When a sponsor tells you they’re buying apartment buildings at a discount, ask what the discount is measured against. If the answer is “30% below what the last owner paid in 2021,” that is not a discount — it is a repriced market, and you are paying today’s fair value. John Brackett of Fidelity Business Partners, who has been buying multifamily since 2008 and now manages roughly $80 million across San Diego, Houston and San Antonio, put it plainly: price is always relative to the cycle you are buying in.
What is actually purchasable is operating inefficiency — the gap between how the current owner runs the asset and how you could run it. Brackett’s example: a property operating at a 15% inefficiency on operating expenses looks marginal in year one and becomes significant compounded across five to seven years.
Below: how to underwrite that gap, why it only works if you control management, how Brackett reads San Antonio and Los Angeles right now, and how a $529,000 short-term rental rebuild in Texas got saved by restructuring supplier deposits mid-project.
Key takeaways
- A "discount to what the seller paid three years ago" or "discount to replacement cost" tells you nothing about deal quality — both are relative to the market cycle you are transacting in.
- The repeatable edge in commercial real estate is buying an asset operated less efficiently than you can operate it. A 15% operating expense inefficiency compounds into real money over a five- to seven-year hold.
- Anyone can run an asset well for one or two years. Underwrite deliberate room for uncertainty so the business plan survives years three through ten.
- Fidelity Business Partners started buying out of state over ten years ago, but growth only became meaningfully more profitable after spinning off their own property management company — control over outcomes is what makes an inefficiency thesis executable.
- San Antonio currently carries the highest vacancy in the country, which Brackett reads as "on sale." LA prices are depressed too, but he considers that discount warranted by tenant law and political risk, and he limits himself there to product built in the last five to ten years.
From the Real Estate Pros Show
This article draws on an interview with John Brackett of Fidelity Business Partners on the Real Estate Pros Show, hosted by Issa Hanna.
Why "Bought at a 30% Discount" Usually Means Nothing
Brackett gets asked constantly how to buy discounted properties. His answer is that he doesn’t, really — and neither does anyone else claiming to.
A recent offering crossed his desk pitched on exactly that basis: buy at a 20% to 30% discount to what the previous owner paid three years earlier. Look at what that sentence actually says. The prior price was rational in the prior market. Rates were different, cap rates were different, rent growth expectations were different. Today, at the lower number, you are paying market value for the asset. Not overpaying. Not underpaying. Paying what it is worth right now.
“Discount to replacement cost” has the same problem. Replacement cost is itself a moving number — it moved violently through 2020 and 2021 when materials and labor repriced — and a building trading below the cost to construct it new may be trading exactly where the income supports. Sometimes the spread signals something real about supply. Often it is marketing copy.
The practical filter when you read an offering memorandum: identify what the discount is being measured against, and ask whether that benchmark reflects anything about the asset’s future cash flow. Prior purchase price does not. Peak-cycle valuation does not. Neither does an insurance replacement figure.
None of this means there are no good deals. It means the deal quality lives somewhere other than the headline. If a sponsor’s entire thesis is the size of the discount, they have not told you how they intend to make money — they have told you what happened to the market between the last sale and this one.
What You Are Actually Buying: Operating Inefficiency
In commercial real estate — apartments, mixed-use, industrial — you are buying an asset that is being operated less efficiently than you could operate it. That is the whole trade, in Brackett’s framing, and it holds precisely because the sellers are more sophisticated than in single-family. You are rarely going to out-negotiate an institutional seller on price. You can frequently out-operate them.
The gaps are usually unglamorous and small-looking on a single-year proforma. Brackett’s illustration: a property running at roughly a 15% inefficiency on operating expenses. In isolation that reads like a rounding error against a purchase price. Compounded over five or seven years of ownership, with the expense savings flowing to NOI and NOI driving valuation, it becomes significant.
This is a different thesis from cosmetic value-add. Cosmetic value-add is a one-time event: you spend $8,000 a door on flooring, counters and lighting, push rents, and the trade is done. It either works at the rent you assumed or it doesn’t. Operating inefficiency is structural and recurring — contracts priced above market, staffing that doesn’t match unit count, deferred maintenance being paid for repeatedly in emergency call-outs, turn times that quietly cost weeks of rent, utility billing left uncaptured, delinquency tolerated because nobody enforces.
