10 Questions to Ask Before Working with an Out-of-State Broker
Like the large exodus of remote workers fleeing high-tax coastal states for lower-tax states in the Midwest and South, commercial real estate investors are also fleeing the cap rate-constrained coasts for the Midwest and South for higher cap rate opportunities ignored by foreign and large institutional investors.
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The Appeal of Commercial Real Estate
Sophisticated investors love commercial real estate (CRE) because it’s an inefficient market. Unlike efficient public markets where there are few opportunities—ones that are not illegal, at least—to exploit informational advantages for financial gain, the private CRE segment is rife with opportunities.
Because of public company disclosure requirements and the immediate dissemination in the financial press of any news or reports related to a company, it’s near impossible to find any unknown information about a company to be able to exploit for gain. The same is not true in the CRE market.
In CRE, market inefficiencies can be exploited for significant gain by finding off-market opportunities not available to everyone. Someone with boots on the ground and intimate knowledge of a specific market is more likely to come across these under-valued opportunities than someone who’s not in the same position.
Even in hot markets with heavy investor and tenant demand, arbitrage opportunities still exist for those intimately knowledgeable and familiar with the region. Investors with informational advantages that can find value properties in these high-demand markets put themselves in the prime position to either immediately unload these properties for a quick gain or hold onto them for consistent cash flow because of a large, reliable renter pool.
So, what about out-of-state investors looking to establish a foothold in a new market?
How to Invest in a New Market Successfully
The key is finding and working with a superstar local broker. The difference between a good broker and a mediocre one could mean the difference between establishing a long, trusting, mutually profitable professional relationship with a reliable broker or spinning your wheels and wasting your time with an incompetent one.
Your success in a new market and your ability to seek out and take advantage of arbitrage opportunities from finding under-the-radar assets will often hinge on the real estate agent or broker you decide to work with. The ideal broker will have the boots on the ground and intimate knowledge needed in order to serve as your proxy and be your eyes and ears in that market.
Beware of brokers who think every property for sale is a great deal. These brokers think like salesmen who are only interested in making the sale and banking the commission. You want to work with brokers who think like you, who have your best interest in mind as a real estate investor, and who don’t see you as just another buyer. The best brokers will be the ones that speak your language.
So, how do you find the right brokers—the ones that speak your language?
How to Find a Great Real Estate Broker
Here are 10 questions that should help you identify an ideal broker:
- Do you own any CRE directly or have passive investments in CRE?
- What asset segments do you prefer? Multifamily? Office? Retail? Industrial?
- If you do invest in CRE, when evaluating new opportunities, what kind of financial metrics do you target? What’s your target going-in (1st year) cap rate? Target terminal (at time of disposition) cap rate? Target IRR?
- What’s your preferred investment strategy? Core? Core-plus? Value-add? Opportunistic? Why do you prefer this strategy and why do you like it for this particular market?
- What kind of professional, community, and interpersonal relationships do you foster to find off-market deals?
- How many listings do you have at this time?
- What trends are you seeing currently in this market? What are the economic and demographic drivers fueling this trend? What are the long-term prospects of this trend?
- What particular areas in the market are seeing headwinds or challenges? What areas would you avoid altogether?
- How do you evaluate and vet your personal CRE investments? What can I expect when I work with you in terms of sourcing, evaluating, and vetting potential investments?
- How extensive is your support team? Do you have an assistant or team to help you?
The Bottom Line
You can't be everywhere at once and can't wear every hat when it comes to your CRE investments. That's why if you're a seasoned CRE investor, you've learned to leverage the expertise of others to make your life easier and to profit financially. Investing in new markets will require the same trust in the expertise of others in order to succeed.
Your gateway to success in a new market will be finding a local broker or agent who knows how to find, evaluate, and vet great deals in this market. The key is identifying a broker who is also an investor, one who speaks your language.
A broker only interested in selling CRE—not investing in it—is like a stockbroker only interested in churning transactions in your portfolio to make those per-transaction commissions. The only one making money in both scenarios is the broker, and they’re not interested in whether you make money or not—as long as they make their commissions.
The right broker will understand your perspective as an investor because she or he is also an investor. Hopefully, the questions I listed above will help you vet out and find these super brokers.
Are there questions you’d add to the above list?
Weigh in below with a comment.