Part 2: How to Find Apartment Deals From Real Estate Brokers
A very obvious way to find deals: get a broker to bring you on market deals. That being said, it can be a lot easier said than done to earn a good broker’s trust. Theo has covered that in detail before, and will summarize on this episode. Then he’ll discuss how to get on their list for deals, because unlike residential shopping, there is no centralized MLS for large apartment deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we will offer a document, spreadsheet or some sort of resource for you to download for free. All these free documents, as well as the past and future Syndication School series can be found at SyndicationSchool.com.
This episode is going to be part two of what will likely be a six-part series entitled “How to find your first apartment syndication deal.” So if you haven’t already, make sure you check out part one, where you will learn the seven or so things that you need to accomplish before you are actually ready to find your first deal. Those are essentially what the previous Syndication School series have been all about, leading into the point where you’re ready to find your first apartment syndication deal.
Then we also talked about the differences between the on-market and off-market deals, as well as how the off-market deals can benefit both you as the buyer, as well as the person selling the deal. Then we also went over the six factors that the seller will take into account when deciding who to sell the deal to… So these are the five or six things that will ultimately win or lose you a deal.
Now, as I mentioned in the last episode, the two main deals are going to be those on-market and off-market opportunities, and the type of opportunity you pursue really depends on your preference. So you could just work with brokers to find on-market deals, or you can just implement the off-market lead generation strategies to find off-market deals, or you can do a combination of both.
Starting out, you’ll most likely be trying to work with brokers to get those on-market deals, just because of the advantages of forming a relationship with a broker… Because they can send you off-market deals in the future, and that also will give you a lot of practice underwriting deals, analyzing markets, understanding rental comps by doing the on-market deals, because you’re usually gonna be able to get your hands on all of the financials, and you’ve already got an offering memorandum that you can at least in part trust the market info… So it’s definitely helpful to, at the very least, from the beginning, talk to all the brokers in a new market and get sent on-market deals.
For the off-market deals – we’re not gonna talk about those at all this episode; we’ll be talking about those most likely in the next episodes, because there are a lot of different ways to find off-market deals. We’ll probably just talk about all of them and it might cover two episodes, it might cover four episodes… We’ll see. You guys know I like to talk a lot, so it might be four episodes.
When it comes to finding on-market deals, those will be found exclusively through brokers. In order to maximize the number of on-market deals you get — because for single-family homes, duplexes, triplexes, fourplexes, sometimes 5 to 10-unit properties, you’re likely gonna be able to find those on the MLS. At least for the 2 to 4-units, an agent will list the property on the MLS, and then as long as you’re set up on the automated MLS list and that deals meets your investment criteria – whatever criteria you sent to the agent, so duplexes under 200k in area code 12345 – then you’re gonna get that deal. It doesn’t really matter what agent lists the deal; as long as it meets your criteria, you’re gonna get it.
For apartments it’s not like that. There is no centralized place where every single deal – or at least the majority of deals – gets listed. Now, there are things like LoopNet where a lot of deals go to, but LoopNet is not as detailed or as widely-used as the MLS. Probably a large majority of the 2 to 4-unit deals are listed on the MLS, and I don’t think that’s the case for LoopNet when it comes to apartments.
So instead, you need to actually work with individual brokers to get set up on their list. What you wanna do – and we’ve talked about this before on previous episodes, and we have a blog post about the ultimate guide to find the broker, but just to summarize – is you want to create a list of all the brokers in your market… This is as simple as going to Google and saying “commercial real estate brokers in Tampa, Florida.” The search results will be a list of all the brokers, so you wanna go ahead and open up all those into new tabs. Depending what market you’re in, you might have 5-10 brokers, but if you’re in a place like New York City, you’re probably gonna have thousands of brokers. If that’s the case, then you most likely wanna focus on the ones that have the top results. I’m not saying those ones are always gonna be the best, but if they’re in the top results on Google, then they at least know what they’re doing from an SEO standpoint.
Then you’re gonna wanna go ahead and reach out to all of those brokers. Somewhere on the website should be the contact information of someone at the office in your area. For example, if you find a large place like a Marcus & Millichap, then you’re going to need to find the local Marcus & Millichap office on the website, and then call that office. And you might just talk to an office manager who isn’t a broker at all – you need to politely ask them if they can direct you to someone that represents and lists apartment deals in Tampa, and mention that you’re an investor looking for this type of deal, then tell them your investment strategy, and go from there.
