Moses Kagan on Real Estate

Archive for the ‘Brokerage’ Category

There’s no substitute for hustle

leave a comment »

In our business, there is a lot of money to be made. I personally know agents who have cleared north of $1MM in gross commissions in good years. I know a guy who owns one of the midsize brokerages in LA and I think he clears $5-10MM / year. Obviously, huge asset managers like Blackstone, etc. do 100x that.

But that money doesn’t come for free, because money never does.

Real estate investment is a seriously competitive, risky business with stakes large enough to attract sharp players with big bankrolls.

The amazing thing is that, because it’s easy for banks to take properties back, there is debt available to amateurs, and therefore an opportunity for amateurs to get involved, build a career, and eventually become pros themselves.

But none of this happens without hustle. There is no shortcut to this stuff. You have to look at deals all day, make tons of offers, get in escrow, inspect, figure out what’s wrong and if you can fix it, close deals, screw up, fix your screw ups, sell, make money for yourself and your clients / partners and then do it again and again (and again and again and again).

The game is enormous, there’s plenty of money to be made and every possibility of success. But there’s zero hope unless you’re willing to dive in and make things happen.

Written by mjkagan

01/20/2015 at 10:28 am

What makes us different

leave a comment »

Have been reflecting on the difference between brokering at Adaptive and other, “normal” brokerages.

In normal brokerage, you mainly represent sellers. Your job is to present your client’s property in the best possible light and then hope someone buys it, warts and all. Success is mainly about convincing a potential seller to sell and to choose you to do the selling. The kind of person who can do this is generally attractive, charming, polite, easy-going, etc.

What we do is totally different. Yes, there is some selling, but it’s mainly in the beginning, when we’re convincing a client to work with us.

Once a client has chosen to work with us, we basically stop selling. At that point, we become almost like private detectives. We scour the available properties to try to find the one in fifty or a hundred that’s actually a reasonable deal.

Then, once we get our client in contract on the property, we spend 10 days or so doing everything we possibly can to figure out why our client SHOULDN’T buy the property.

Seriously. We use every trick we know, from estoppels to sewer scopes, to uncover what’s wrong with the property (there’s always something wrong; no one sells a great property at a fair price).

Once we figure out what’s wrong, we help our client figure out a way to mitigate the issue(s) if possible. Then, and only then, do we advise our client to move forward with closing and, therefore earn our commission.

You know what it takes to do this well? Hint: It’s not good manners and a gleaming smile.

It’s a suspicious mind-set, a willingness to ask impertinent questions, and an unwillingness to get-along-go-along. It’s the assumption that people are willing to be dishonest if its in their interest. It’s a rejection of “cross your fingers and hope”. It’s about being clear-eyed and bloody-minded and shrewd.

And, then, ultimately, in the midst of a whole bunch of dishonesty and misinformation, it’s the absolute devotion to being honest with yourself and your client.

Written by mjkagan

01/14/2015 at 10:39 am

Posted in Brokerage

A great real estate story

leave a comment »

One of our agents just bought his first apartment building, it’s an awesome story, and I thought I’d share it with you.

When David Brundige came to work with us a few years ago, I knew he was exceptionally smart and entrepreneurial, since we had gone to college together.

On the other hand, he knew very little about real estate.

But, by working extremely hard, paying attention, trying new ideas, and, most importantly, serving as a tireless advocate for his clients’ interests, David has turned himself into a effective deal-maker.

A few months ago, David helped a particularly savvy, aggressive client complete what I believe to have been the best real estate deal in LA over the past few years.

A week or so ago, using some of his commission from that transaction for the downpayment, David closed on his first personal deal.

Is this one triplex going to make David rich? No.

But, over time, the rents will pay down the mortgage (plus pay David every month), leaving him with sole ownership of a very valuable asset 30 years from now. No one can take that away from him.

Not bad for two years of hustle, right?

Written by mjkagan

01/06/2015 at 10:01 am

Seeing the big picture

leave a comment »

One of my agents is working with a client on an interesting deal and running into a problem.

The building itself is great – big, recently built, non-rent control, in an improving area, fair price.

The problem is that the current owners don’t have their act together. Missing leases, conflicting estoppels, deferred maintenance issues.

None of this is unusual; as I have written here many times no one sells you a great building at a fair price. They sell you great buildings at unfair prices or screwed up buildings requiring a bunch of work at fair prices.

This particular deal is an example of the later type, except that, as issues with apartment buildings go, these ones are pretty minor.

So, what’s the problem?

Our clients are detail-oriented people who are successful in their jobs. They run their affairs in an orderly manner and I believe it unnerves them to see this asset so poorly managed. They have therefore been wavering about whether to move forward with the deal.

This is totally understandable. But it’s short-sighted.


In our business, you need to think not about how things are but about how they can be. Then, you need to work backwards from your vision of the future to see whether you can make it happen for an amount of time / hassle / money to make the deal attractive to you.

