Real Estate Investor Series Part 2: The Dirty Little Secret In Real Estate Investing
Investing in real estate can be a great alternative to stock investing that not only can bring excellent returns but also allows you to diversify into other asset classes.
There is a dirty little secret in commercial real estate that is played and rarely talked about. It’s not illegal but can at times seem unfair and very frustrating. If you don’t already know, there is an unspoken good ol’ boys/gals network that if you aren’t in it, then you are an outsider who will always be wishing and hoping to get a deal done.
This can also be likened to the age-old and deep philosophical question many remember jokingly asking as a child: “What came first, the chicken or the egg?” The same holds true when getting into larger multifamily or any higher priced real estate. Instead of a chicken or egg, it is having experience and getting deals. When jumping into this type of property class, without experience, how can investors trust you with their money or brokers believe you will be able to close on the property? Without deals, how will you be able to obtain the experience?
When we first got started investing in larger multifamily real estate, we entered into a new market we hadn’t ever been to as an opportunity fell into our laps to acquire a larger multifamily complex. We’d been in direct contact with the seller to negotiate terms. However, the seller was insistent on listing with a broker since he was out-of-state. This broker was one of the more well-known multifamily brokers in the market. We spoke directly with the broker and explained our desire to acquire the property, our real estate goals, and experience. Come to find out later, he was telling the seller that we weren’t experienced enough and probably could not get a loan on the property. From that point forward, we knew there was a marked change in the way the broker treated us.
When we spoke with our advisor about the situation, he only commented by saying this happens often in the industry and there is no way he can possibly know our financial situation without seeing what our financials are. Sure, we weren’t the most experienced operators, but everyone has to start somewhere.
In the end, we stood no chance at acquiring this property, not because we could not qualify financially for it, but because the broker thought us unworthy. He did get it sold to one of his clients and scored a double commission.
The second example happened after we cold called a commercial broker in another market. We explained what we were looking for and he advised us they were just about to list a 90+ unit property meeting our criteria. We received the OM, rent roll, and T12 from the seller a couple days later. After running our analysis, we put in an offer. We came out as the second highest offer out of at least four others. The broker advised us the buyer did not like the group who had the highest offer and was not going to select them. They then tried to ask us to increase our offer which we respectfully declined as we felt we were fairly priced. We did accept the seller’s other requests to decrease the due diligence contingency time from 30 days to 21 days and we sweetened the deal by offering hard money after the due diligence contingency period expired. The seller’s broker admitted he had not heard of hard money before and thought it was a fair offer and said the seller would send the contract over shortly.
A few hours passed and we still had not received the contract. My partner called the broker and asked about the status of the contract and the broker stated they had signed the LOI from another buyer. After some prodding, the broker admitted they ended up accepting the EXACT negotiated terms we offered for an extra $100k.
Our advisor is a very well connected and experienced individual who we have a lot of respect for. He often mentions to us during our conversations that it is a common occurrence to see brokers kill deals. It is frustrating for him to see a great win-win deal for both sides end up dying because of a broker.
This is not to say all brokers will act this way. There are excellent brokers out there and we have worked with some of them. However, do your homework on the broker and be prepared to sell yourself to them. Your relationship should be more than just transactional and time must be spent developing this relationship.