Dealing with buyer conflicts

One of the issues I deal with periodically is “buyer conflict”.

By buyer conflict, I mean the situation where multiple buyers with whom we are working decide to offer on the same piece of property.

As you might imagine, this presents a problem: We always want to help our clients get what they want, and this is one of the few cases where we will definitely fail at least one client (since, by definition, only one can buy the property).

So, how do we handle these infrequent, but annoying, conflicts? About how you would expect – gingerly, and with focus on behaving ethically.

In general, we:

  1. Give priority to the first client who decides to offer on the property.
  2. Cooperate. Once an agent has offered for one client, if another of his/her clients wants to offer, I personally write the offer for the second client;
  3. Never disclose proprietary information from one client to another or one agent to another. So one client will never hear what the other client is bidding. And his agent won’t hear what the other client is bidding, either; and,
  4. Disclose, disclose, disclose. With the exception of proprietary information relating to competitive bids, we favor total transparency. So, if we’ve written for one client and another ends up wanting to write, we make sure both of them know we’re representing multiple clients.

Buying good deals is, almost by definition, a ruthlessly competitive business. We do our best to help our clients get what they want. And, in the rare cases when our clients want the same thing, we do our best to give them the best possible help/advice, so that the client who wants the property most ends up getting it.

Navigating the broker/principal divide

One of the weird things about our business is that I am both a broker and a principal investor. That means I look at deals for other people and for myself.

Who cares? Other brokers.

Brokers make money as middlemen. Their goal is to know who’s selling and who’s buying and match the two together. Simple, right?

The problem I sometimes have with brokers is that they are worried about sharing information with me. On the one had, they know that I buy all cash, close quickly, etc., so, in some ways, I am an ideal client.

On the other hand, they are aware that I also help other people buy stuff and they are concerned that they will share some information with me about who is selling and that I will then sell the deal to one of my clients, thereby cheating them out of a commission.

This is a totally reasonable and valid concern.

Here’s how I handle it: I never, ever share information about deals which brokers bring to me as a principal without getting their permission first.

The reason is simple: Sure, I could use the information to make a quick commission. But I’m in this business for the long haul. It does me no good at all to get a reputation for screwing brokers out of commissions… they’ll just stop bringing me good deals!

How I pick agents

Was just thinking about the commonalities among the sales agents we’ve recruited to Adaptive Realty, Inc. and thought it might make interesting for everyone.

Here’s what we look for:

1. Integrity – This one is obvious. I can tolerate mistakes (the first time someone makes them; not the second). But I absolutely can not tolerate dishonesty. At the end of the day, if one of my agents screws up a deal because s/he lied or covered something up, I’m the one getting sued. I don’t mind (and, indeed, encourage) playing rough if that’s what it takes to deliver for my clients. But I need total transparency / honesty and I won’t settle for less.

2. Reading and listening comprehension – Being successful at doing real estate deals requires you to quickly take in large amounts of information, figure out what’s important, and then maneuver to get the outcome you want. There are tons of tricks and subtle nuances, but you can’t access any of them if you can’t read / listen and comprehend quickly and accurately.

3. Curiosity – I still learn something new on almost every deal I do. Do you know why there is CW zoning in a one part of Westlake? I do. Do you know what material sewer lines were made out of in the 1920s? I do. Do you know the reasons you can legally evict a tenant under the RSO ordinance? I know that, too. Why do I know all this weird trivia? Because I pay attention, ask questions, look stuff up. Over time, the little bits of information cohere into a framework that allows one to look at deals in a more sophisticated way. But that only comes from being curious enough to gather all the information along the way.

4. Tenacity and (controlled) aggression – This is a big boy/big girl game. When there’s a good deal, you need to jump on it. That means you need to get off your ass and MOVE before the other guys do. You can teach people a lot of things, but you can’t make them energetic and tenacious. Either they bring those traits to the table or they don’t.

5. Ability to sell – I don’t just mean “to clients”. A huge part of an agent’s job is to sell his clients’ offers to listing agents. There are all kinds of tricks for distinguishing your offers from other peoples’, but a big part of winning in this game is conveying to the listing agent that your client is serious and intends to close. That’s all about selling.

6. Numeracy – This is pretty self-evident. My whole brokerage is based on the following concept: If the numbers make sense, lean hard towards doing the deal. We’re not doing rocket science here, but you need to be able to look at and understand spreadsheets, etc. If you can’t do that, you might as well go peddle townhomes in the Valley.

7. Willingness to get dirty – A large part of what we do involves looking at a screwed-up building over the course of a 2-3 hour inspection and helping the client figure out exactly how screwed-up it is and what it will take to fix it. Being willing to get your hands (and knees) dirty crawling around / underneath apartment buildings is part of the game.

Did you notice that “experience” isn’t on the list? It’s not that I won’t take on experienced agents. It’s just that I find that most agents who’ve been doing this for a little while have not been doing it particularly well. I’d rather find people who have the above characteristics but who, for whatever reason, didn’t “click” with another career*, then train them to be great at real estate.

We’ve got four people working with Adaptive now who fit the bill, but we’re always looking for more. If you know someone who you think might have what it takes to do this stuff well, send them my way.

* Interestingly, I’ve had a lot of success with people who went into creative fields after college, recognized that those fields don’t pay very much, then decided to try real estate. 

Why I don’t write much about our funds

Got an email from a reader recently asking me why I don’t write more about the funds we run.

Believe me, I’d love to!

The problem is that I don’t want to run afoul of securities regulations, which prevent the open advertising / marketing of unregistered securities.

The reasoning behind these regulations is sound: The government has an interest in preventing hucksters from setting up BS investment vehicles and scamming unsophisticated investors into parting with their capital. So, if you want to market to the public, you need to be registered with the Securities and Exchange Commission, which is a very expensive proposition.

However, there is an obvious need among entrepreneurs for cash from investors. After all, there are plenty of investment opportunities which:

  • Require more money than can normally be mustered by an individual or family;
  • Are too small to interest large funds / public companies which can advertise publicly;
  • Are too complicated / risky for bank debt to fund; and
  • Which are still sufficiently interesting to be worth doing

Responding to this need for private equity, the government has carved out a workable loophole: Entrepreneurs can raise money for these kinds of opportunities from high net worth investors, so long as they don’t solicit publicly (and so long as they abide by a whole bunch of other requirements). Basically, the fundraising needs to be done via personal contact / referrals / introductions.

Because I don’t want to violate the law, I don’t write about my funds directly. It’s kind of a bummer, because this blog would be, in some ways, a pretty great fund-raising platform. And also because, as you may have guessed, many of the most interesting things I’m working on right now relate to our funds, meaning that I can’t share as much as I’d like to you with!

The required legalese: This post is NOT, and should not be interpreted as, a solicitation for investment or for the sale of any securities. Also, I’m not a lawyer, so this post should not be considered legal advice.

Fee for services

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.