The problem with portfolio sales

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As the market heats up, am seeing more and more portfolio sales. That’s when an owner decides he’s ready to exit the market and offers up all of his properties for sale together, rather than individually.

There are at least three reasons for an owner to do this:

  1. He’s not interested in selling part of the portfolio. It’s either get out entirely or nothing;
  2. He knows that some of his properties are better than others and wants to entice buyers to take the bad ones by tying them to the good ones; and
  3. He believes that, by offering everything together in one big deal, he can access a pool of (presumably institutional) buyers who want/need to deploy their cheaper capital in very large chunks.

Despite the above, I think most portfolio sales in LA do a very poor job of maximizing value, for the following reasons:

  1. Most of the properties involved are not institutional quality (because they’re small, subject to rent control, and usually have deferred maintenance), so the cheap money usually doesn’t flow;
  2. Most portfolios available contain a mix of value-add and cashflow deals… which interest very different kinds of buyers;
  3. Most portfolios available contain a mix of locations, again interesting different buyer pools; and
  4. Because the portfolios contain different property types / locations which naturally attract different buyer pools, it’s very unlikely that one broker will be the best person to sell all the properties, and yet that is what is required in a portfolio sale.

So, when does a portfolio sale make sense? Two scenarios:

  1. Where the properties are very similar in type, condition and locations; or
  2. Where the seller wants to exit quickly and is willing to sell the whole package at a discount to the combined value of the underlying properties

Unless your portfolio falls into one or both of the categories above, you’re far, far better off breaking the properties up and hiring absolutely the best broker to sell each property.

That’s how you maximize value.

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