Moses Kagan on Real Estate

Archive for the ‘Brokerage’ Category

How I assign agents

leave a comment »

When someone comes to me for help buying an apartment building, the first thing that happens is we have a phone conversation.

During the talk, I give an overview of our process, then spend a bunch of time asking questions of the potential client, including: how much capital she has to deploy, what size deal she wants to do, what her return requirements are, which areas she likes, etc.

Based on the above information, I need to decide:

1. Whether it makes sense for us to work together at all. All we brokers have to sell is our time. On the buy-side, which is mostly where we work, there is absolutely no guarantee that any particular client is going to do a deal where we get paid. So, to make sure we have a functional business, we need to screen potential clients to ensure they are serious, have the necessary financial resources, and have reasonable return requirements. If yes, great; if no, we’ll very politely decline the work.

2. Which agent she should work with. This one is tricky. Obviously, target deal size and area play a very big part. But, ultimately, getting a deal done is about the agent and client working together as a team. Therefore, I try to balance the more objective factors with a big subjective one, too: Would these people get along?

I wish I had a great system to going back and checking on the decisions I have made about whether to work with clients and to whom to refer them. But I don’t.

With respect to the question of whether the prospective clients are worth the time the agents need to invest, all I can say is that the agents are making a living and continue to happily service the clients.

With respect to the question of whether I’m doing a good job matching agents with clients: We’ve had tons of repeat business. So I can’t be screwing it up too too badly.

Written by mjkagan

08/26/2014 at 10:51 am

Posted in Brokerage

How to get the best out of your buy-side agent

leave a comment »

Be responsive.

What do I mean? Well, at any time, my agents are working with a handful of active buyers, plus some more “passive” types who have expressed interest in doing something but aren’t motivated.

So, how do the agents decide whom to focus on?

Simple: The more responsive and engaged buyers get the lion’s share of the attention, because the agent naturally expects those buyers to be more likely to actually write offers and close deals.

So, if you want our best, here’s what you have to do:

  • Have reasonable expectations (so, no, you can’t buy a 9% cap in LA… that was impossible in 2009, let alone now)
  • Clearly define for us what you’re looking for
  • Respond promptly when we send you deals that we think make sense based on the criteria you have expressed
  • Forward along other deals that you see that we may have missed (we’re good, but sometimes stuff does slip through the cracks)
  • Trust us, at least as far as writing an offer (later you can come up with all of the reasons not to buy the building)

On the other hand, here is how to ensure you don’t get our best:

  • Expect miracles in terms of returns
  • Waffle about what type of property you want (today it’s buy and hold, tomorrow it’s a renovation project, then you want to build small lot, whatever…)
  • Take more than 24 hours to respond to ideas we send (in fact, if you wait 12 hours, that’s a bad sign… when something good comes along, you want to MOVE)
  • Get involved in long philosophical conversations when it’s time to write the offer, rather than just writing (there’s little-to-no risk in writing; you can back out before sending your EMD if that’s what you decide you want to do)

Just remember: All the agents have to sell is their time. They’re going to be pretty ruthless about allocating it to the buyers who demonstrate real willingness to act when a good opportunity presents itself.

Written by mjkagan

07/23/2014 at 3:26 pm

Posted in Brokerage

The brokerage is beginning to hit its stride

leave a comment »

One of the things I wrestle with is how much time to devote to our brokerage operation.

As many of you know, I supervise six agents who help investors buy and sell investment property in gentrifying parts of LA.

Compared to our fund management business and our fee-for-service development business, the brokerage is tiny. To give you a sense for how tiny: We generate more revenue from one decent fee-for-service deal than we will from the entire brokerage this year.

That’s not to say that the agents aren’t active; they are. It’s just that the economics of the business are such that the agents (appropriately!) receive the vast majority of the commission income from their deals. And since the deals they are doing are generally not huge (mostly in the $500-1.5MM range), the amount of revenue we collect on a given deal is pretty small. Even with pretty active agents, the numbers don’t really get that interesting.

So, why do I bother with the brokerage?

1. We derive a lot of market intelligence from the agents, who are all smart, diligent people constantly looking for interesting deals to sell to their clients. They’ve often brokered deals for us (in other words, represented our fund entities in acquisitions).

2. At scale, the brokerage economics improve. Six agents, particularly agents towards the beginning of their careers, don’t generate a ton of revenue. But, depending on productivity, 20 agents absolutely would. We’re not actively recruiting, because we wouldn’t accept most applicants, anyway. But, over time, I continue to run across talented people who I think we do well in real estate and I bring those people in and train them. Over time, we’ll probably get to the point where the brokerage is an interesting business.

3. It’s gratifying to teach people how to make real estate deals. There’s a big part of me that would have been pretty satisfied with being a highschool teacher (except I’m greedier than that!). So it’s nice to get to spend part of each week teaching something I love, even if it may not be strictly economically rational for me to do so.

I keep the brokerage going / growing for all of the reasons above. So it’s quite gratifying for me personally to stretches like the one we’re in now, where one of my agents just closed a deal yesterday and has another (big one) closing next week and where another agent just closed a very difficult deal today and has another one closing early next week.

The brokerage appears to be hitting its stride!

Written by mjkagan

07/18/2014 at 10:46 am

Why I (almost) always ask for retrofit

leave a comment »

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.

Written by mjkagan

06/24/2014 at 4:11 am

Posted in Brokerage, Buying

The difference between a loan broker and a direct lender

leave a comment »

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.


Written by mjkagan

06/04/2014 at 1:14 pm

Posted in Brokerage, Buying, Debt

How to negotiate a price reduction

leave a comment »

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:

  1. Signed cancellation instructions; and
  2. 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.



Written by mjkagan

06/03/2014 at 3:38 pm

Posted in Brokerage, Buying

More on starting a real estate career

leave a comment »

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.

Written by mjkagan

05/29/2014 at 10:50 am

Posted in Brokerage

Wading through shit

leave a comment »

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.

Written by mjkagan

05/12/2014 at 2:34 pm

Posted in Brokerage, Buying

Great listing!…Oh, wait

leave a comment »

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:

  • $1675
  • $1550
  • $1600
  • $1700

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.

Written by mjkagan

05/08/2014 at 11:58 am

Posted in Brokerage

Am I a principal or a broker?

leave a comment »

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.

Written by mjkagan

05/07/2014 at 4:55 am

Posted in Brokerage, Buying