Archive for the ‘Brokerage’ Category
In Los Angeles, the law requires that every building that changes hands needs to have low-flow toilets and shower-heads installed in the bathrooms (to preserve water). The law is enforced by means of a single form that is required to be completed prior to close wherein a contractor, licensed plumber or real estate agent attests that the relevant fixtures have been installed.
For newer or newly renovated buildings, any toilets or shower-heads that passed plumbing inspections comply with the code. For older buildings, it is pretty likely that the owner will not have made the necessary changes.
So, the question that crops up on sales of older buildings is: How will installation of the required fixtures be handled?
Many buy-side brokers opt not to request that the seller handle the retrofit prior to close, in hopes of making their offers marginally more appealing to sellers (who will therefore not have to spend the money).
But this causes the following problem: Either (a) the buyer is going to have to pay for the retrofit prior to closing (in other words, pay for work to be done on a building she doesn’t own) OR (b) a contractor, plumber or agent is going to have to lie on a government document.
Would it surprise you to hear that “b” is chosen pretty often?
We’re in this business for the long haul, so we’re not going to risk our reputation or those of the subs with whom we work closely by lying on forms. That means we will almost always insist on the seller doing the work prior to close. If it means we have to offer slightly better terms in our offer to compensate, that’s ok.
In our business, we frequently have clients come to us with pre-approvals from direct lenders like Bank of America, Wells, etc.
The clients love the banks because they promise high loan amounts and low interest rates.
And, on simple deals where there are no real issues with the borrower or the property, the direct lenders do fine.
So, why do we strongly recommend to our clients that they use a loan broker instead of a direct lender?
Because, when problems come up in a deal, which they almost inevitably do when you’re wading through shit, the direct lenders just decline the loan and head for the hills.
Why do they do this? Bank of America does not care about closing your loan. They’re going to close a million loans. All the bank cares about is not doing anything non-standard so as to avoid upsetting regulators. So, when a problem pops up, it’s much better for the bank to run away. There’s always another loan to do.
Contrast this with a loan broker who gets paid to close deals. All he cares about is closing the loan. If the lender raises an issue with the property or the borrower, the loan broker is there to figure out a creative way to jam the loan through. Because, if she doesn’t, she doesn’t get paid. And, if she does jam a questionable loan through, it’s the bank’s problem, not the loan broker’s.
Now, it should be noted that you’re going to pay for a loan broker’s services. The loan may be a hair more expensive.
But you’re paying for a greater certainty of closing. And, in our business, where the problem is the lack of reasonable deals, the last thing you want to happen as you near the finish line is to have some drone at a big bank tell you they can’t close.
I really, really hate chipping price during escrow. Do you know what I mean by “chipping price”? It’s when the buyer, after doing his diligence, comes back and requests a price reduction from the seller in exchange for removing contingencies and moving forward with the deal.
Why do I hate it? I do an enormous number of deals in a relatively small area. I see the same brokers again and again. Sure, I might be able to chip someone once, but what happens the next time I want to do a deal with that broker? Likely, he’s going to tell his client that they can’t trust my offer, because I’ll just come back and lower it. So, in order to make sure that I and my clients get the absolute best shot at every attractive deal that comes on the market, I make it a point not to to screw around.
That being said, there are occasionally situations where asking for price reduction is unavoidable. For example, we sometimes come across buildings where the square footage as measured during inspections is materially different (by more than 1,000 sq ft) from the public records. In those situations, you can’t not ask for a reduction.
So, what do you do?
Here’s what I do: I present the seller with two signed documents:
- Signed cancellation instructions; and
- An amendment removing all contingencies conditional upon a price reduction to $X (whatever price I need to make the deal work)
Why do I do it like this? Pretty simple, really. The point is to show the seller that we’re not just screwing around and trying to chip price for no reason. We’re saying the property is really not what we thought it was and the deal absolutely does not work at the price, so we’re willing to walk away, and all the seller needs to do to make that happen is to counter-sign the cancellation instructions and we’re done.
If, on the other hand, the seller is amenable to the price reduction, he can simply sign the amendment and be confident that the deal is now non-contingent and no further price reductions will be requested / required.
We now return to our regularly scheduled programming…
Yesterday, I spent some time with a guy who is thinking about getting into the real estate business as an agent.
I’ve written some about this before, which you can read here and various other places around the blog. But I found myself giving some new advice which I think is worth sharing with you guys, too.
I told him to do the following before committing to a career as an agent:
- Make a list of any / all the rich people you know
- Set up meetings with all of them
- Do not attempt to impress them with your real estate knowledge; you will fail and they will not trust you
- Instead, at each meeting, ask questions to try to ascertain whether your contacts have an appetite for buying real estate and, if so, what kind, how much, and when
- Take copious notes, including getting a good email address
- Pull together all the notes into a spreadsheet or database
Once you have all the information in one place, you can begin to consider the following questions:
- Do I have enough of a network to generate enough dealflow for myself in the beginning of my career so that I don’t starve ?
- Which type of real estate do I want to focus on (if all my potential clients are interested in apartments, it’s pretty dumb to focus on industrial, for example)?
- Which areas do I want to focus on?
If you did what you were supposed to do in the interviews, the answers to these questions should be pretty obvious. Now you can decide whether you want to make real estate a career and, if so, which brokerage you want to work with. And, as you begin to find interesting deals, you know exactly to whom to send them.
That’s basically what we do all day.
What do I mean?
Well, we’re looking for mismanaged, run-down, incorrectly-priced assets for ourselves or our clients to buy.
Very often, the processes we have to navigate to secure these screw-up assets are, to put it mildly, “non-standard”.
