Unsolicited Offers To Purchase Real Estate
Has someone contacted you with an unsolicited offer to purchase your real estate?
Maybe you recently opened a probate estate, or inherited the property? You’re not alone. More and more, Personal Representatives, the elderly or recent beneficiaries who inherited real property are routinely receiving unsolicited offers to purchase real estate. Often in the form of a letter or a cold call, these offers inquire if you have plans for the real estate or if you would be interested in selling. While some of these offer are real, most are not and come at significant peril to the seller. Real estate attorneys call this type of offer, an unsolicited offer.
Being the recipient of such an offer is often flattering and can be attractive. It often provides a seemingly easy solution on what to do with an inherited piece of real estate or a building that may require some repairs or improvements. If the buyer is a “developer” there might be a promise of participating in the real development of the property. However, in most cases, it’s best to understand the nature of these offers in general and have a plan in place to proceed.
The Battle Field
When faced with an unsolicited offer, we work with clients through a structured response.
- Understand Buyer Motivations
- Identify Pitfalls
- Develop a Game Plan
We’ll cover this in detail below.
Understanding Buyer Motivations
Off-Market Deals. Savvy buyers are always hunting for a better than fair deal. These buyers often seek to take advantage of the seller’s lack of information to get a better price for a piece of real estate than if it were listed for sale on the open market. It’s no secret that the best way to do this is to put the property under contract before a third party can make an offer on it, thus eliminating the likelihood that they will overpay for a deal. In most cases, these buyers are experienced, and they know a secret that we do too: a piece of real estate that is listed on the market with a broker is going to command a premium over a piece of real estate that is not. One of the major reasons to hire a broker, obviously, is to get the best price for your real estate. So, when a buyer is reaching out to you directly and seeking to source an off-market deal, it’s often a sure sign that they are a savvy player.
Deal Pipeline. Buyers like this frequently “kick the tires” on many deals – often dozens- to find a transaction. Case in point: we recently hosted an event with several real estate investors. One indicated that they were working off a pool of approximately 50 properties in the Washington DC area. In the past year, they have had conversations with several hundred. Of those, conversations matured with approximately two dozen to the point that they exchanged financials and discussed an LOI. Finally, they issued LOI’s on five with the intent of closing one. That’s some pipeline, right? You can bet that they aren’t going through this process to overpay on a deal.
Bottom-line: an off-market deal is nearly always attractive to a buyer. They can slow the pace of the transaction, have more leverage in negotiations, and aren’t negotiating against other bidders in a deal process. Conversely, all the advantages to the buyer are equally disadvantageous to the seller.
Let’s assume you choose to proceed ahead with a single unsolicited buyer. What’s likely to happen?
Re-pricing and Leverage. A real estate owner who prematurely commits to a single buyer forfeits nearly all negotiating power to that buyer. Oftentimes as a seller, receiving a letter of intent feels like the most important part of the deal. However, the only binding provision of the letter is exclusivity. This prohibits the seller from sharing information with, soliciting, or entertaining any other offer during the exclusivity period. Signing that letter of intent formally passes negotiating leverage to the buyer. Once under a standstill, savvy buyers will often leave no stone unturned in diligence, resulting in “findings.” What’s finding? It’s an opportunity for the buyer to re-price the deal otherwise known as “second tier negotiations”. The buyer will have gotten the seller so committed to the deal that oftentimes they feel it is easier to proceed on the re-priced terms rather than to back out of the deal. This is bad for the seller.
Confidentiality. Some owners assume that because there is only a single buyer, it’s better from a confidentiality perspective. Not the case. It’s easy to assume that buyers are a weak point in terms of confidentiality. From our experience, the weak link is often internal to the company. As employees start to think a deal is in the works, the word can get out. Thus, working directly with a single buyer isn’t a panacea for confidentiality issues.
So how do we respond to an unsolicited offer to sell real estate? First, take a breather. There’s truly no need to rush. Second, start working through a deliberate game plan.
Understand Valuation. If you haven’t gone through a valuation process recently, now is the time to engage in a valuation. We frequently have discussions with owners who feel comfortable that they “know their value.” Twenty years of experience suggest that that is rarely the case. As discussed above, there is usually an asymmetry of knowledge between the buyer and seller. So do you homework. They likely do understand value…. And they aren’t having a discussion with the intent of overpaying. Going through a valuation:
- Get an Appraisal. Having a licensed appraiser appraise your property can give you a reliable indication of what your property is worth.
- Contact a Real Estate Agent. Communicate with a real estate agent and get a comparative market analysis. This will provide you with invaluable information on what the agent thinks your property is worth.
- Set Realistic Expectations. At the foundation of every good valuation is an assessment of the true value of the real estate. The outcome of a valuation obviously answers “what’s it worth?” But it also should serve as a roadmap for what attributes are driving the value of your real estate and what are impediments. If a sale isn’t in the cards, then using valuation as the roadmap for value growth is the obvious next step.
In most cases, an unsolicited offer to purchase real estate is only good for one party: the buyer. There are countless advantages from their side of the table, and truly very few on yours.