Commercial realtors and their faulty analyses

Multi-Family and Apartment Investing
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Commercial realtors and their faulty analyses

Christian CarsonPro Member
Cleveland, OH · Member since 2011 · 400 posts · 223 votes

I just got off the phone with a gentleman selling two duplexes in my target buy area. He asserted that the prices asked were a "solid 8.5% cap," but a quick glance at the numbers reveal that all of the soft costs - capex, maintenance, vacancy and property management - were disregarded. I see this on a lot of properties.

Conversations about these numbers with brokers can get quite awkward -- I've had some tell me that it's industry standard to price multifamilies this way (no way!) and others say that the price is the price.

Are these kinds of deals just dead in the water or has anyone had any success sending off an estimate of the true value based on actual expenses? These deals would be worth it if they actually delivered 8.5% cap.

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y

Tax returns, books, contracts, look for "source documents" for claims made. Tell them you don't need the full tax returns, just the schedules pertaining to that property. Much of this should be done at least after a letter of agreement or contract, such being subject to verification. It's also easier to ask for verifications before the seller or agent starts making claims, get that out of the way early on. "I'm more than willing to pay a fair price based on verified income and expenses" is a pretty heavy clue you're not interested in claims being made. If they flutter, ask why, put them on the spot! If they have any reason not to disclose after you show you are really a buyer, tell them not to expect your best offer, if they think they will get a better offer, they usually get serious and open up. No other astute investor will be giving their highest either unless the seller opens up. That means the seller/agent is hoping for a potential buyer to screw up and offer too much, that shouldn't be you.

Trust but verify, LOL :)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Any listing agent will try to show the deal in its best light, most don't understand that the seller's cap rate will rarely be the buyer's cap rate, so don't even go there. Just say, oh, really, and move on to get the actual expenses. Verify expenses. If they won't let you verify actual and you're still interested then base your offer on your estimates and customary expenses in your market to arrive at your offer. It's not that a seller or listing agent will lie or really puff the deal (but some do) it's that they don't understand that how you get into the property will be different than where that seller is in his holding costs and cap rate are irrelevant. Just won't be the same! So, why even go there? But many like to go there making representations as to how great it is. :)

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  • Christian CarsonPro Member
    OP
    Cleveland, OH · Member since 2011 · 400 posts · 223 votes
    12y

    @Bill Gulley - How do you suggest verifying maintenance/capex in a way that's useful? When I've asked before, I usually get some line like "it has a new roof. No maintenance needed at all."

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Tax returns, books, contracts, look for "source documents" for claims made. Tell them you don't need the full tax returns, just the schedules pertaining to that property. Much of this should be done at least after a letter of agreement or contract, such being subject to verification. It's also easier to ask for verifications before the seller or agent starts making claims, get that out of the way early on. "I'm more than willing to pay a fair price based on verified income and expenses" is a pretty heavy clue you're not interested in claims being made. If they flutter, ask why, put them on the spot! If they have any reason not to disclose after you show you are really a buyer, tell them not to expect your best offer, if they think they will get a better offer, they usually get serious and open up. No other astute investor will be giving their highest either unless the seller opens up. That means the seller/agent is hoping for a potential buyer to screw up and offer too much, that shouldn't be you.

    Trust but verify, LOL :)

    2Reply
  • Eric Belgau
    Insurance Agent · Olympia, WA · Member since 2014 · 168 posts · 88 votes
    12y

    Hi Christian,

    Whenever I'm up against a salesperson I feel that my job is to skip his or her narrative. The salesperson has to tell me a story, and if I let that happen then in order to get to the facts I'm going to have to contradict the story. That creates a kind of conflict that isn't particularly useful, in my opinion.

    The best way I've found to skip the narrative is to start the contact with questions. "I'm interested in X, and in order to do my due diligence I need to know Y and Z." That puts the salesperson in the position of providing those numbers or losing the contact, and once you've got them you can do your analysis.

    It's also a way to get past what can be a point of conflict while maintaining a very upbeat and positive contact.

    1Reply
  • Jack Rosenfeld
    Lender · Seattle, WA · Member since 2013 · 17 posts · 9 votes
    12y

    You will see a lot of the listings for MF give a cap rate based on Pro-Forma. Your best bet is to try to get all the financial information you can get evaluate the actual numbers (plus come up with a pro-forma of your own), and make an offer based on the cap-rate of the actual numbers.

