Why Didn't Your Multifamily Property Sell?

Your Multifamily Property Listing Didn't Sell. Why?

Every day, owners of duplexes, quads, and apartment complexes are trying to sell their investment properties. Many result in successful sales and profits. Others are not so lucky. Why not? What separates successful sales results from the others?

There could be many possible reasons why a multifamily property didn't sell. Some may be obvious; others not so much. Let's explore several of the mistakes sellers can make in attempting to sell their multifamily property.

Shifting Market Dynamics

Let's be honest. The last two years or so have been one of the strongest seller's markets in memory. A seller could basically put any price they wanted on a multifamily property, sit back, and watch the offers roll in. Often times, even receiving full price cash offers.

Then January 2022 arrived and interest rates began the steady climb to 7%. In the beginning, it had little if any real impact on buyers. But sure enough, eventually, buyers began to take notice. As with all things real estate investing, interest rates began effecting debt payments, financing approvals, and annual cash flow. Buyers once again had a legitimate leg to stand on in negotiations with sellers. In fact, our most popular article for the year was on this very topic (Selling Investment Real Estate While Interest Rates Increase (purvisre.com)).

Another way a shifting market can effect selling multifamily properties is by way of shifting local or state conditions. Rent controls, increased conveyance taxes (Los Angeles, California, Proposition ULA, Tax on $5 Million House Sales Initiative (November 2022) - Ballotpedia), loss of a large regional employer or a recession can directly impact the value of your property during a sale. If you do not adjust and act accordingly, you'll be left behind by the prevailing market.

Inadequate Financial Metrics

The twenty-five unit property across the street sold last month for $75,000 per unit. Why are you only receiving offers at $45,000 per unit? How infuriating!

The reason could simply be the financial metrics of your multifamily property don't support anything greater. If the property is significantly below market rents, lower than expected repairs & maintenance, unexplainable inconsistencies, higher than market vacancy, account for large amount of bad debt, or the management fees consume all profits, this will absolutely affect the price a buyer will pay. It's something most sellers don't want to hear, but it's best to get it over with sooner than later.

If debt financing is being used to consummate the sale, strong financial reporting is even more vital. As a commercial banker for more than a decade, I can speak from direct experience to this. A banker, or worse yet an underwriter, won't concern themselves with the "potential" upside of a property if the financials are garbage. They likely only care about current and historical debt service coverage ratios (DSCR). I won't even tell you what we used to call outrageously unrealistic proformas!

Deferred Capital Expenditures

So you've priced the property competitively for the financials and the market. Yet, it still didn't attract suitable offers you were willing to entertain. Why?

Did you take into consideration the condition of the property?

As individuals, we all have the same bias. Everything we own is worth what we say it is while someone else's is overpriced. If you haven't invested in the condition of your multifamily property you're setting yourself up for disappointment. Capital expenditures (capex) are a significant factor in accurately determining the value of investment properties. Poor foundations, old worn out windows, plumbing or electrical issues, a large portion of units needing to be updated, and roofs needing replacement all fall into the deferred capex category.

There is certainly a class of investors that seek out value add properties. However, they are not in the habit of overpaying for the privilege of correcting what you didn't maintain. They expect steep discounts and the rewards associated with the risks of taking on such a property.

Lesson: If you want top, market price you'll need to consistently invest in the property. This will lessen the deferred capex burden and aid in maximizing sales value.

You Picked The Wrong Agent

This may sound self serving. And perhaps it is.

I am a Commercial Realtor® after all!

If you have everything above in order, you likely chose your agent poorly. I know this will anger many in my profession, but it's absolutely true. Real estate niches are important to consider when selecting your real estate agent. I am probably one of the last Realtors® you would want to list your five hundred acres of development land. My team is built for, among other niches, helping clients buy and sell investment properties.

Think of it this way. If you needed knee surgery, would you make an appointment with an orthopedic surgeon or a cardiologist? They're both doctors. Oh, so you do prefer someone with the requisite knowledge and experience in your area of need.

In order to effectively sell multifamily investment properties, the Realtor® should specialize in this niche. They should be highly experienced with understanding financial analysis along with statewide and national trends in the asset class that affect values. A deep, vetted database of multifamily specific buyers is an absolute must. A multifamily specific marketing plan that is constantly adjusted for maximum results should always be employed. Simply inputting the property into whatever listing platform and waiting for results should never be the plan. Your agent should be accustomed to working directly with real estate investors and the mentality it takes to overcome the inevitable objections. Lastly, don't be just a cog in their sales figures. Many large commercial brokerages will count you merely as a number amongst hundreds of properties on the way to meeting their goals; not yours!

Do you really want to be a number to a faceless corporation? Pick a specialist that can dedicate the necessary resources and attention to the assignment in order to best meet your end goals.

So Why Didn't It Sell?

As you can see, there are a myriad of reasons why your multifamily property didn't sell. Only you truly know the answer. However, odds are it's one of the topics we've discussed. There is certainly at least one buyer for every investment property. In the end, price is always a major factor in all real estate transactions. If you've priced your investment property in a way that's supported by the market, condition, and financial health of the property, you should certainly ask why your multifamily property hasn't sold.