable to make their monthly loan payments so the lender auctions off the property to recoup the debt owed to them. Auctions are held in-person or online, but either way, investors can attend and bid on properties to purchase.

There are a few things that investors need to know about auctions. First, when a property is purchased at auction, the buyer usually has to pay cash. In other words, investors can’t borrow money to buy a property at auction. Second, properties that are sold at auctions often can’t be seen beforehand. This makes it difficult to figure out what condition the property is in.

Travel the Area

Investors who want to invest in a particular city or town can source properties to purchase simply by traveling the area. Sometimes investors will target a particular area based on research they have done previously or because of information they received by word of mouth. Investors can drive, bike, or walk and look for properties that appear to be good off-market acquisition candidates. When the investor finds a property they are interested in, there are online tools that can help the investor to do what is known as skip tracing to find the owner’s contact information. From there, the investor can reach out to the owners and inquire about purchasing the property. Traveling the area can also be a great way to build lists for mailing and cold calling campaigns.

The Benefits of Finding Off-Market Properties

We’ve discussed some of the benefits of finding off-market properties. First, investors are drawn to off-market deals because there is no or limited competition from other investors. Second, investors who are strong negotiators can negotiate directly with the seller to get the best deal possible. Both of these benefits unlock the possibility of acquiring property below fair market value, which is what sets apart highly successful investors from the rest. Third, sometimes there is limited inventory on the multiple listing services, which means that investors have limited options available through on-market channels and end up fighting over the same properties, which drives up the price. Having the ability to find off-market properties can be beneficial during times where on-market inventory is smaller than usual.

Consider Investing Through a Real Estate Syndication Instead

Finding and investing in off-market deals can be very rewarding and lucrative when done diligently. That said, it is a lot of work to find off-market properties. Investors usually have to speak with many potential sellers and might end up looking at dozens of properties before finding one that is suitable to their investing objectives. Not every investor has the time or knowledge to find and buy off-market deals. An alternative is to invest in commercial real estate through a syndication.

A syndication is a commercial real estate deal structure that allows individual investors to purchase a fractional share of a commercial real estate asset.

In this structure, the deal leader or “syndicator” forms a corporation, LLC, or partnership and uses it to purchase a commercial real estate property. Then, they sell shares in the corporation, LLC or partnership to a group of investors whose combined capital is used to help finance the purchase of the property. Real estate syndications can be used for all commercial property types including multifamily apartment buildings, office, and retail properties.

There are several major benefits that come with investing in a syndication.

Passive income: First, by investing in a syndication as a limited partner, the investor can generate passive income. This means they earn income from the rents generated by the property. Without doing any additional work, the investor receives a check in the mail every month for their share of the profit.

Portfolio Diversification: Investing in syndications offers investors an easy way to diversify across multiple properties. Rather than putting all their capital into one property, as is often the case with off-market transactions, investors can buy into several syndications. If the performance of one of the syndicated properties does not meet expectations, the investor has allocated capital to two others that may perform better.

Tax Benefits: A syndicated investment comes with two very important tax benefits.

First, accounting rules allow property owners to take a certain amount of depreciation each year to account for the physical deterioration in a property’s condition. Since depreciation is a non-cash expense it lowers taxable income, but does not reduce the amount of cash available to real estate investors.

Second, if the syndication sells the property for a profit, they can defer capital gains taxes by reinvesting sales proceeds into a like-kind property using a transaction known as a 1031 Exchange.

Summary of Off-Market Commercial Real Estate Deals

Off-market deals refer to properties that are not listed for sale on a multiple listing service. Investors who search for these properties usually do not work with a real estate agent to find and purchase the properties. Instead, investors use one or more strategies to generate property leads and then negotiate directly with sellers to buy a property.

There are pros and cons to off-market deals that investors should be aware of before deciding to focus the time and effort necessary to be a successful off-market real estate investor. For investors who are looking for the benefits associated with real estate investing without the time commitment and hassle can opt to invest through commercial real estate syndications. These provide passive income as well as diversification and tax benefits.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We utilize our liquidity and decades of experience to find multi-tenanted, world-class investment opportunities for our partners.

If you are an Accredited Investor and want to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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