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  • Christian CarsonPro Member
    OP
    Cleveland, OH · Member since 2011 · 400 posts · 223 votes
    12y

    In the case of the last prospects, my numbers (even generously construed) would demand that I make an offer for 33% less. The realtor called me again today and walked me through his pro-forma. When I pointed out that his property tax number was almost half of what it should be at that price, he said something about using an LLC to disguise the sale transaction from the auditor. I told him that wouldn't fly and he gave me a bit about how "we would like to sell it to someone who wants to owner-occupy this property." I told him that it's my plan to do so, but I'm not going to pay too much for a property regardless of how much I like it.

    It seems like at least half of these realtors are trying to pull the wool over my eyes. That last comment that the realtor made just screamed "we're looking for a sucker!"

    The most laughable part about this exchange is that anyone who would want to owner-occupy would be seeking conventional financing, which means that they couldn't use this LLC sale disguise method that he suggested. I didn't bother explaining that to him. I wonder if he knew that he was using the wrong tax number or not.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    I really wouldn't classify a broker/agent selling 2 duplexes as a commercial broker/agent.

    At least not to me they aren't.

    2,3,4 units is residential property for lending purposes. You are applying income numbers with the commercial approach to a duplex. The seller is looking for a sucker or someone who just breaks even on the mortgage and is happy to not make cash flow and pay a higher price.

    This broker/agent might not have any investment experience themselves and not know anything from what they are talking about. They also might have drank the sellers Kool Aid (what they were selling) to get the listing. A majority of the stuff out there I evaluate for clients the numbers are off from the stated cap. On Loopnet it's hilarious because the listing agents will post a novel about all this stuff but leave out the rents and unit mix! Just give me the rent per unit and unit mix that make up total units and what utilities the landlord pays. From there I can run my own analysis in under a minute.

    If a seller contacts me I can't list or assign what I know I cannot sell. I know what the numbers need to be. If the seller wants to claim 30% total expenses I would be the laughing stock for taking such a listing.

    You get sellers like this on large apartment buildings too. Main thing I see over and over again is a building built say 10 years ago. Seller claims look at tax returns and very little expenses. Might be correct but now my buyer in years 11 through 20 will have way more repairs to the property reducing cash flow. Therefore I am using XX percentage for the projected numbers and not your historical repair history from when the property was brand new. The sellers are smart and looking for someone not to catch things. That's probably why they are selling as they see the capex coming down the road impacting their returns ............. : )

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    12y

    As @Joel Owens said this is not a commercial property. Look at the comps if you can find them. The appraisal will be based on comps. Previous expenses may not be near your expenses especially if there is a lot of deferred Maint. A lot of the Maint could be done by the owner .

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  • Johnny P.
    Real Estate Broker · Orlando, FL · Member since 2008 · 181 posts · 66 votes
    12y

    try to verify the income by asking for a current rent roll & P&L. Schedule E helps of course.

    Verify the gross income

    calculate the property taxes that you will pay when the property is re-assessed after the sale

    Get a few new insurance quotes because it normally increases for new owners if your lender requires windstorm coverage

    Add a management fee

    use the 50% rule to quickly look at deals to estimate a cap quickly

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  • Christian CarsonPro Member
    OP
    Cleveland, OH · Member since 2011 · 400 posts · 223 votes
    12y

    Thanks all for the insight. @Jeff Greenberg , you're right that this isn't a commercial property, but the agent is from a commercial brokerage and presented the deal to me in terms of cap rates. When I hear that I go into analysis mode and usually find that their cap rates are off by several percent.

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  • Joe Fairless
    Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    @Christian Carson - rule #1 is never believe a broker proforma. I've found that when I do run the #s and go back to the broker they are willing to bring it to their seller assuming the #s are done logically. It's important to talk through the #s with them and why you're doing your assumptions that way.

    If logic doesn't work with them or the seller then move along. That trend will persist in future stages and you're about to entry unrealistic expectations territory. But do follow-up with them later, after the property as been sitting on the market, and re-present those #s. You'll get favorable results.

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