Batting a Thousand Fortunately, Sterling hasn’t had to tell any investors that it lost money on a deal. In that respect, it’s batting a thousand. In baseball, success, even for good hitters, comes much less frequently. If you get a hit one-third of the times you’re at bat (hitting .333), you’ll be a perennial all-star.
Sterling’s key to hitting for a high average: a conservative approach. It manifests itself in a number of ways, but it starts with financing. Sterling leverages anywhere from 60 percent to 75 percent of a deal and stays away from adjustable-rate mortgages, preferring to lock properties on fixed-rates instead. “Other players rely more on floating rate financing, which can produce more short-term, but may prove to be much riskier,” Frischer says.
Sterling Equities bought Sunshadow in Casselberry, Fla., in March 2001. It used the joint venture system on the 384-unit property, partnering with ConAm, a developer, owner, and manager of multifamily properties in San Diego. In the long run, this gives Sterling what may be its most important asset: time. “Everyone’s says it’s location, location, location in real estate,” Osterman says. “It’s really timing, timing, and timing. We don’t want to be in a position where we’re forced to sell because we got floating debt that we did at 2 or 3 percent.”
Yet there’s a downside to this strategy. If Sterling played the market right on adjustable-rate loans, it would pay less in debt service costs each month, leaving more money in its coffers. But company leaders say that’s a small price to pay for the security of choosing the security of fixed-rate financing. “We will lose some money, but it’s OK,” Katz says. “We will still make enough to make everyone happy.”
Laser-Like Accuracy Late in a tied baseball game, a runner who successfully takes an extra base off a hit can devastate the team in the field. The best way to keep this from happening is to have outfielders with strong, accurate arms, discouraging base runners from becoming aggressive and putting your team at risk.
When Sterling looks for multifamily properties, it also wants to limit risk. It does this by zeroing in on profitable properties the same way an outfielder would throw out a base runner trying to take an extra base. Sterling utilizes a number of resources across the country to find properties. It first relies on its regional offices, located in St. Louis, Houston, and Boca Raton, Fla. Sterling’s presence in these local markets also allows it to develop relationships with joint venture partners, other owners, and brokers.
It also possesses the advantages of being involved in different real estate sectors. “If you have office, you will see residential properties and vice versa,” Osterman says. “You’re going to know that market and understand its demographics and where it’s going.”
Sterling sorts through 500 properties a year, buying 10 or 15 after putting them through a rigorous evaluation. The most important question that gets asked (and answered): “What if?” as it applies to the area’s job market and other factors. “A property is torn apart like you can’t imagine,” says Lee Harris, president of NAI Cohen/Esrey Real Estate Services Inc. in Kansas City, a longtime manager and joint venture partner with Sterling. “A lot of eyes look at those numbers. Rather than make the numbers fit the deal, they look at the worst-case scenario.”
It represents yet another example of Sterling’s conservative approach. “The penchant for managing risk can cause you to pass on good deals,” Harris admits. “As a result, sometimes we’ll beat a deal to death and miss out. But I’d still rather err that way than do a bad deal and pay for it later.”
