For those that aren’t familiar, an offering memorandum or OM is a marketing package put together by a brokerage company that is used to sell a property on behalf of the seller. The purpose of an OM is to provide detailed information to prospective buyers about the property, location, and market. Brokers do a fantastic job putting together extremely professional OMs which include robust market data as well as summarized property data and financials. Additionally, brokers often forecast the optimal business plan for the future buyer to pursue.
However, there are some key things that are almost always left out of an offering memorandum yet are super important for a buyer to know. The first one is very simple but potentially the most important thing which will save you lots of time when evaluating deals: the pricing guidance. Brokers don’t like to include pricing guidance in OMs because it makes the “strike” price public and makes it more difficult to change it later. Additionally, it is better to keep the strike price away from county assessors since they can use that data to appraise the property for a higher value than it otherwise would for tax purposes.
The first thing we do is ask for pricing guidance since that allows us to quickly understand what value the seller is seeking and whether or not it is in line with recent trades or where we believe a good price is. If the pricing guidance sounds pie in the sky, then the seller may not be a motivated seller and is instead testing the market to see if anyone is willing to come in and pay a crazy price. Those are the types of deals that we don’t like to spend a lot of time working on since it is unlikely that we will ever be able to make a deal with the seller.
This idea leads me to the next point, which is arguably the most important information yet is pretty much always omitted from offering memorandums: the “seller’s story”. We place a lot of emphasis on the seller’s story and factor it into our decision making as to how much we want to pursue a given acquisition. Specifically, the seller’s story is a series of questions: Who is the seller? Why are they selling? When did they buy the asset? How much did they pay for it? What was their business plan for the property when they bought it? How much did they invest into the asset?
Asking these types of questions can help uncover whether there is strong potential value in the property. If the seller is selling the property for a loss, it doesn’t guarantee that it is a good deal, but it definitely means something. Similarly, it is usually a good sign if the seller has owned the property for a long time but there are situations where money can be made by buying from a short-term owner. Understanding this entire picture helps identify a deal with a truly great story such as a distressed seller or an unsophisticated owner.
The last two things that are rarely in OMs that are important to have a good handle on is delinquency and crime. The trouble with delinquency is it isn’t reflected on a trailing 12-month financial statement (T12) which is most commonly shared to prospective buyers. This is because delinquency is a balance sheet item which sits in accounts receivables. Only when delinquency is written off as bad debt does it become reflected on the T12. This means that a seller could be holding a lot of delinquency on their balance sheet and holding off reflecting this never-tobe-collected rent on their P&L. A simple solution is to ask for a delinquency or collections report for the current 2 and/or previous month which will actually show collected rents. Particularly in this uncertain time due to COVID, collections are a very hot topic.
Lastly, as mentioned above, is crime. Crime issues are rarely discussed in OMs since obviously the seller and the broker want to portray the property in the best light possible. However, it is wise to understand if there are any existing crime issues at the property as this may affect the viability or speed at which you can implement your business plan. Crime can be checked out by doing Google searches as well as utilizing online crime reports. Additionally, you can request police records from the local precinct as well as have an honest conversation with the manager on site or even a maintenance employee or tenant on the property.
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About Lone Star
Capital Lone Star Capital is a real estate investment firm focused on underperforming multifamily properties in Texas and surrounding states. Lone Star creates core-plus and value-add opportunities that deliver superior risk-adjusted returns by implementing moderate to extensive renovations, improving management, and designing creative capital solutions. Lone Star owns over 1,500 units worth nearly $100M. Click through to view our company presentation here.
About the Author
Robert Beardsley oversees acquisitions and capital markets for the firm and has acquired over $100M of multifamily real estate. He has evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles about underwriting, deal structures, and capital markets and hosts the Capital Spotlight podcast, which is focused on interviewing institutional investors. Robert also helps run Greenoaks Capital, his family’s real estate investment and advisory firm. Robert grew up in Silicon Valley and currently lives in New York City, where he enjoys reading nonfiction, traveling, working out, meditating, playing golf and piano.