This deal, with a little effort, looks like this:

  • $230 / sq ft
  • 9.8x GRM
  • 7.25-7.5% cap (unlevered yield)
  • 10-12% cash on cash return (!), depending on how they finance it

All of this on a newer, non-rent control building in an improving area.

Do you know what that is, particularly in this market? A home run.

Written by mjkagan

12/19/2014 at 11:39 am

Describing what we do

leave a comment »

Have been doing some thinking about how, exactly, to explain how Adaptive helps clients deploy capital in the multifamily space.

Regular readers know we do bunch of different things, including:

  • Managing real estate investments (via discretionary funds and one-off projects)
  • Fee-for-service development (where we get paid cash to help investors buy and rehab their own properties)
  • Property management (for our own deals and select 3rd-party owners)
  • Brokerage

On the brokerage front, I’ve recently found myself describing our service in the following way:

“Adaptive applies the tools, methodologies and procedures developed for our own deals to the deals we do for our clients.”

Someone is eventually going to help me turn the above into a catchy tagline… clearly it hasn’t happened yet!

Written by mjkagan

10/28/2014 at 11:34 am

Why I talk myself out of commissions

leave a comment »

Recently, have found myself telling a lot of people not to buy real estate. Weird, right?

It’s not that I don’t think people should own apartment buildings. They absolutely should, for a whole host of reasons.

But the market is pretty hot right now and it’s easy to make a bad deal.

I don’t worry about this with the sophisticated investors with whom we work. They trust us not to do anything stupid and we take that trust incredibly seriously. Plus, being sophisticated investors, they are accustomed to deals sometimes not working out. So, in the unlikely event that we were to lose money (it hasn’t happened yet, but it probably will!), it would not be the end of the world.

I do, however, worry about less sophisticated / less wealthy clients of our brokerage. These people tend to have $50-500k to play with and that money is very, very important to them.

So, we find ourselves advising many of these people not to buy things that they themselves want to buy.

Why would a brokerage talk itself out of commission income?

The answer is pretty simple: The brokerage is tiny compared to the rest of our business. We have big ambitions for it, but those ambitions will only be realized over the course of years. And the way that we will realize them is to make sure that our clients are happy with the deals we help them buy. Happy clients refer their friends / family / etc. and that is, by far, the best kind of marketing.

So, we’re perfectly happy to tell people not to buy marginal deals. We figure, over the long run, earning trust is considerably more valuable than money.

Written by mjkagan

10/22/2014 at 9:56 am

If I were a broker…

leave a comment »

…who didn’t also renovate tons of apartment buildings, I would:

  • Run rent surveys across all relevant neighborhoods, all the time
  • Constantly poll my clients about construction costs for different finish levels and unit sizes
  • Constantly poll my clients about eviction / tenant relocation costs

Why would I do all these things?

Because, without the above information, I would:

  • Ignore some deals which I absolutely should push my clients to buy; and
  • Push my clients to buy some deals they absolutely should not buy.

Both of the above mistakes would cost my clients money (either in bad deals or missed opportunities) and therefore cost me credibility.

Fortunately for me and for our clients, Adaptive does so many renovation projects in the relevant neighborhoods that we know better than anyone what the above numbers actually look like. That doesn’t mean we don’t make mistakes, but it does mean those mistakes are rarer and less costly than they would otherwise be.

Written by mjkagan

10/20/2014 at 10:20 am

Building a reputation

leave a comment »

One of our agents and I just signed a listing agreement on a 4plex we will be bringing to market shortly. (If you want to hear about it before it goes on the MLS, I recommend joining the mailing list right now.)

When we were preparing our pitch to the owner, my colleague pulled all of the relevant comparable sales over the past year.

Guess what?

There are 26 4plexes marked as “sold” by the MLS in the areas in which we are interested (the improving parts of NELA) in the last six months. That means there were 52 “sides” (each transaction has a buy-side broker and a sell-side broker).

Adaptive accounts for six of those sides. No other brokerage accounts for more than two.

And we also sold two others off-market (four more sides because we represented buyer and seller) and another on market deal is closing today (knock on wood!).

I’ve thought for a long time that we were better than any other brokerage at helping clients navigate the complexities of buying smaller income properties in NELA. Now, it seems, the market is catching on.

Written by mjkagan

10/09/2014 at 10:00 am

How we value apartment buildings (part 2)

leave a comment »

In my last post, I talked about how our approach to valuing apartment buildings derives from my experience as an investment banker trying to value media and technology companies.

Simply put: When you’re trying to get a sense for the value of an asset in an illiquid market, you want to use all of the tools available to you.

For apartment buildings, here’s what we do:

1. Consider the property as a straight buy-and-hold / yield deal

This one is pretty simple. We assume the buyer of the property will be a rational investor looking to achieve a reasonable yield on the cash she will use to acquire the property.

We build a model of the property incorporating the rents it commands, reasonable estimates of the expenses, and appropriate financing structure(s). Then, we input a range of potential valuations, which results in the model outputting a range of potential yields an acquirer could expect to achieve.