You might be able to get a hold of someone else at the office… I probably wouldn’t go straight for the VP of the company right away, but find someone who’s maybe the head of the local office, and they’ll direct you to someone lower than them to help you out. If it’s a smaller brokerage, you should be able to just contact the owner of the brokerage, and their information will be on the website as well. But overall, in some form or fashion you need to reach out to these brokerages and find the person who’s gonna help you, and that’s going to be the person who actually lists properties for sale.
Once you do that, in your initial conversation with them you’re gonna want to communicate to them your intentions to buy an apartment in whatever market you’re looking at; the more specific, the better, so instead of saying “I’m investing in Tampa, Florida”, say “I’m investing in the markets in between these two highways, all the way up to Temple Terrace”, for example. This will show credibility. You also wanna tell them the size of the property, or at least the amount of money of the property, you’re gonna wanna tell them the age of the property, and anything else that you use to screen out your deals. Once you do that, then they should – again, depending on the brokerage – set you up on an automated list, or at the very least provide you with a link to the landing page where they will list all of their properties… But I’ll probably say 99 out of 100 brokers will have some sort of automated mailing list that once a deal that meets your investment criteria is listed, you will automatically get that deal sent to your inbox.
As I mentioned, you’re gonna want to reach out to as many brokers as you can in your market, because the more brokers you reach out to, the more deal flow you’re going to get… Because one deal is not gonna be listed by multiple brokers, and one deal is not going to be found at some centralized location that you can go back to to find every single deal that’s for sale. At least not that I know of.
And obviously, when you’re first starting out, these are going to be the only deals you get from the broker, but one of the main reasons why you want to focus on reaching out to all these brokers and working with them on their on-market deals is because ultimately you want them to send you off-market opportunities. Because if you think about it, sure, you can do direct mail, cold-calling, cold texting, Facebook ads, things like that in order to find off-market deals, but at the end of the day these brokers – that’s what they’re doing as well. So you’re not only competing against other investors who are going to be doing lead generation strategies to find off-market opportunities, but you’re also gonna be competing against brokers, who more than likely have a lot more money to spend on marketing than you do, plus the owner might want to actually list it with a broker and not go through the process of selling it off-market, for one reason or another.
So yes, again, sure, you can find off-market deals yourself, or you can spend six months to a year cultivating a relationship with a broker who will send you off-market opportunities. So before they actually list the property for sale and go through the process of making the offering memorandum, and having to deal with the headaches of doing multiple property tours, multiple Q&A sessions – all those things that the owner doesn’t wanna do either… Instead, they could send you the opportunity before listing it on the market. That’s one of the main ways Joe finds his deals, through these broker relationships.
Now, of course, the problem is that since you haven’t done a deal before, and you’ve got minimal experience and no one really knows who you are, you’ve got to ask yourself why would a broker send you an off-market opportunity if they have a list of four other investors who they’ve closed 100 million dollars in deals with each, why would they bring it to you as opposed to them? That’s gonna be a pretty big problem starting out, which is why I said you’re gonna be cultivating those relationships for a while, because at the end of the day the broker cares the most about closing, because that’s when they get paid. So they’re going to trust someone who they’ve done deals with in the past to close more than they’re gonna trust some guy who found them through a Google search, and talk to them one time and asking them to send in their best off-market deals.
So instead of doing that, don’t really expect off-market deals right away, but there are a few things that you can do in order to win over a broker at a faster pace; so rather than doing it in a year, maybe you can do it in six months, or rather than doing it in five years, maybe you can do it in two years, depending on the market and where you’re at right now.
So one thing to think about is how a broker qualifies who they work with, because the best brokers don’t work with just anyone, because they have to prioritize their time and focus their efforts on the people who, again, are going to get them what they want, which is their commission at close.
Joe interviewed a top broker in Washington DC, I believe – it might have been a year ago – and one of the things Joe asked him was how he as a broker will qualify a new investor who reaches out via e-mail or a phone call. The five questions that this broker will ask a new client are 1) Have you ever completed a deal before? Obviously, if you’ve done a deal before, you’re going to be perceived as more credible than someone who has not done a deal before, so it’s really a yes or no answer at this point. If the answer is no, then you’re not out of luck yet, because we’re gonna discuss in the next section how to win over a broker before you’ve actually closed a deal… But for now, a top broker is gonna ask you if you’ve closed a deal before, and if you haven’t, you’re gonna have a very hard time working with them in general, more than just being put on their e-mail list.
