02 Apr2013

Picking the Wrong Buyer (Kyle Stevenson, Hunter Hotel Advisors)

"Kyle, we need to maximize our proceeds on this hotel. Why wouldn't we pick the highest bidder?" Those words ring in my head over and over during this difficult market. In times of distress many owners need every dollar possible from their hotel disposition. Even in "non-distressed" situations, sellers are often tempted to reach for every dollar.


Unfortunately, this can be a critical mistake.  In a buyer's market, between a meeting of the minds and a successful closing, many things can occur along the way to crater a deal. Let's go over some of the causes of this problem and how you can avoid it.  


When Highest Isn't Best?


Buyer Mirages

A lot of people aspire to be in the hotel business. Sometimes outside market entrants see this as an opportunity, and in order to win the deal in a competitive environment, these buyers are willing to offer more than the rest of the buyers.


These buyers will put a property under contract with sincere intentions of closing on the hotel. During the diligence period, however, such variables as a lack of sophistication and buyer's remorse, often appear with every new piece of information. The diligence process becomes a drawn out opportunity to second-guess their decision.



Another form of price adjustment occurs when buyers discover a problem during the diligence process and request a price reduction. With surprising frequency, the amount of reduction moves the price down to the rest of the offers received on the property.


Inability to Finance

Sometimes buyers are unable to obtain financing and back out of their highest bid entirely. This can be a variation of the first two examples cited, but particularly with under-performing properties, it can happen to experienced buyers with strong equity. The difficulty is most lenders refuse to process a loan application without a signed contract before they start.


Why do sellers expose themselves to these transaction risks?  "Kyle, we know the buyer may not be able to perform, but their price is so much higher. We owe it to our shareholders/partners/family members to give it a try."  The hope of the extra dollars is too strong to resist. All too often, however, the process crashes.  Often this happens around the time the deposit becomes non-refundable. 


What Now?

When the dream price collapses and returns to market values, sellers often attempt to go back to the other bidders in hopes of a backup offer.  Often, while the seller is chasing the dream, the other buyers move on. Even if the buyers are still interested in the property, their backup offers will likely be lower. They are often reluctant to accept a backup position since they know something went wrong in the primary deal. Now, the seller is watching the value of their property decline with every step towards the market.


In a buyer's market, buyers want to find the bottom. Since no one NEEDS to own a hotel, what is wrong with negotiating tougher with the seller?  One candid and brutal buyer told me, "I want to transact at the price where the seller squeals like a stuck pig, and then I will offer 10% less." While not a fun scenario for a seller, the buyer thinks saving a million dollars or more is worth aggravating the seller. 


How To Prevent This

In a buyer's market, sellers can protect their values by relying on a professional broker who can see through the mirages and retraders. By conducting a broad marketing campaign with wide exposure to the market, a seasoned broker can weed out these false high bids and keep the process honest.


When experienced capable bidders fall in a tight range of offers, that range is a clear indication of the market value. One of our most active sellers said to me, "we are finding that the first round of offers is always the best." Savvy sellers listen to the market and their advisors, and certainty of close is an important consideration.  While some sellers are tempted to require non-refundable deposits at signing, this can limit the pool of buyers and reduce the values.


All cash buyers know they have an advantage over other buyers who need to study the opportunity so they factor that into their offers.  Recently, we have even seen buyers who default on these deposits when a better opportunity came along.


Knowing the buyer, seeing their proof of funds, and pre-qualifying them with a lender, are all important steps you and your broker can take to protect your time and your property value. 



We all know the adage "if it's too good to be true, it probably is." Trust the sales process to understand the value of your property, and remember that the highest offer can sometimes hurt your hotel's value, but only if you let it. 

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