Credit: Pathfinder Partners

Mitch Seigler is taking a Wayne Gretzky approach to multifamily real estate acquisition. “That means we are going to skate to where the puck is going to be rather than where it is at this very second,” says the senior managing director of San Diego-based Pathfinder Partners, which added five new properties to its multifamily portfolio in the third quarter via loan and REO asset purchases.

“We look for well-located properties in the path of growth, but we’re not afraid to take risks that others shy away from. If we were targeting generic, cookie-cutter transactions in obvious locations and insisting on buying finished, stabilized real estate, we would have a lot of competition. That’s why we are not in that space."

As bidding frenzies and cap rate compression intensifies in core, high-barrier markets, firms like Pathfinder Partners and others are finding success with smaller deals in secondary markets that are below the radar of institutional buyers but out of reach of the typical country club and mom-and-pop investor. According to a survey recently released by the Los Angeles-based National Association of Independent Landlords, almost one third of (31 percent) of smaller multifamily owner/operators intend to buy additional rental properties by the end of 2012.  

Leading the way are firms like Pathfinder and Miami Beach-based Fifteen Group, which after liquidating an 18,000-unit apartment portfolio between 2005 and 2007 is reentering the market again with a focus on off-the radar properties with distress or other contingencies that are limiting the pool of buyers. “The deals that are stabilized and cashflow and can be agency financed from day are trading at yields in many respects lower than they were before the bust,” says Fifteen Group principal Ian Sanders. “Those yields are uninteresting to us.”

Instead, Fifteen Group has turned to acquisitions like Turtle Creek, a 268-unit rental community in Naples, Fla., which the firm grabbed in late October in a $12 million all-cash transaction. “This is the second kind of deal where if it were leased and cash flowing and operating properly, it would also be trading at a low yield. But because it is not, it cannot be financed, taking the bulk of prospective purchasers out of the equation. Those are the ones that we look for, where we don’t have to compete with the pack and where we can execute a deal quickly by bringing liquidity to the table.”

Pathfinder, which has raised two opportunistic real estate funds since 2007, is poised for rapid expansion beyond dits current 1,000 unit portfolio. According to Seigler, the company will continue to source deals from lenders and special servicers in California, Florida, Texas, Colorado, Oregon, Oklahoma, Arizona, Nevada, and Washington.  “We’re sometimes two or three blocks away from core markets and we are sometimes two or three states away,” Seigler says.

“But we’ll start with smaller deals that are below the radar screen of big institutional investors, and focus on buying loans rather than properties which we think keeps a lot of folks away," he adds. "Are there groups that have $5 million to do one-off deals with all cash and finance it later? Yes, but that becomes pretty difficult when you are talking about $50 million transactions without debt.”