Question number two is gonna be “Can you send me examples of what you’ve done before?” Assuming you’ve done a deal before, they wanna know what type of deal that was. Was it an A class property or a C class property? What was the purchase price? Was it a million dollars or ten million dollars? How much money did you make on that deal, cash-on-cash return, IRR? Were you happy with your investment, that is did it meet your projections? Was the level of deferred maintenance what you thought it was going to be? Things like that, with the purpose of trying to understand what you are actually used to as an investor. So if you’re used to buying ten million dollar properties, they’re gonna approach you differently than if you’re used to buying $100,000 duplexes.
Next they’re gonna ask you if you understand the market, which you do, because you’ve listened to Syndication School and you followed the market evaluation steps we talked about in the previous Syndication School series. So if they ask you if you understand the market, you say yes, and then tell them a little bit about the market – what businesses are moving in there, what are some of these population trends, employment trends, medium rent trends, occupancy trends, things like that… Because at the end of the day, the best brokers don’t have time to educate you on the market. Sure, you can ask them, after proving to them that you know what you’re talking about when it comes to the market, then you’re gonna ask them “What are your thoughts on this specific area?”, but something you don’t wanna do is if they ask you “Do you understand the market?”, you say “Well, no. Tell me about the market. What’s the unemployment rate here?” They don’t have time for that. Again, they’re prioritizing their time to close deals, and educating someone on a market they’re not necessarily getting more closing from that. Sure, that person might eventually close on a deal, but their time can be spent better elsewhere, so make sure you understand the market before talking to brokers.
Number four, they’re gonna ask you “How will you finance a potential deal?”, which is why before you start looking for deals you need to have a) your debt lined up, and b) your equity lined up. Now, that doesn’t mean that you need to have a pre-approval letter from a lender, nor does it mean you need to have ten investors with $100,000 given to you in the bank account.
For debt, you need to have a conversation with a mortgage broker and have an understanding of the type of loan programs you’re gonna qualify for, and what you need to do in order to qualify for the loan program, and making sure that you know who’s going to be the person signing on the loan. And number two, for the equity standpoint, as we talked about in the Syndication School series focused on passive investors, you’re gonna need to know how much money you’re capable of raising, and ultimately they’re gonna wanna know “If I brought you a deal today, could you close on it?” and the answer should be yes. You should have enough in verbal commitments from your passive investors, as well as a head nod from a mortgage broker saying “Yeah, if you find a deal of this size, we should be able to qualify you for a loan, as long as you bring on a loan guarantor who has experience with a similar such property, as well as a net worth of this, and a liquidity of this.” If you say no, then you’re kind of wasting their time.
And then lastly, number five is gonna be “What are your goals?” This one right here is not as important as the other four, but it’s still gonna be an important question, because they’re gonna wanna know if you have realistic expectations of what you’re able to accomplish in that specific market. For example, if your goal is to make a million dollars per month in cashflow, but you’re only buying properties worth a million dollars, then that’s not very realistic; that’s basically impossible.
Whereas if you have more realistic expectations of running an annualized cash-on-cash return of 8% for five years, and at the five-year exit we’re looking for a 15% IRR at least, on a property that’s 10 million dollars, and we plan on raising the rents by $150 – things like that, what are your specific goals for the deal, and are they realistic?
They’re also going to want to know if you have the team members in place to actually achieve that goal? So if your plan is to do a value-add deal, then who is gonna be the property management company managing that? What’s their experience doing value-add deals? Again, they want to know if your goals are realistic, and if you have the pieces in place to actually achieve those goals.
Those are the five questions that a top broker in the market is going to ask you, and that you should be prepared to answer before you even start reaching out to the top brokers in your market.
Now, as I mentioned, that first question, “Have you ever completed a deal before?”, if your answer is no, you’re not out of luck just yet. Again, it’s gonna be difficult to work with a top broker, but you’re still going to be able to cultivate relationships with the top broker(s) or just brokers in general in your market, and kind of expedite the time it takes for them to send you off-market deals, as opposed to kind of just really doing nothing with the broker besides that initial conversation.