What to look for in diligence, then, is evidence of an owner who is distracted rather than an owner who is distressed. Undermanaged is the word Brackett uses. Compare the seller’s expense line items against what you know you can run the same building for with your own vendors and your own staffing model. That delta is the deal. If there isn’t one, you are betting on the market.
What you’re really buying is the inefficiencies today that you can manage up over a two, three-year period. Those inefficiencies may look marginally small — hey, they may be operating at a 15% inefficiency on operating expenses — but when you compound that over five or seven years, it can be really significant.
— John Brackett, Fidelity Business Partners
Underwriting for Uncertainty Over a Five- to Ten-Year Hold
“Anybody can manage something really well for one or two years,” Brackett said. “Doing it over a five to ten-year period requires a lot more focus.” That is the sentence to hold onto when you build the model, because an inefficiency thesis only pays if you are still there to collect it.
Short-hold underwriting rewards optimism. You assume the lease-up goes as planned, the exit cap holds, and nothing structural breaks before you sell. Over five to ten years, none of that survives contact. Rates move. Insurance repricing hits Texas Gulf Coast assets in ways nobody modeled in 2019. Submarket supply arrives. A regulatory change alters what you can charge or how fast you can evict.
Brackett’s response is to build allowance for uncertainty directly into the underwriting rather than treating it as a stress test you run afterward. The distinction matters: a stress test tells you what happens if you’re wrong, while an allowance means the plan already assumes you will be wrong somewhere. Practically that shows up as expense growth assumed faster than rent growth, real reserves rather than nominal ones, and refinance timing that has slack in it rather than depending on a specific window.
His stated reason for doing it that way is control. Cushion in the model is what lets you make the operating decision you want to make in year four instead of the decision the lender or the cash position forces on you. That is where the money is made — management over a long hold, not the entry price.
Why They Brought Property Management In-House
Fidelity started buying out of state over ten years ago and, by Brackett’s account, learned a lot doing it. But the inflection point was not a market or a deal. It was spinning off their own property management company.
“Once we spun off and started our own property management company, that’s when things really changed and we really started to grow — but more importantly, grow a lot more profitably, because we just have more control over the outcomes of our assets.”
That sequencing is worth noting: buy first, learn the markets, then vertically integrate. Not the reverse.
The reason it matters specifically for an inefficiency thesis is straightforward. If your entire edge is closing an operating gap, a third-party manager is the one closing it, and their incentive is a percentage of collected rent, not the compounding of your expense line over seven years. They have no reason to fight a vendor contract, and they will not restructure staffing in a way that reduces their own fee base. Brackett’s wife and co-founder, Debora, a former commercial appraiser, runs the asset management side with the team she built — the operating gap is closed by people whose job is the asset, not the fee.
Scale context, because the answer depends on it: they manage a little over $80 million, with roughly 100 units owned by the two of them outright and a little under 500 units with partners. That is enough door count in concentrated markets to carry the overhead of a management company. Three units in a market five states away is not. The threshold is density in one MSA, not total portfolio size.
Reading a Market: San Antonio Vacancy and the LA Discount
Fidelity buys in San Diego, Houston and San Antonio, plus secondary markets between those MSAs, and Brackett expects to stay in three or four markets rather than expand the map. Two of his current reads are instructive because they treat the same signal — soft pricing — in opposite ways.
San Antonio. “San Antonio has the highest vacancy in the country right now, which means it’s on sale.” That is a supply story: heavy deliveries into a market with real underlying job and population growth. Vacancy caused by oversupply into a growing market is temporary and works itself out as absorption catches up to deliveries. Vacancy caused by people leaving does not. If you are underwriting there, the question is how long your concessions and lease-up assumptions have to hold before the pipeline thins.
Los Angeles. Brackett likes LA too — but he is explicit that the price decline there is warranted. Tenant-favorable law and political risk are real, and in his view the regulation exists partly because LA had a long history of neglected, slumlord-owned stock. So the discount is compensation for risk you have to actually manage, not a mispricing. His filter is product built in the last five to ten years: newer buildings mean less deferred capital, fewer habitability disputes, and less exposure to the rules that bite hardest on older stock.
