All Forum Posts by: Loren Howe

Just posting this in case my beginner’s case study might help others and also to get any feedback.   I own a half dozen residential rentals, but with high prices lately decided to move into commercial real estate for the first time, which seems to be a much more depressed market at the moment.  

I had about 1 million cash to invest, didn’t want to take a loan, and always purchase in one coastal mid Atlantic area where I have connections, know the market, and growth prospects are strong.  The first thing I had noticed from watching LoopNet over the years and limited research was that dealing with commercial brokers appeared even trickier than residential. Pocket listings almost seemed the norm for any good deal, and people online said you had to schmooze and build a relationship with a commercial broker to have a chance of finding the best deals.  This was precisely my experience.  The commercial returns available on loopnet or auction sites for public viewing generally seemed no better than I could’ve gotten buying overpriced residential property.  I made a list of a dozen of the commercial agents who showed up most often on LoopNet listings.  Upon phone messaging or emailing them my first big surprise was that quite a few commercial agents wouldn’t even return the call or seemed standoffish. This was despite my explaining that I would be making a cash purchase and already owned residential rentals in the area.

Eventually, I found one or two agents who were enthusiastic to work with me although not after first promoting their own noncompetitive pocket listings. I just continued to reiterate what I was looking for, and sure enough, suddenly an agent sent me a couple great deals, which did not show up on loopnet or the free version of Crexi.  So I guess that was my lesson number one: all the issues you’ll have with residential agents are magnified in commercial agents and finding a good agent to work with is more vital in commercial.  By the way, anyone please feel free to jump in and correct me or add to any of these points.

The next vague impression I had been given about commercial property is you’ll be dealing with more hard nosed and knowledgeable people. I found this to be exactly the opposite.  During the sales and escrow process everything was much more loosely goosey in commercial.  It was extremely hard to get information about properties while owners and brokers seemed a lot more careless and missed basic things.  There also seemed to be a lot more room to renegotiate management or purchase contracts versus residential where people tend to tell you things are set in stone. This ends up working out as an advantage to careful buyers, however, it also ends up wasting quite a bit of everyone’s time.

One thing I never quite understood was that everyone seemed adamant that the commercial sale should go through a lawyer versus an escrow company. This ended up costing me many thousands of dollars more but I didn’t want to hold up the process arguing about it, and since I was new and thought I might be missing some reason a lawyer was needed. In reality, the lawyer didn’t seem to have as much experience as an escrow company and the sale may have been delayed a bit in addition to costing more.  It also took me down the rabbit hole of the safety of escrow deposits which seems quite frightening. Apparently, neither lawyers nor escrow companies are generally bonded for more than $50,000? and in the extremely rare instance that someone runs off with your money it appears to me you’re out of luck.  I’d love to hear more from anyone with experience on this lawyer versus escrow company issue and how to protect your money while in escrow.   

The sale went through and the deal overall was much better than I could've found in the residential market in my opinion. Dealing with the management company has also entailed their typical issues, but at least you have far more leverage on a larger property. I've been able to get them to make concessions they never would've made if you were just an owner in an HOA. Overall, I'm quite happy to have ventured into commercial real estate. My impression is also that no one should be intimidated by it and that the people you deal with in commercial are actually less careful and hard-nosed than in residential real estate. Happy to answer any more specific questions and would love to have feedback on what I should've done differently.

Thank you so much for all the information!  It’s great to connect with knowledgeable people here and not be completely in the dark as I would be without this forum.  

Thank you very much for giving me a much better picture of how commercial quotes work.  I’m almost certain I never signed anything like a broker of record form so I’ll be interested to see how they blocked my agent’s quote.  Hopefully on Monday my insurance agent can/is willing to reverse the block with whatever I need to sign.  

One last thing I’m wondering, if anyone has insight, is why one quote would be 30% higher for what initially appears to be identical coverage.  Is it likely as my broker said that her exact quote was “taken over” by the other brokerage?  Can a new broker then tack on a much higher fee like this, or is it more likely that one broker conveyed different information about the property to Hartford?

It’s my first time buying a commercial property and I’m still in escrow.  I’m naive and wanted to get some input on what may be happening and what you would do.  

To avoid escrow delays and tenant upset, I decided to stick with the prior management company.  The prior Farmers insurance was relatively cheap so near the beginning of escrow I asked the management company if they could switch over the policies (or get a new policy) from Farmers using their contacts.  I assumed this was something a management company does and at any rate they said no problem.

After about a month and various excuses for delays in getting a quote, I decided to get a backup quote from my normal insurance agent.  My agent found a policy from Hartford somewhat higher than the current Farmers insurance which the management company was trying to transfer to me, so I told my agent I was waiting for a comparison quote.  

