In this podcast episode I have the privilege of getting the perspective of an experienced commercial real estate broker of how to be taken seriously as a buyer, especially if you don't have a track record or are raising money from others.
Charles talks about how to build credibility with brokers (and how to avoid being tagged a “newbie”). His answers are encouraging to new investors, I think, because he didn't say that he discounts the newbie investors. But there are certain things a new investor should do BEFORE they pick up the phone and call on a commercial real estate listing.
First impressions are important!
Here are some of the questions we cover
- What's your biggest fear when you get a call from a potential buyer you don't know?
- What can the investor do to gain your trust and build credibility so that you take them seriously?
- What advice do you have for newbie investors who might not have a commercial real estate track record?
- For syndicators especially who don't have the cash sitting in an account, what can a syndicator do to address the “proof of funds” issue?
- How do you like the buyer to behave once you send them a deal.
- What are some things you've seen investors do that you strongly recommend against?
- What advice do you have for investors trying to find deals?
- What tips do you have for investors for dealing with you?
- What is driving the market right now? Who's out there buying stuff at low cap rates and why?
- What is your market outlook for the region and nationwide?
Here were the key takeaways:
- Have at least one prior banking relationship: you can get these by networking with local lenders and brokers. Do this before looking for deals.
- Learn to speak the lingo. Educate yourself, analyze deals. Then call the broker.
- Tour the property. Allows you to build rapport with the broker and earn their trust.
- Start a little smaller to get into the game.
- Who have you recruited to your team so far? What investors or partners are on board?
The key is to tell a compelling story that the broker can tell to the seller. The more compelling the story and the more of this upfront work you've done, the more likely it is that the broker (and seller!) will take you seriously, even if you've never done a deal before or are raising money from others. He also advised investors to analyze the deal quickly and get back to the broker with feedback. Only about 25% of buyers actually do this, and analyzing the deal quickly will immediately set you apart from other potential buyers.
How to Connect with Charles
Charles can be reached at charles.wentworth at cbre-richmond dot com. Enjoy!
Hey everyone, what questions do you have for Charles?
Great podcast Michael. Absolutely loved it. Many thanks to Charles for his insight as well.
As someone who is a newbie and trying to get into the game, what is the advice on interest rate hikes and impact on multi family housing market ? Would CAP rates fall even lower because my NOI is getting lower as debt is more expensive ?
Amol: Thanks for the question and glad you enjoyed the podcast. As I talked about, interest rates and the availability of cheap debt is one main force driving this competitive environment. For the past couple of years, interest rates and attempting to forecast their future (or near term) movement has been a popular topic. The consensus I feel is that the economy is not strong enough to withstand an interest rate hike in the next 12 months. Small businesses, home buyers, AND BANKS!!, etc. rely on low interest rates to grow their businesses, transact, and conduct commerce (and create jobs).
One thing you are going to need to consider when underwriting deals is exit cap rates. If interest rates rise, cap rates will rise accordingly. If you are buying at an 8% cap today, can you forecast an 8% – 8.5% exit cap rate in 5 years? Assuming you have fixed rate debt (vs. a floating rate), you’ll be able underwrite your loan amount through the term of the deal. Let’s say interest rates rise hypothetically 200 basis points and your exit cap rate is now 10%. If you don’t have strong rent growth and rising NOI, that $1,000,000 deal that you purchased in 2014 may only be worth $850,000 in five years. Now we are back to 2008 when owners couldn’t sell or refinace.
Hope this helps.
I’m looking for a little advise. A few weeks ago I signed a contract for my first deal, a 17 unit property for $996,000.00 ($1,000.00 more than the asking price). My lawyer while protecting my interest wrote into the contract that Representations and Warranties would survive the closing for a period of 3 years. The seller refused and the contract was voided. I know my lawyer is only doing his job and he has vast more experience with these transactions than I but I’m trying to find out frequently Representations and Warranties survive their closings? I understand about due dilligence and buyer beware. Now I just want to know what is usually the case in this scenario. Any feedback would be appreciated. Thank you.
Mark lane
Mark … I’m not an attorney so I can’t give you legal advice. I’m not sure why the seller thought this was such a big deal. Unless maybe he’s hiding something. Or maybe he thought that was too much of a liability, I’m not sure.
I do know that it’s an attorney’s job to tell you all that could go wrong and the risks involved. Just know that if attorneys had their way, NO BUSINESS DEAL WOULD EVER GET DONE because nearly all deals involve risk. And attorneys don’t like risk.
It’s your job to decide what risk is acceptable to you and what is not. You need the attorney to tell you about the potential and impact of the risk but then you need to decide if that is an acceptable risk you want to take. And remember, there’s always risk!
Hope that helps!
HI Michael –
I’m currently taking notes on the best ways to go about building a team in a new city (Houston) without sounding incompetent and I’m seeing some contradicting advice given. I understand all the ‘basics’ of knowing the lingo, understanding how to underwrite deals and negotiate based on different assumptions, etc to keep from embarrassing myself once speaking with a broker.
The contradictions arise where on the one hand you say to find brokers on loopnet, start some dialogue with them, ask for referrals from them for PM companies, attorneys, etc, and on the other hand, you say in this podcast (and another one I can’t remember at the moment) that you should speak to the broker *about* the team that you’ve built, using it as leverage against the hurdles of being a beginner and syndicator.. So, which is it?
The brokers seem most connected to all the different team members therefore the best to ask for referrals, but at the same time won’t take you seriously if you are new and don’t have relationships already built with lenders and PMs and others…catch 22
I may be wrong here, but I also don’t see most brokers being as understanding and helpful/educational as Charles is – as great as that would be. Thoughts?
In the beginning, be upfront with the broker and say you’re just getting started in an area, and that you picked it from a short list and you’re ready to get serious and that you’re looking for referrals. All you need is a few referrals to start dropping names -;)
I see, thanks
Thank you for this, Michael. This is basically where I am now…needing to talk to brokers. There’s one particular broker here in Knoxville that I see on Loopnet often. She basically has about half of all listing I see on there. I’m a little scared of calling her. I think I know enough now to speak intelligibly and already have a team in place (lender, attorney, etc). I just need to establish the criteria I’m interested in, work out a rough script, and call her, right? I know the answer, but doing it is harder than it should be for me. FYI, I just bought your SDA and am poking around learning how it works. Very nice work.
Thanks Chris …!