A Good Deal Is Hard to Find
A crucial factor in adding value to any community is buying right in the first place. Observers stress that it’s the price you pay at the beginning that always determines your return in the end. “The obvious answer is to find the worst property in the best area,” says David Baird, national director of multifamily for Irvine, Calif.-based broker Sperry Van Ness. “But,” he acknowledges, “that’s easier said than done.” That’s especially true, observers say, as a seemingly limitless number of buyers competes for a finite number of properties.
Given that environment, buyers who want to remain active are trying to sniff out off-market or unlisted deals and approach a seller first. “You’ve got to find a very aggressive broker who is willing to go out there, dig up the deals, and then get in touch with the owner one-on-one to talk to them about moving their property,” Baird says. Other firms try to identify deals even before brokers get wind of them. “Instead of going through the normal broker channels, we’ll plumb our own contacts to get knowledge of a deal before it gets to the general market,” says McClure at A.F. Evans. Adds Rick Bell, A.F. Evans’s vice president of acquisitions, “I’m not sure I want to be the guy who wins the bid against 15 other offers.” The firm also looks for deals that may have fallen through recently and then pitches its track record of closing transactions with the shell-shocked seller.
‘We Like Big Headaches’
Once a deal is struck, operators use a variety of strategies to increase an asset’s value. In New York City, Ioannis “John” Danalis, a principal at Blue Star Apartments, an owner and third-party manager of more than 40 properties in the city, has a two-pronged approach. First, Danalis looks for buildings with major problems, such as leaky roofs and malfunctioning boilers that the firm can fix. Then, he’ll audit rent rolls and identify any illegal sublets that may be present, a common scenario in his market.
“We like big headaches,” says Danalis. “The bigger the headache is, the more value it has to us.” For instance, the firm recently acquired two neighboring buildings in Greenwich Village for $5.25 million. It spent a total of $250,000 to fix the roofs, clean and repair the hallways, and do major kitchen and bath upgrades to internal units. With the help of a private investigator, it then identified six illegal sublets in the building and took action to evict those tenants. Replacing those residents with new renters, it was then able to boost rents from $800 to $2,200 per month. Then, just eight months later, Danalis and Blue Star were set to close a deal and sell the buildings for more than $8 million, a 45 percent return in less than a year. “Major capital improvements are how we make our living,” Danalis says. “You upgrade the building, charge it to the tenant, and increase your rent rolls.”