This ain’t the kind of brokering they teach down at your friendly neighborhood real estate office (you know the one I mean… where they mostly do single family homes and the success of the agents mostly depends on how white their teeth are).
We see all manner of greed, incompetence, fraud, unlawful behavior towards tenants, double-dealing, etc.
Our job is to navigate through all of the above to secure the assets in question without exposing ourselves and / or our clients to undue risk and without doing anything unlawful / unethical ourselves.
Basically, we wade through shit. Why? Because, in a market like this one, you gotta wade through shit to get the gold.
Just ran across a listing for what looks like a turn-key 4plex in East Hollywood priced at $1,095,000.
The listing advertised a 12x GRM. Now, that’s not a great deal or anything, but at a little less, maybe 11.5x, it would probably work for someone.
So, I prepared to shoot an email out to my agents so that they, in turn, could alert relevant clients.
But something stopped me. I figured I’d check on the rent roll, just to see how the close the competition is getting to matching the rents we’re capable of getting.
Here are the rents:
Can you spot the problem?
Go ahead and add the above numbers up and multiply by 12 to get the annual gross rent. What you’ll find is that the number is $78,300.
Now multiply the gross by the advertised 12x GRM… $939,600. But that’s not the list price, is it? The list price is $1,095,000, or 14x the rent.
Super glad I spent time reviewing that listing, though. Thanks, guys.
I get this question a ton, usually from brokers who are interested in figuring out a way to take both sides of the commission (by representing both the buyer and the seller).
For the record, here’s my answer:
1. If you bring me a deal which is “off-market”, in the sense that it has not been widely marketed on the MLS, Loopnet, etc., then I will happily have you write for me. Nice work in bringing it to me: For a certain type of deal, I’m almost always the best buyer.
2. If you bring me some valuable piece of information regarding a deal which is on the market which causes me to view the deal differently, then I will happily have you write for me. Examples of information like this: The deal will actually be delivered vacant, the seller is willing to take dramatically less than asking, the property is actually non-rent control due to some obscure agreement with the city, etc.
3. If your deal has been widely marketed and I approach you, then I am almost certainly writing my own offer. The only exception would be in a scenario where the deal is ridiculously, blindingly, spectacularly good… and those deals tend to get bid up as soon as they are widely marketed.
The concept is pretty simple: I want to incentivize brokers to bring me good deals, disincentivize them from calling me about stuff I already see online, and allow myself to take the buy-side commissions when I’ve done the work of identifying the deal.
At Adaptive, we take a very quantitative approach to brokering income property deals for our clients.
I’ve personally trained all of our agents to focus first on the achievable yield on the downpayment and only after that on other, more qualitative factors.
While this doesn’t guarantee that every deal will be a homerun, it does have the the benefit of screening out obviously stupid deals. You could make a good real estate investing career in LA by buying reasonable deals each time you have enough money and avoiding any horrible mistakes.
The downside is that, because all of them look at deals the way that I do, I sometimes find myself losing out to my own clients on deals! The reason is that some of them have lower return requirements than I have for my funds. And, the lower the return you’re willing to accept, the higher the price you’re willing to pay, and the more deals you’ll win.
While losing out to a client occasionally annoys me, it’s an incredibly good sign for our brokerage. It means that our agents are pitching strong deals to our clients and our clients are clever enough to recognize a good thing when they see it.
Have been doing some thinking about what makes an “enlightened agent”.
One very important skill / talent is knowing when/how to push a client and when to back off.
What do I mean by “push”? I mean the times during the course of a deal where the client is unsure about whether to proceed and looks to the agent for guidance.
Obviously, the agent’s strong financial incentive is to advocate for moving forward. Bad inspection report? We can fix those problems post-close. Weird easement? Everyone on the street has one. And on and on.
The problem with “pushing” is, of course, that the client can (and should) lose confidence in you if you’re always pushing. Lose the client’s confidence and nothing else matters; it’s unlikely you’ll close and, if you do, unlikely you’ll get repeat or referral business.
The flip-side of the above is that, if you have the client’s confidence, you will almost definitely earn a commission from that client eventually, even if this particular deal falls apart. And, doing a good job for the client and in a manner that preserves / enhances trust is likely to mean repeat / referral business.
So, the enlightened agent almost never pushes. Instead, she goes out of her way to point out the problems with a deal, the risks, the downsides, etc. In most cases, it should be the client who loves the deal and wants to move it forward, while the agent covers the client’s back.
What’s an exception to the above? Every once in a great while, a deal comes up which is so good that you have to push a client who is hemming and hawing. This isn’t a once-a-month kind of thing… more like once every few years. And it has to be the kind of situation where, if the client backs out of the deal, the agent feels like she would call every single one of her friends and family to raise the money to buy the place herself.
In that one situation, it is not only appropriate but almost a requirement of enlightened brokerage that you grab the client by his (figurative!) lapels and drag him over the finish line. Believe me, as someone who has been dragged a few times… the client ends up thanking you for it.
Get a sales person license.
Join a decent brokerage.
Get your personal expenses under control so you can survive for 6 months without earning.
Read voraciously to learn about the business.
Hustle like crazy to bring in your first deal.
Work your first deal as hard as you know how.
Ask questions of your broker if you think there’s a chance you might not understand something perfectly.
Deal honestly with everyone and put your clients’ interest before you own.
Close your first deal.
Put the money away so that you can survive for 6 more months.
Close your next deal.
Make sure the world hears about your success.
Keep hustling to meet people.
Keep reading / learning.
Keep doing deals.
Repeat. You’re on your way.