Sourcing and Underwriting Real Estate Deals
Consistently sourcing real estate deals takes an enormous amount of effort, systemization, and dedication. For that reason, deal sourcing is a practice that most real estate investors don’t even attempt.
Even sourcing small deals can be difficult, but sourcing and underwriting large-scale deals for an REIG (Real Estate Investment Group) has its very particular set of challenges.
Let’s take a look at who sources real estate deals, how to find and underwrite properties, and the benefits of sourcing as opposed to simply investing in deals.
Who Sources Real Estate Deals? GP vs. LP
We touched on this question in our General Partner vs. Limited Partner blog post. General Partners (GPs) are real estate professionals, and they typically have the resources, network, and expertise to find deals, underwrite them, and execute the business plan for the property. However, they need capital from outside parties to acquire investment property opportunities they source. Limited Partners (LPs) typically don’t have the existing real estate infrastructure in place to consistently source deals. They partner with GPs by providing the necessary capital to acquire a property. A GP will approach an LP (or many LPs, in most cases), with an investment opportunity on a property that the GP has sourced. LPs are usually interested in real estate investing, but they need GPs to find the right deals to invest in. It’s a mutually beneficial pairing.
How GPs Source Deals
Successful real estate General Partners don’t limit themselves to one method for sourcing deals. They combine a number of different techniques to achieve steady deal flow and consistent sourcing opportunities. Then, they evaluate all the possibilities and select the deals with the best ROI potential.
How can you source deals like a seasoned GP? Stick to the following fundamentals, and you’ll be on the right track.
Establish Investment Criteria
Before you start scouring the market for deals, you need to develop a strategy. You don’t want a scattershot approach, which leads to wasting time investigating undesirable investments. You want to focus your attention on the right deals. That means establishing criteria based on certain parameters such as:
- Purchase price
- Class/building type
- Additional investment needed (repairs, renovations, marketing, etc.)
For instance, recent Deal Makers Podcast guest Levi Benkert searches for industrial properties in major Texas markets (Houston, Dallas, Austin, San Antonio).
Your criteria should be based on your current market knowledge, professional expertise, and available resources.
Foster Industry Relationships
Real estate is a business based on relationships. And to source deals, you need to actively establish and maintain relationships in your industry. The most logical place to start is with brokers. You want to focus on the top brokers in your target markets. Once you inform them about your investment criteria, they can let you know when applicable deals come on the market.
The best brokers often have a number of GPs competing for their attention, so showing professionalism and credibility is essential. Courting them with gifts and nice meals won’t hurt either.
While brokers are a great starting point, you’ll want to build relationships across all facets of your market. This can include property managers, bankers, other investors, and real estate groups. The more people that know your criteria and are willing to refer potential deals, the better.
Look for Off-Market Deals
Establishing great relationships can naturally lead to finding off-market deals — or deals that aren’t actively on listing services. Why are off-market deals valuable? Well, because they aren’t listed, there are fewer investors competing for them. That leads to early access, more negotiating power, and potentially lower prices and higher profits.
Finding off-market deals on a consistent basis usually requires a system of inbound and outbound marketing. This system could consist of:
- Direct mail – sending flyers and packages to potential sellers or referral sources
- Cold calling – reaching out directly to owners to gauge their interest in selling
- Advertising – buying ads to encourage inbound offers
- Contacting referrals – proactively reaching out to referral sources at regular intervals to gauge market activity
When you set up a system with multiple sources to find off-market deals, you should always have multiple options from which to choose.
Perhaps most importantly, you need to be persistent in your search for quality opportunities. This is especially true when you’re first establishing your general partnership and investment criteria. It’s tempting to settle for the first decent deal you find, but you always want to make sure you’re buying with a rock-solid plan for a substantial ROI.
When you continuously show you can get strong returns for your investors and deliver on your business plan, more and more deals will start coming your way.
Where Does Underwriting Fit In?
Underwriting real estate deals involve analyzing the investment and evaluating its potential risks and rewards. This process typically requires a financial model or pro forma that takes into account factors like the initial investment, the property’s expenses, the net operating income, and projected cash flow.
The financial model will usually be part of your presentation to investors, so you’ll want to make sure your numbers are accurate. An experienced investment analyst or broker can help you with the underwriting process if that’s not an area where you already have expertise. This is yet another example of the benefit of building strong industry relationships.
Sourcing Can Be Your “Secret Sauce”
Sourcing deals is a crucial part of any GPs business model. And if you can develop a sound strategy for deal flow, it can be your secret sauce to a successful GP real estate business. Agora works with GPs to make all aspects of real estate operations and investor relations automated and easier. To learn more about how Agora helps accelerate your growth and exceed investors’ expectations, contact us today.