Since we’re working with loads of buyers at all times (and buying for ourselves as well), we have a good sense for the yields buyers demand in the areas in which we’re active. One good way to think about valuation is to select the price at which a buyer would achieve the minimum yield which we have found buyers willing to accept.

2. If 2-4 units, consider as owner-occupier deal

Ah, but not all deals are acquired by rational investors. For certain properties, usually 2-4 units with at least one unit desirable, 2+ bedroom unit delivered vacant, an owner occupier will sometimes be willing to pay more than a rational investor would.

Why is this? People are irrationally excited to own their own homes. All the proof you need is right there in the sales data for single family homes. In Southern California, you can easily rent a home for $4,000 / month which would sell for $1,000,000. At 20% down and $800k borrowed at 4.5%, the owner’s monthly out of pocket expense is something like $5,500 / month. One way to think about the difference between the $4,000 and $5,500 numbers is that this is the premium people are willing to pay to be an owner rather than a renter.

So, when we are asked to value an income property which might appeal to an owner-user, we try to price in an ownership premium for the owner’s unit… in other words, we can confidently consider valuations for the building which result in the new owner paying more out-of-pocket each month than the unit would rent for.

3. Evaluate as re-positioning opportunity

There is a big category of deals that just don’t make sense as buy-and-hold / yield deals. These are typically properties with tenants paying far under-market rents. At a certain point, the rents are so low that a price derived from applying a standard yield to the expected cashflow would result in a ridiculously low price / sq ft or price / unit.

These are the deals we love to buy. So, we know the economics better than anyone.

By working backwards from the new rents possible in the property and incorporating an estimate of the profit a new owner would want to achieve for doing the hard work of repositioning the building, we can get at the maximum price this kind of buyer would be willing to pay for the property.

4. Evaluate as a development deal

You would be amazed at how few brokers think to check the zoning of properties they are valuing for sale. This is usually not a huge deal, because pretty often the existing structures are built pretty much to the maximum density that the lot allows. But, every so often, there are major, major exceptions.

I’ll give you one from my own career: I bought a 15 unit (with 1 additional, non-conforming unit) in 2009. Without stopping to consider the zoning, I totally rehabbed the building and re-tenanted it. Then, sometime later, I realized that the property was zoned for 26 units. I might have been better-off tearing down the building and building 26 units in its place.

Anyway, whenever we are valuing a property, we consider what a developer would do with the lot. We look at how many units can be built, how much it would cost to build them, what the resulting building would be worth, and how much profit a developer could expect.

Usually, the valuation resulting from this method is lower than from the other methods (after all, it implicitly values the existing structure at zero). But, every once in a while, it turns out that the land is more valuable for development than in its existing configuration.

Pulling it all together

The result of the above valuation methodology is to clarify what prices different kinds of buyers can afford to deliver for a property. This gives us (and the owner) a sense for the highest price likely to be achieved in a sale.

And, very importantly, it lets us know how best to market the property. For example: If what you really have is a land deal, it does no good to spend a bunch of time and money on staging and taking pics for the MLS, since the likely buyer is going to tear the place down, anyway. On the other hand, if you have a property that will work owner-user, then you want to spend some time and money really marketing that owner unit, because that’s how you’re going to get the best price.

Are you considering selling? Want to make sure your sale process is run in an intelligent manner? Get in touch and we’ll come run the numbers for you and discuss the right strategy for extracting maximum value.

Written by mjkagan

09/22/2014 at 10:18 am

Posted in Brokerage, How to

How Adaptive thinks about valuing apartment buildings

leave a comment »

The first time someone asked me to come in to talk to them about listing their property for sale, I was pretty unsure about how to handle the meeting.

Of course, I had my own ideas about the value of the property. But I was also concerned about the possibility of losing the assignment by being too conservative about the proposed listing price. After all, there a lot of brokers, some of them very successful, who “buy” listings by telling sellers what they want to hear, instead of what reality is.

In the end, I decided to fall back on my training as an i-banker. In that job, a few times a month, we’d be invited in to pitch for the sale of $20-250MM media / technology companies. Of course, the most important question from the potential client would be: “What’s my company worth?”.

This was a difficult question to answer, because companies are so different from each other.

The best approach was to use a combination of methods. We would do a discounted cashflow valuation of the company’s free cashflow. We would do an analysis of comparable sale transactions to get at a reasonable multiple of revenue and earnings (usually EBITDA, for the accounting nerds out there… which is an insane profit measure to use, but that’s another rant). Then, we would look at how the public markets valued similar, publicly traded companies (again, extracting revenue and EBITDA multiples).

Individually, these methods were unreliable. But, if you did the work and then put the value estimates together and took a range, you could get a pretty accurate sense for the market value of the company in an auction situation.

It turns out this is a very good way to think about valuing apartment buildings, too. So, in the next day or two, I will set out the way we here at Adaptive go about valuing apartment buildings here in Los Angeles for the purposes of selling them.

Written by mjkagan

09/16/2014 at 10:41 am