His posture on the regulation itself is the part worth copying. “I’ve learned to not complain about things, but rather ask, where’s the opportunity? I am not going to individually change the political situation in LA.”
Protecting the Business Plan From Execution Risk
Good entry terms do not protect you from execution risk. Fidelity bought a single-family property between Austin and San Antonio for $529,000, intending a custom rebuild for short-term rental use, in a thin submarket where comparable finished product was trading from roughly $1 million up toward $2 million. Financing was 2.5% fixed for 30 years with about 20% down. On paper, an excellent basis.
Then COVID hit mid-rehab. Materials were delayed, or paid for and never delivered, or delivered as something entirely different from what was ordered. Skilled labor could not be found locally, and crews churned. Four months in, Brackett stopped and forced the pivot rather than continuing to grind against conditions that weren’t going to change.
Three moves, all repeatable:
- Sequenced deposits instead of a large one. Rather than 30% up front, 5% to start the order, another 5% once he could confirm materials had actually been purchased, another 5% once they were confirmed en route. Labor-intensive to administer, but it capped exposure per order and — critically — orders started arriving with the contents that were ordered.
- Imported known labor. He flew and drove California trades he had worked with before out to Texas, paying roughly 50% above their normal rate. Expensive, and cheaper than another cycle of crew turnover.
- Substituted materials on roughly 30% of scope. Improvised comparables to keep the project moving. Not free: a chimney he built from clay materials came back non-compliant and had to be redone.
The lesson for a rehab budget is that the risk sits in your payment terms and your crew relationships, not in your line-item pricing. Money paid before delivery is money you may not see again.
Frequently asked questions
If a deal is not really a discount, what should I be looking for in an apartment offering?
Look for a quantified operating gap between how the seller runs the building and how you would run it. That means line-item expense comparisons against your own vendor pricing and staffing model, current turn times and delinquency, and any income the seller is leaving uncaptured. Those are things you can act on after closing.
Discount claims measured against a prior purchase price, a peak valuation, or replacement cost tell you about the market cycle, not about the asset’s future cash flow. If the sponsor’s thesis is the size of the discount rather than what they will do differently in operations, they have not told you how the return gets made.
How much of an operating expense gap is worth chasing on a value-add apartment deal?
Brackett cites roughly 15% on operating expenses as the kind of gap he looks for — a number that looks marginal against the purchase price in year one and becomes significant compounded across a five- to seven-year hold, because the savings flow to NOI and NOI drives value.
The threshold that matters is whether the gap is structural and recurring rather than a one-time fix. Above-market service contracts, mismatched staffing, and repeated emergency repairs on deferred maintenance recur every year. A cosmetic renovation pays once.
When does it make sense to bring property management in-house instead of hiring a third party?
When you have enough door density in one market to carry the overhead, and when your returns depend on closing an operating gap a third party has no incentive to close. Fidelity bought out of state for years before spinning off their own management company, and Brackett says that shift is when growth became meaningfully more profitable — because of control over asset outcomes.
The relevant scale is concentration, not total portfolio. They manage a little over $80 million with roughly 100 units owned outright and under 500 with partners, spread across three primary markets. A handful of units in a market you do not otherwise operate in will not support it.
Is high vacancy in a market like San Antonio a buying signal or a warning?
It depends entirely on the cause. Brackett reads San Antonio’s national-high vacancy as the market being “on sale” — that is a supply-driven softness in a market with real underlying growth, and heavy deliveries get absorbed over time.
Vacancy caused by population or employment leaving a market is a different problem and does not correct on its own. If you are buying into oversupply, the underwriting question is how long your concession and lease-up assumptions have to hold before the construction pipeline thins out.
How do you protect a rehab budget when suppliers demand large deposits up front?
Break the deposit into sequenced tranches tied to verifiable milestones. During COVID, Brackett replaced 30% up-front deposits with 5% to open the order, another 5% once he could confirm the materials had actually been purchased, and another 5% once they were confirmed en route.
It takes real administrative effort to track, but it caps your exposure per order and creates leverage that a single large deposit destroys. In his case, orders also started arriving matching what was actually ordered rather than substituted product.
The bottom line
Before you sign the next LOI, write down the specific operating gap you intend to close, in dollars per unit per year, and name who on your side is going to close it. If you cannot answer both halves, the discount in the offering memorandum is not going to save the deal.
