Archive for the ‘Brokerage’ Category
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.
We’re very pleased to announce (belatedly!) the sale of 1012 N Virgil, a 4plex renovated by Adaptive Realty through our first investment fund.
Here are the numbers:
- Purchased for $427,000 in November of 2012
- Renovated for $380,000
- Rent roll upon completion of $111,000
- Approx. $40,000 in cash collected prior to sale
- Sold for $1,274,000 at the end of March 2014
If you do the numbers, you’ll find this was an approx. 50% ROI deal. No the absolute best we’ve ever done, but pretty close!
The new owners are experienced investors with whom we have a very good relationship. We’re going to be managing the building going forward and we expect that the new owners will generate very attractive returns from cashflow, particularly given the cheap leverage to which they had access.
Thought you guys might like to check out this video interview I did with Justin Brown.
Have been looking at listings for mid-size apartment buildings today and ignoring the cap rates.
Why? Isn’t cap rate the thing you should care about with investment real estate?
Not when you’re working with brokers who don’t have a good grasp on calculating cap rates.
Here’s an example:
- Looking at a 10 unit deal priced at 12.8x GRM (in other words, 12.8 x the total annual rent)
- Broker is calling it a 6% cap rate
- Let’s do some math…
- Assume rents of $100k / year
- That means the price is $100k x 12.8 = $1.28MM
- At a 6% cap, that means the net operating income is $1.28MM x 6% = $77k / year
- With rents of $100k / year and NOI of $77k / year, that means expenses are $23k / year
That’s the point I call “bullshit” on the broker.
If you buy this building for $1.28MM, your property taxes alone will be $16,000 / year. On a 10 unit building that’s, say, 7,000 sq ft, your insurance will easily be $4,000. That means you’ve got $3,000 left to cover utilities, management, vacancy, pest control, repair reserve, etc. Bullshit.
What’s the real cap rate on this sucker? Honestly, my guess is that it’s a 3-4% cap rate… awful.
And that’s why you ignore broker-quoted cap rates. Most of them don’t know what they’re doing, and you should not get lured into their world. After all, when the deal closes, the broker goes home with his commission. You’re the one living with the 3% cap.
Are you interested in seeing some deals that don’t suck? Please consider joining my mailing list. We’ll let you know on the rare occasions we find deals worth taking a close look at.
Seriously, it exists, despite the fact that East Hollywood is really far from any bodies of water.
Because the Army Corps of Engineers created a flood zone around the intersection of Santa Monica and Hoover, banks will require that properties in the area carry flood insurance during the time the property is mortgaged.
The problem is that, due to the insane Biggert-Waters Flood Insurance Bill (which Congress thankfully toned down today!), you need to get an elevation certificate before you can get a reliable quote on flood insurance.
And, to get an elevation certificate, you need to get a survey, which is pretty expensive.
Fortunately, because this particular problem bit me in the ass on my last deal in the flood zone, I have a guy willing to do the surveys on a contingent basis, where you only pay a small portion of the fee upfront and the balance if/when you close on the deal.
Brokerage, it turns out, is mostly about coming up with creative ways to solve the niggling little problems that come up on every deal.
We have a buyer inspecting one of the properties from Fund 1 today, so I thought this would be a good opportunity to discuss how you ought to behave when you, as a seller, attend a buyer’s inspection of your property.
Here are the key things to keep in mind:
- Be honest. You never, ever want to lie during a sale process. If you get caught, the buyer instantly loses all faith in what you’ve told him through the entire process, making it much harder to make a deal. If you don’t get caught, you’re setting yourself up for a lawsuit later on, once the buyer finds what you’ve hidden from him.
- Admit when you don’t know something. It’s ok not to remember something about the property. A perfectly fine response to a question about, say, whether you replaced the sewer line in addition to the drain lines is to say “I don’t know. Let me get back to you in writing by tomorrow afternoon.” That’s a much, much better answer than lying.
- Don’t ramble. I’m guilty of this one all the time. When someone asks you a question, answer it. But there’s no need take off on a major lecture. The buyer is there to see the property, not interview the seller.
- Give the buyer privacy with his inspector(s). Don’t hover / eavesdrop. It makes everyone uncomfortable and possibly causes the buyer to doubt the veracity of what his inspector tells him (“maybe he was holding back because the seller was there…”). If there’s something wrong with the property, believe me, you’ll hear about it in writing from the buyer or his agent.
- Don’t take things personally. Some buyers like to spend the inspection period pointing out niggling little issues with the property. That’s their trip; you don’t need to go on it with them. Just smile, nod, and move on.
- Be personable, but not overly friendly / jocular. You would be amazed at how many deals go bad because buyer and seller interact and decide they hate each other. It’s hard enough to make a deal without that kind of interpersonal nonsense getting in the way. So, keep it calm and friendly, but also business-like. No need to risk screwing up a deal by rubbing the other guy the wrong way.
- Honest (this is 100% non-negotiable; you have to be able to put other peoples’ interests above your own)
- Smart (book- and street-)
Did you launch into a creative career after college and then find yourself with less cash than you wanted / needed as you entered your mid- to late-20′s?
We have had amazing success training people like you to broker real estate deals. It’s pretty simple: If you’re the right kind of person, we mentor you through the relevant classes (takes around 2-3 months, part-time). Then, you go through training with me. Then, you ride shotgun on a few deals with me. Then, once we’re confident that you know what you’re doing, we start to refer clients to you.
At first, you work on small deals. You call me pretty much every day with questions. After you go through the ringer a few times, you call me less and less often as you start to work on bigger and bigger deals.
If you hustle your butt off and treat your clients like gold, your annual income will look something like this:
- Year 1: $30,000 (2-3 small deals)
- Year 2: $60,000 (2-4 deals)
- Year 3: $90,000 (5-6 deals)
After that, your income is pretty much limited by how hard you work.
Interested? Get in touch.
Right now, our agents have three deals in escrow for various clients. Generally speaking, these are deals in emerging neighborhoods where the in-place cashflow is reasonable and there are good reasons to think that rents can be increased dramatically over the coming years.
It is not easy to find these kinds of deals, but they are out there. All it takes is some expertise and a bunch of elbow grease on our part and some confidence on yours.
Interested in finding a good place to park some of your savings? Get in touch. It’s definitely not fish in a barrel (like 2009-10), but it’s not exactly needle in a haystack, either (yet!).