Hello BP - I’m finally confident enough to take action. I’ve decided what markets to target, my property criteria (40+ units, etc), and want to start analyzing and looking for deals in those markets. I have a list of brokers I want to call. What’s stopping me from picking up the phone is this:
Will commercial brokers ask for proof of funds? My plan is to do a capital raise once I have something under contract, for down payment & any rehab costs. Is this a fair plan of action, or will brokers laugh when I tell them this, and not want to work with me? I’ve heard/read about investors saying they first get a property under contract, and THEN line up the capital. So I know it can work like that. Since I don’t have a track record yet, I guess my main concern is coming off as not sophisticated enough! But everyone starts somewhere and I know I need to pick up the phone and start building relationships.
For new investors taking the leap to call their first commercial brokers, what advice would you give?
All great questions, Meredith! Also a newbie that share these same questions and concerns. Hope to get some valuable insight on this post from one of the pros.
Hi @Meredith L. ,
I can speak from a commercial mortgage broker perspective. I would be open and up front about your situation when you speak with sales brokers. Lots of large commercial transactions require creative equity financing, and brokers should be comfortable guiding you in the right direction. They may even know some good equity partners that would be interested in working with you. If the broker declines to work with you, don't take it personally and just move on to the next one. No one gets a bad reputation for being new.
I would suggest that you start putting feelers out for potential equity partners now. Draft up a 1-page sheet listing the type of property you're looking for, and what kind of capital partnership you're picturing, so once you find the right property, you have a list of potential investors ready to go. I like my clients to have a basic financing structure in place before they submit an LOI, and then tweak the numbers as we progress through due diligence.
Call them and say what you what and the returns. Ask them to include you in their mailing lists.
Learn how to analyze a deal under 2-3m so when they send you a deal you always respond with numbers justifying you purchase price bid
Not exactly what you're asking, but it concerns me that you said you want to "start analyzing..." I don't plan to buy my next property until 2018, but I try to analyze every day since these tools are new to me. I want to be comfortable with them, but more importantly, I want to be able to recognize a good deal when I see it. I believe analyzing and finding good deals when I'm not looking is important practice for when I AM looking. Brandon Turner agrees. He says to analyze 3 per day for practice.
I agree with the others about having something at least planned, if not officially in the works for your financing. You aren't looking at $50k properties, so it may be harder for you to find financing since it's your first time. (I'd also double check your credit score to be sure it's where you think it is, too.) I once had owners agree to a steal of an offer just because the last 2 people couldn't get financing and I could prove I could. :-)
Good luck with your plans!
Meredith it sounds like you want to syndicate but have limited experience or a track record. What I have seen others do before is have a mentor as part of their team.
In the prospectus it does not say mentor but a trusted advisor and backer as part of your team. There are people such as Joe Fairless, Craig Haskell etc. where I have seen people associated with them have them on their website and marketing materials.
I can't speak for them or what they do and no legal advice given just something to look into. That way when you find a deal your coach or mentor could show you why or why not it's a deal, have the financial proof of funds to back the deal, and the lender relationships to get a loan easier.
If you do not get help you are stuck in a catch 22 meaning if you actually do find a deal but have limited experience to get passive accredited investors to take a gamble on you they tend to want above market preferred returns to invest. That makes it tough as the higher cap rate good deals go to the (proven buyers) with great experience that will give surety of close but always tend to want the best deals.
For a seller to take a chance on you they often have to get better pricing and lower cap rates rather than going with their known buyers. The lower cap rates will make it to where you cannot likely offer the returns investors would want to invest with someone new for the risk profile.
So even on your first deal the likelihood is you will be giving a chunk of it away to a partner to drive the deal along with the passive investors.
You have to crawl before you walk, walk before you run,etc.
If you tell a commercial broker you want to find a deal then get capital and a loan with limited to no experience generally a hang up of the phone in a few seconds. The reason is you want to LEARN how to do something but have little to no funds or experience. So the commercial broker sees that typically as a very long shot to happen. We get paid when we close. Everything up to that point is an investment of time. Experienced brokers analyze that time spent and the odds it will lead to something.
Eventually if you look high and low you might stumble across a deal or it might not be a deal at all you might just not have the experience or knowledge level to see it yet. That is where the mentor or partner comes in. They are not free and it is an investment.
