This article is part of our guide on passive investing in multifamily via syndication, available here.
Acquisitions are a fundamental piece of business and real estate investing. Simply put, an acquisition refers to when a company invests in another company’s shares to be able to control the latter. While many companies and individual real estate investors can buy company shares, an acquisition happens when a company buys over 50% of the company’s shares.
Today’s blog post will look at real estate acquisitions and why your investment firm needs an acquisitions team. Let’s start with the basics:
What is Real Estate Acquisitions?
From the general description, we can say that real estate acquisitions refer to when real estate investment firms buy new property or a portfolio of properties in the real estate market. While many real estate developers focus on acquiring land to build from the ground up, real estate acquisition professionals pay attention to an already existing property, whether stabilized or unstabilized.
This is because in real estate acquisitions, we’re able to buy property below its replacement cost and without all the risks associated with building from the ground up. Any property can be renovated, rented, flipped, and sold to make profits.
As such, real estate acquisition teams typically check the property’s mortgage situation, outstanding debts, or anything else that can help the team negotiate a purchase or the best terms possible.
Why Should Every Real Estate Investing Firm Have an Acquisitions Team?
Many life insurance companies, private equity and public equity companies, pension funds, family offices, and many others have real estate acquisition teams on their payroll. So, why should you also have an acquisition team in your firm?
Real estate acquisition teams perform crucial functions during the acquisition process. Simply put, the team is in charge of spotting lucrative potential investments, conducting market research, and negotiating with the seller. The team is also tasked with presenting the potential investment to the firm to show them the possible value creation with the subject acquisition.
Items the Acquisitions Team is In-Charge Of
Most large companies have a team of real estate acquisition professionals to scrutinize investment opportunities brought to them by sponsors or buy outright properties for their own portfolios.
When it comes to the functions of the acquisitions team, there are four vital aspects:
- Deal sourcing
- Preliminary underwriting
- Due diligence
Each team is responsible for the listed functions, so let’s look at each aspect individually:
One of the primary functions of a real estate acquisitions team is implementing different strategies to submit letters of intent to motivated sellers.
It’s important to note that in most cases, these deals will be distressed in one way or another. This means that the investment company will have to set aside a budget for major repairs and renovations, title clearance, and other functions needed to bring the property to optimum profitability. It’s up to the acquisitions team to account for these factors to establish a deal’s feasibility.
Real estate acquisition teams need to be good at marketing since that’s how they reach out to motivated sellers and get their responses.
Here are some common deal-sourcing strategies used by acquisition professionals worldwide.
- Online Marketing
- Direct mail campaigns
- Text messages
- Ringless voicemails
- Pre-foreclosures, foreclosures, short-sales, and bank-owned properties
- Networking with real estate brokers and agents
Preliminary underwriting is an essential process to determine the deal’s level of risk and reward. For starters, underwriting determines a property’s potential return on investment and cash flows. An acquisition team also uses this process to establish the likelihood of attaining the calculated cash flows. These factors help an investment team establish the risk in the investment.
Preliminary underwriting helps the company decide whether to continue with the deal or consider other properties. The acquisitions team estimates the expected cash flow within a specific period, usually the timeline in which the company intends to hold the investment property.
The core factors that go into the preliminary underwriting process include:
- Estimated monthly rent for the property until the current leases expire
- Current tenants’ lease expirations along the hold period
- Probability of tenants renewing their leases after expiration
- Expected costs for getting new tenants or renewing expired leases
- Conservative stress testing on vacancies, concessions, and delinquency from the existing tenants base, and future tenant base
Once the team has calculated the expected returns, expenses and mortgage repayments (if the company is obtaining a mortgage for the purchase), the team can then test the numbers under different scenarios to see how the property is likely to perform if there are any market shifts.
Once the team is satisfied with the preliminary underwriting results, they can conduct due diligence. This is where they scrutinize the deal further to uncover any hidden issues that may prevent the company from making the expected returns.
In short, due diligence is the process of analyzing a property to establish whether it’s going to be profitable and ensure the investor has a seamless experience during the investment and holding period.
Various acquisitions teams use different due diligence strategies. However, the two most common areas of due diligence are physical due diligence and financial due diligence.
This includes hiring professional property inspection reports and environmental phase 1 and 2 reports to study the feasibility of the soil where the property sites are on. Physically walking the units to analyze it’s condition, scoping out the plumbing to check for any issues, lease audits to verify the validity of the tenant base, and much more.
If there are any issues, the team may talk to different contractors and local vendors to understand how much work is needed to repair the property and how much it’s going to cost. The team should also check the local laws and regulations to ensure they don’t get into legal trouble depending on the rental strategy they intend to pursue.
The final process for the team to complete once they’re completely satisfied with the property is closing the deal. This is where the property purchase is completed after working out the terms of the deal.
In most cases, the transaction is handled by a closing agent, such as a real estate attorney or title company. The closing agent may conduct further due diligence on the title to ensure the title has no issues. They may also obtain a title insurance policy that could cover any liabilities if they missed an issue.
The real estate investment company may hire a transaction coordinator to supervise the closing process. However, this function typically falls on the acquisitions team manager or department.
Frequently Asked Questions About Acquisition Definition Real Estate
Acquisition cost in residential real estate refers to the amount an investment company spends to acquire a property. The fee includes all expenses from when the acquisition process started to the end, including attorney’s fees, inspection expenses, credit reports, title insurance, property survey, mortgage application fees and taxes, and mortgage insurance.
Real estate acquisition refers to acquiring properties in the market. On the other hand, a disposition is liquidating, selling, or disposing of the property assets to have money. In short, a disposition is an antonym for acquisition.
Acquisition in commercial real estate refers to purchasing existing commercial properties to renovate, rent, operate, or sell them for profit. Commercial real estate refers to land or buildings that are non-residential. Most common types of commercial real estate include shopping malls, office buildings, and storage facilities and warehouses.
Acquisition Real Estate Definition - Conclusion
Real estate acquisitions refer to when an investment company purchases existing properties, renovates them to fit market standards, then rents them and eventually sells them for profit. Real estate acquisition teams are tasked with deal sourcing, preliminary underwriting, conducting due diligence, and eventually closing the deal.
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