Fee for services

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Lately, it feels like we’re spending a lot more time speaking with potential partners about fee-for-services deals, rather than straight brokerage.

What do I mean by “fee for services”? Jon and I have relationships with certain investors where we help them buy and renovate apartment buildings in exchange for brokerage fees and cash payments from the partner.

These aren’t our favorite deals to do, because the tax rate on the cash we receive is so high. However, in the right circumstances, with the right partner, they make sense to us.

So, why are we seeing an uptick in requests for this kind of deal? The reason seems to be the increase in prices across the market.

Basically, if you’re an investor looking to buy a building, you have two options:

  1. Buy some blah building at something like 11-12x the rents and accept the terrible return that implies; or
  2. Buy something really beat up at 14-20x the rents** and spend money to fix it up, with the intention of getting to something more reasonable like 9-10.5x the rents (on a newly renovated building).

Clearly, the second option is more appealing than the first (since the returns are better and the asset will be in much better shape post-renovations). But many investors don’t have the time / experience to carry out this strategy. That’s why they’re paying us to do it.

 

**Two readers emailed in to ask why a beat up property would have a high GRM. The reasoning is: When you have a building with really low rents, getting a market GRM would drive the price ridiculously low.

For example: Say you have a fouplex is Silver Lake that’s 4,000 sq ft and which is getting $600 / month each from four tenants, or $28,800 / year. If you apply a “fair” GRM of 11-12x, you get a price of $316-345k. But the owner isn’t stupid. He looks around and sees other 4plexes selling for $800-900k. His broker might argue that the rents in the subject building are low, but the owner doesn’t care – he’s focused on what he gets for his building, not what market is. Maybe he’s willing to let the thing go for $650k. That’s $162/sq ft, which is still very cheap on a price / sq ft basis. But it’s a 22.5x GRM.

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