Moses Kagan on Real Estate

Why do people hire dumb brokers?

join the conversation »


Buying a home or income property is a big deal. You’re committing a chunk of your (or your family’s) hard-earned capital, plus taking on an enormous amount of debt. All kinds of things can go wrong, from structural problems, to tenant issues, to badly structured loans, to city inspection concerns, etc.

So why do people insist on working with their friend’s cousin, Steve. Or Beth, the lady their mom knew in highschool?

OK, with a house, it’s somewhat understandable. There are fewer moving parts to a deal. And many people don’t approach buying a house as an investment, so getting the best deal isn’t super important to them. (Can you see the steam coming out of my ears as I write this?)

But I really, really don’t understand why anyone would allow a stupid or inexperienced broker to advise them on the purchase or sale of an income property. The acquisition of an apartment building of any size is akin to a leveraged buyout (the kind carried out by Carlyle Group or Blackstone).

One difference: You use MUCH more leverage when you buy an apartment building! On a typical leveraged buyout, where the target is acquired for, say 10x profits, the debt piece is maybe 5x, meaning that the acquirer puts down 50% of the price in cash. Compare that to using an FHA loan to buy an apartment building, which you can do with 5% down. (Which is why it’s so potentially tasty!)

Leverage (debt) magnifies both upside AND downside. It’s awesome when it works, but it can kill you when it doesn’t.

So knowing this, why on earth would you have your brother’s sister’s cousin who sells condos in Reseda help you evaluate and execute the acquisition of an apartment building? It’s insanity.


Written by mjkagan

03/26/2012 at 7:00 am

Posted in Buying, Debt

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>