A Close Encounter With My First Commercial Broker

It has been an interesting feeling being a newbie again. As I have written about in this space, I have gotten so comfortable with the single family side of the Cash Flow business that I bought the last one on my lunch break. But now that I’m after apartment buildings I’m starting over from scratch.

Sure a lot of the skills and knowledge is transferable and leverageable, but let me tell you that pursuing your first million dollar property is a LOT different than buying your first $50k rental. A WHOLE lot different. At least that’s what’s what I thought at first.

So to get started I read some books, I bought a course, and I did a ton of research on internet** on buying multi-family properties. All good stuff, but it only went so far. What it did, though, was validate that in this area at least, Return on Investment was it – THE criteria – that determined if a property was a deal or not. And being a finance guy I liked that a lot. No emotion, no subjectivity, no soft and non-quantifiable factors. Just ROI and nothing but ROI. At that point I was ready to get some practical and actual information.

I started with the Apartments For Sale listings in the Sunday Detroit News real estate section. There are three or four commercial brokers that advertise there regularly so I decided to start with them.

Now I had been warned that the commercial real estate business in this area was like the Land that Time Forgot when it came to leveraging technology, but I was unprepared for just how bad it really was when I reached out to the first one.

My first clue should have been the lack of voicemail, or I should say, the cassette tape answering machine that took messages for everyone in the office when you called. They didn’t have email, didn’t have a website or even use the internet, and their listings were typed – with an IBM Selectric typewriter – on legal size paper. I swear that I haven’t seen one of those since High School.

But while their particular idiosyncrasies were a little strange in this era of Facebook, Twitter, and Web 2.0, there was really nothing wrong with doing business that way if it worked for them. I actually thought after a while that it was kind of nice to do things the old fashioned way – face to face.

But unfortunately, my sense of amusement and comfort with that office went out the window about two minutes into my meeting with the broker. They were replaced by red flags and warning bells.

Why?

Because this guy started telling me things that not only didn’t make sense, but that were downright WRONG. And I knew this instinctively without ever having talked to a commercial broker before. It was THAT obvious.

What did he tell me? Here’s a partial list:

  • You can’t buy properties that cash flow outside of the city of Detroit
  • There are no owners selling apartment buildings on land contract outside the city of Detroit
  • Nobody in this market will do a 10% seller carry-back for part of the down payment
  • You don’t look at the cap rate when you buy a building because it’s meaningless
  • The only criteria that matters when you buy a building is cost per unit
  • You can’t buy a building in the suburbs for less than $50,000 per unit

And I could go on and on, because this conversation went on and on for 90 minutes of more of the same. The listings that this broker put in front of me were, as a rule, at least $200,000 over priced, and I have seen four of the buildings that he showed me that day get listed by other brokers for as much as $350,000 LESS.

Unbelievable. I left that office as fast as I could. Just for yucks though I decided to actually go look at a couple of the buildings that he had presented to me, because I figured that more education couldn’t hurt. I even ran the numbers on two of them and called him back to see if he was serious about his prices. And he was, to the extent that he told me that he wouldn’t even present the numbers that I was talking about, even though I was talking in the area of a 9 cap rate.

Unbelievable. After this meeting I was really hoping that I wasn’t going to hear the same thing from every broker.

 

Check back in a few days for the next installment called “The One Trick Pony Apartment Guru”

** One excellent resource that I highly recommend is John Reed’s website at JohnTReed.com. He has a couple of excellent free articles on apartment investing, cap rates, and the like. All great content without much of a sales pitch.

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