When someone wants to buy retail and they want to learn I am happy to help when they are buying through me directly where I make a commission or invest with me passively as an accredited investor. If they just want to learn the asset class and do nothing I do not have time for that. There are courses they can go to and pay 30,000,40,000 etc. to get information and if they do nothing with it they lose money. My time is worth thousands and hour these days.
Most of the deal packages can be downloaded from the brokers website. You can analyze these deals from the information provided on the website.
Part of a brokers job is to qualify buyers. I recommend you find a partner or three who has experience and funds. You add value to the relationship by finding deals and they add value by being able to execute.
Thanks for everyone's insight! To expand a little on where I'm at:
Great news is I do have a mentor who will help me evaluate properties and will partner with me in some way on the deal. I'm going to ask to see if he's okay with me mentioning his experience when I'm building my team and talking to potential lenders and brokers. Being able to piggyback off his resume will hopefully get me past some of these major hurdles.
I have been analyzing deals, what I meant to say is that I want to start analyzing as many as possible in my particular SUBMARKETS to better understand those submarkets and recognize a great deal when I come across it. There just aren't that many properties on LoopNet in the particular areas I've decided to target.
Once I have a deal, my spreadsheet of potential private lenders I'll reach out to to fund the deal is already ready to go. I'm constantly adding to it, and networking by going to my local REI meet ups.
@Andrew Beauchemin - love the idea of having a more detailed 1-page summary of my property criteria, ideal financing structure etc. I'm definitely going to do this. And you're right, I can't change my experience level but that shouldn't deter me from at least speaking confidently with lenders and agents. I would love to be able to structure a deal with 75% bank financing and 10% seller financing/SCB. I'm sure there are ways to get a lot more creative!
@Joe LaFleur , That's a great tip to look for deal packages on brokers websites to analyze. I'll start looking for that.
@Joel Owens Everything you wrote makes a lot of sense. Having a trusted mentor/coach on my side is probably the only reason I think I'll be able to successfully buy an apartment as my first deal. Before connecting with a mentor (through networking) I was stuck in a smaller mindset, focusing more on 2-4 units. What are your thoughts on reaching out to very new commercial brokers who might be hungry for commission? I'm not in this to waste anyone's time, but new brokers might be more amenable putting me on their buyer's list, and they might have more time/hustle than the experienced brokers (since they have no choice but to hustle to be successful). Do the younger brokers at firms also know about the off market deals that the seasoned brokers know about?
@Jody Schnurrenberger Just clarified in my post above. Completely agree. Need to analyze a LOT of properties to know what's an actual deal!! Good luck to you as well :)
Why not start smaller at first? You mentioned you were stuck initially at 2-4 units but your mentor encouraged you to think bigger, but on the podcasts I hear a lot of investors advising newer investors to smart small and then scale up, just because a failure with a 40-unit could be a lot more detrimental than a failure with 1-4... that way you could build your portfolio and demonstrate to lenders your ability to manage smaller holdings first...
It's not unreasonable for them to ask about your sources and uses/financing plans. If your plan is to figure it out when it is under contract they'll want to know how many deals you have done where you have successfully raised funds after a deal under contract, and how much equity did you raise. The market right now is incredibly competitive and is a sellers market. As a seller, if I have multiple buyers bidding at around asking, even if you are the highest bidder but there are two others that have any sort track record of closing, who would you sell to?
I would have a good idea of where your equity is coming from, they don't need to be fully committed but you don't want to start having conversations about who you are and what you do while you're in DD. I would go over underwriting/analysis of several prospects with potential investors, even old deals, to see if they would be interested in that type of investment. Once they're on board with the strategy, then you can even tell the broker that you have x number of investors on the sidelines waiting for a deal. You still have the line up the capital, but you want to have an idea of what the capital stack is going to look like before going in.
@Rachel N. lots of people do advise starting small, which is a perfectly fine approach. i also hear lots of people saying their biggest regret was not starting bigger. since i have a mentor, and other local investors i’ve built relationships with through networking, to walk me through it I figure I might as well aim a little larger and go after a medium sized multifamily as my first deal since i have the resources.
@Spencer Gray I really like your idea of approaching potential partners with example deals to at least introduce the topic and gauge their interest. I’m going to start with my closest network - friends, family, former coworkers, etc. Most of these people already know what I’m working towards, and some invest in real estate themselves.