Fast forward to the LAST day of escrow, I wake up to two calls.  One from the management company telling me they finally got a quote which is double the current insurance price and no longer using Farmers but instead using Hartford.  Their Hartford quote is also well above the price my own agent had gotten me from Hartford and at least initially appears to be identical coverage.  The second call is from my insurance agent upset that I have apparently “signed over the Hartford quote they obtained” to my management company’s insurance agent.  My agent says the only way for her to get back the ability to write me Hartford insurance, was to send a written notice that she was to be my agent with Hartford.  All this was Friday so I just asked clarification from the management company on why the quote was so high versus existing insurance, or my own agent’s Hartford quote.  Then I called my agent and explained that I had never given permission to sign over her quote to anyone else and that I could send her anything in writing and would prefer to go with her quote.

Escrow happened to be delayed for other reasons, so I have some wiggle room in trying to sort this out. Otherwise, normally I would’ve been forced to use the high quote coming through my management company. 

Mostly, I’m just wondering what exactly happened here. I didn’t realize that one insurance broker can apparently block another insurance broker and take over their quote?  I thought multiple brokers could get quotes from any insurance issuer.  I certainly never signed anyone exclusive rights to be my insurance broker unless the management company is taking a very liberal interpretation of general wording in the management contract.  Anyway just trying to figure out what’s happening, what I did wrong, and any advice on sorting it out in the very short time frame I have left or in the future for switching policies.

Quote from @Evan Polaski:

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  When you dive into it, there are a lot of nuances.

First, there are subsections of retail: single tenant NNN, small unanchored neighborhood, grocery anchored, shadow anchored, power centers, regional malls, lifestyle centers, etc.

Then you get into tenant mix and market specifics. 

On the buying side, there are not really "re agents" per se in most commercial deals. There are listing agents, but buyers are almost always self represented with legal counsel helping negotiate LOI and PSA.

Loopnet and Crexi are the most common platforms for listings, but many brokers don't list properties there.  So, you will be going to CBRE, Marcus and Millichap, Cushman, Colliers, and likely some local brokerage websites to find various listings.  Most brokerages will have a retail investment sales team and likely a retail leasing team.  You will want to talk to both.  Sales, clearly for actual investment opportunities.  Leasing to understand market rents, pros and cons of specific assets, any insider knowledge on tenant interest, etc.

Then you get into the day to day operations.  Leasing, property management, tenant billing, lease administration, finance, capex budgeting, etc.  

Your leasing broker will be able to help with this, but things like which side of the street you are in can make a big difference.  Coffee shops like the "to work" side.  Grocers like the "coming home side".  Ingress/egress is considered, other tenant mix to draw foot traffic, exclusive use clauses, pylon signage, visibility, parking ratios, etc all matter. 

The biggest thing though is retail is not entirely price sensitive. Most retail tenants will happily pay more in rent if they can get more sales.  

I worked for a retail operator for many years.  The partners spent their careers in retail real estate and made a ton of money.  And like all real estate, the more stable the asset, the lower your yields will be.  The more risk you are willing to take, the higher the potential return, but also the more chance it will all crash down.

I’m curious when you say there are rarely buyer’s agents in commercial real estate, but buyers represent themselves.  How does the buyer insure the seller’s agent doesn’t pocket a double commission as they normally manage to do when you try this in residential real estate?

Just logging in to say I feel your pain.  I used to think residential brokers/agents were a terrible bunch, but commercial is another level of lazy/corrupt.  My experience is the exactly the same as yours, but guess we just have lots more effort and/or expense to even have data to begin to consider a deal.  One bright point is usually in any arena, the more difficulty middlemen create, the fewer investors you’ll have to compete against.

They have a minimum bid which is meaningless, low, and meant to generate interest.  Then there is a hidden reserve bid which will be the actual minimum bid.  So you’ll waste A LOT of time investigating properties not knowing the actual minimum asking price.  Many/most properties will also never actually go to auction after you investigate them. If they do go to auction in many/most cases you’ll find the min bid was above what you’d consider for the inadequate due diligence you are allowed.

Makes for huge inefficiency and risk, but if you can put up with all that then the greatly reduced pool of buyers probably allows for some good deals.  Personally I don’t like dealing with people who waste everyone’s time with deceptive practices.

 

Thanks Chris, yes I agree.  I've got a PM company for one property and they handle everything.  However, for the others I've got a local relative who is great for repairs and keeping down costs but I'll have to research this first eviction on my own.  I could easily hire a lawyer with the accumulated savings from not using a PM, but was hoping it isn't that complicated and once we learn the system on this first eviction it won't be as much trouble in the future.  

I'll be serving a 5 day notice to vacate in Virginia. I'm out of state, the property is owned by an LLC and managed by a local manager. Under the "From:" at top of the notice, do I list the LLC, myself the ultimate owner, or the manager, or all 3? At the bottom of the notice it is to be signed by the landlord's authorized representative who I guess will be the local manager who will show up in court? Thanks for any advice.

She's likely not going to find a stranger who is good at both real estate management and investing.  Also there is an enormous risk the stranger would not take their fiduciary duties seriously and would siphon off funds through high fees, etc.  She should look for trustworthy family members or others involved with the ultimate trust beneficiary.  Trust is by far the most important factor for a trustee, they can hire or seek advice on technical aspects of investing if needed.