Four Keys to Sourcing Good Deal Flow in Commercial Real Estate
Four Keys to Sourcing Good Deal Flow in Commercial Real Estate
Updated on September 14, 2020
Finding the most profitable investment opportunities is not a result of luck. Fundamentally, it is a function of hard work, focus, and voluminous deal flow. By screening a high number of deals against a defined set of investment criteria, the best candidates can be identified and acquired at a favorable price.
But, generating strong deal flow is not easy. It requires a significant investment of time and resources to develop the network of bankers, owners, brokers, and real estate professionals that it takes to build a referral machine. In our experience, we have found that there are four keys to developing strong deal flow.
Key #1: Relationships
Commercial real estate brokers are the gatekeepers for many deals. They tend to have long standing relationships with property owners andcanact as a matchmaker between them and buyers with capital to invest. Developing a wide network of broker relationships is a critical element in the effort to build strong deal flow, but just having a relationship may not be enough. It is equally important to build credibility with each broker and to demonstrate the financial capacity to close on deals that they present. Doing so will encourage them to present their best deals early and often.
In our own case, we actively seek out top brokers in our target markets and like to provide them with our investment criteria while highlighting our ability to close. When they present a deal, we seek to demonstrate our appreciation by analyzing it quickly and communicating next steps clearly. We have found that this type of reciprocity is the key to developing a mutually beneficial relationship over the long term.
But, brokers aren’t the only deal gatekeepers. Owners, bankers, insurance agents, property managers, and fellow investors are also potential deal referral sources. When they come across a deal that meets our criteria, we want them to think of us. Again, we actively seek to build relationships with these individuals based on honesty, integrity, reciprocity, and clear communication.
Key #2: Clear Investment Criteria
While getting a high volume of deal referrals is desirable, it isn’t necessarily preferable. Getting a high volume of referrals for deals that match preferred investment criteria is better and can reduce the amount of time spent analyzing deals that turn out to be dead ends. While building relationships with potential referral sources, it is important to communicate investment preferences clearly and frequently. Doing so allows them to act as a pre-screen of sorts to curate the deals that best fit the criteria provided.
In our case, we prefer NNN leased properties, grocery store anchored shopping centers and properties with service-based businesses in target markets. We communicate these preferences to brokers, owners, lenders, and property managers so that they know to present deals that meet these criteria. This way, we know that the deals that they present already meet our basic criteria so we can spend time focusing on tenant and financial analysis.
Key #3: A Methodical and Data Driven Approach
The key to being able to quickly filter through a high volume of deals is to take a methodical and data driven approach to analysis. A methodical system should be in place with clear target ranges for key investment metrics.
For example, if we require a minimum of 15% IRR, 2.5x Equity Multiple, and tenants with a long history of on time rental payments, we can quickly eliminate deals that don’t meet these targets and focus on deeper analysis for the ones that do.
Key #4: Multiple Offers
Competition for the best deals means that offers aren’t always accepted. So, it is a best practice to make offers on multiple properties at prices that provide the best chance of achieving return targets. This is possible because strong deal flow means that there is an opportunity to analyze many deals to find the handful that have the most potential. If offers are made on multiple properties, the odds increase that at least one of them will be accepted.
As a general rule of thumb, we may look at 100 deals to find 10 that meet all of our criteria. From those 10, we may make 3-5 offers in the hope that one of them is accepted. While this may seem like a lot of work, it has allowed us to develop a rigorous screening process and provided us with the luxury of only pursuing the properties that have the best chance of a strong return for our investors.
Interested in Learning More
One way to think about the connection between deal flow and property acquisitions is to imagine a funnel where deals go into the “top” of the funnel and are subjected to a variety of screens and criteria. Only the most promising deals emerge from the “bottom” of the funnel and those are the ones that are pursued with the most vigor.
For investors looking to grow and scale their property portfolio, the key to finding the best deals is to pour the maximum number of deals into the “top of the funnel” and to use a data driven approach to filter through them. And, the key to getting the most deals into the “top of the funnel” is to build relationships and communicate investment criteria clearly.
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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