I have found that moving quickly is the best, meaning if you can close quickly you will be great!
@Meredith L. do you have someone on your team who understands the local market and knows what the typical costs per unit for the asset class and size? How much are capex reserves, vacancies, improvements budget, rent increase potential, etc? If not, form a relationship with a property manager and lender who specializes in the type of asset you seek.
Brokers and sellers understand that you may syndicate the deal. The last LOI we signed in a new market was submitted with a list of RE owned by key principals of the deal, so that the broker and seller can be confident in our ability to close. There is a little bit of selling to the seller (and/or their broker) by the buyer if in a new market.
Hi Meridith, I am a new commercial investor too and was concerned about calling brokers as well. But I was listening to a commercial real estate advisor on youtube and he said “they are just people like us, with same life challenges. Best way to get started is to just jump in.” I did and so far they have all been very professional. Plus as an investor, your are their client - thats how they earn their pay check.
If you are NEW money talks because with the right guidance a closing might be possible. If you are new, little to no money, no experience then if a broker or seller spends time trying to make a deal with you they are essentially throwing a (hail mary) and want to score a touchdown.
This is why if you try to low ball a seller and you have all those things going against you from the start most will not give the time of day to you. The reason is for that same offer they have a KNOWN closer of a buyer already and they are experienced so the seller does not have to hold their hand.
There has to be a material benefit to the broker and seller to want to put the time in. I am not saying it is impossible but would be very challenging. On the commercial retail side I work with new clients all the time BUT they fill out a PFS statement showing their capability with income,liquidity, and net worth to buy. If they have to get a (friend of a friend), form a group, someone else is the decision maker,etc.,etc. I do not like to put time into such scenarios. The reason is based on 14 years of experience the failure rate is very high and usually it will not lead to a closing.
Try getting a group of investors all new to figure out what each wants out of buying a property and get all their schedules and timing to line up to affect a sale with the sellers schedule also. Throw on additional layers such as some are out of state or out of the country etc. You just keep compounding more and more things to make chances higher of failure. I like vanilla transactions generally dealing with one person at a time. Now there are some groups and REIT's etc. that are very experienced but still dealing with one head person and they make the decisions fast and have final say.
Everybody starts somewhere. The original poster mentioned they have a mentor. It's key to clarify what the mentor will or will not do for them. If it is just an occasional analysis or two from time to time that is different from someone who will (kiss the note for financing, bring some equity of their own, bring other passive investors they know into the deal,etc.)
Meredith I am an equity investor.. and I work in the mid west A LOT.. not necessarily in that asset class but in rental properties.
I am going to be brutally honest here. There is no way I would even consider for a minute investing with someone like you.
1. out of state ( highly risky you don't really know the market)
2. Zero experience in the space
3. No experience managing investor money
what will happen is if you can get a seller or broker to even work with you .. your not coming in from a position of strength.. to mitigate all of the above you need to have your capital and financing arranged so when you do make an offer you have real POF Not hey I am going to go try to raise the dough. .and you have financing available ( which could be tough for you being a first time sponsor with no experience)
I suggest you talk to some lenders now before you waste thousands of hours looking at deals.
what you will find out though is there are all sorts of Ghetto dogs in the mid west that will take a flyer with you .. the nicer performing properties the brokers and owners are going to want to deal with a proven source who has all of the above.
Now as a Equity investor you talk about a market you KNOW and live in that mitigates one negative.. you find a screaming deal and you have brought value.. investors will over look number 2.. and number 3. .but you still need to work on how are you going to finance this realistically. This is were others are suggesting starting a little smaller were you stand a better chance at capital raise and financing..
most of those I know in the Multi game started in a progression.
One gal I know in Oregon they started with a 4 plex and in about 15 years through a series of sales and 1031's ended up with a 54 unit.. they made a classic mistake and sold it thinking C class mid west was better cash flow.. they sold and bought a 300 unit in the mid west and guess were they had to move.. they damn near lost it.. finally sold it and came back to ORegon down sized and are happy..
Now if you have your warm market IE family and friends that will put up equity and probably help you with loans.. that's different but to go out into the open market .. boy that's tough.. and I think a does of reality instead of RA RA you can do .. might be a good thing for you.