So in order to win over a broker, before closing on a deal with them or a deal in general, and to expedite the time for them to send you the off-market opportunities, number one is going to be to pay them a consulting fee. So if you need their help with anything, for example if you want to talk to them on the phone for half an hour to pick their brain about a market, you can offer to pay them a fee of $50 to $100/hour. Say, “Hey, do you mind if I hop on the phone with you for 30 minutes to talk about this market? I will pay you $100/hour for your time.”
That’s you essentially telling them that you know how valuable their time is, and how valuable their expertise is, and you’re not necessarily taking advantage of them, but you’re not gonna waste their time by just asking them questions for 30 minutes and thinking that they’ve got all the time in the world to help you out and that you’re the center of the universe. Instead, you’re kind of reversing that and saying “Hey, you’re really smart, I really wanna pick your brain. I understand how valuable your time is, and I’m even willing to pay you in order to teach me about the market.” So that’s number one, offer a consulting fee.
Number two is going to be to drive their recent sales. I’ve had a lot of success with this strategy. Essentially, what you do is after initially talking to the broker and telling them your investment criteria, say “Hey, I really want to get to know the market on a street-by-street level, as well as learn a little bit more about the opportunities that your company lists. Could you send me a list of your most recent five to ten sales? All I need is the address, but if you have a sales package, that would be even better. I would like to drive these properties and offer you my feedback on how these properties relate to my investment strategy.”
I haven’t had anyone say no, but I have had it where they only send the address and nothing else, due to confidentiality reasons… But I’ve had some people send me the actual offering memorandum too, which is helpful because you can kind of use that to screen the broker to see “Okay, here are the rental comps that they listed, so let’s drive the subject property and the rental comps to see if those are actually rental comps or not.” If they aren’t rental comps, then you’re gonna have a little bit less trust in that broker… But the idea is to get the list of recent sales, drive those recent sales, take notes on the actual property, the condition of the property, the location of the property, and then once you’re done, go back to your desk and send that broker an e-mail of a pros and cons list as it relates to your investment strategy. So you say “Hey, Billy, I went and drove those ten properties. Thanks again for sending me those lists. Based on my tours, here’s the things that did and didn’t align with my investment strategy. Property number one – perfectly aligned with my investment strategy. I really liked the way that property was maintained, the location was great, the gated security, which I really liked, the demographic was ideal. The only negative was I saw a shingle missing from the roof. Is that something that’s pretty standard at these properties, or is that because the owner won’t pay for that, or does it have something to do with…?” Questions like that.
Then if it’s a really bad property, obviously trying to find some positive about that property, but then say “Hey, my investment strategy is to buy properties that are built after 1980, whereas this property was built in 1960. I also saw that the foundation was wood frame, whereas I only want concrete foundation…” Again, not only are you showing them that you are willing to put forth the effort to close on the deal, but it’s also giving them an idea of the types of properties that you want to invest in. So that’s number two, driven the recent sales.
Number three is going to be to underwrite the deals quickly and visit the property beforehand. If a broker sends out a new deal, your goal should be to underwrite it within the first few days of it being listed… As long as it meets your investment criteria, obviously. Then you can go visit that property that weekend, in person, and that next week, a week after the property has been listed, you can reach back out to that broker and say “Hey, I saw that you’ve listed this deal. I’ve underwritten it and it kind of passed the first phase of my underwriting, so I went ahead and visited the property in person, as well as visited the comps. The comps look great, you’ve selected the perfect comps. Can I set up a property tour to the inside, so I can finalize my underwriting?”
That’s a lot better than saying “Hey, I saw you listed that deal. Can I schedule a property tour?” So at the end of the day you’re going to still tour the property, but you’ve put work in upfront to show the broker that you’re a serious person, who is interested and capable of closing on a deal.
Number four is gonna be to complete the market evaluation, which you’ve done already, but again, if you reach out to a broker and you are in the Tampa market, you can not necessarily send them a spreadsheet of your market evaluation, but just tell them why you picked that market, why you’re investing in that market. That can be on the phone, or in an e-mail, and we kind of already went over that. You’re like “Hey, I really like this specific neighborhood because I know that this Fortune 500 company plans on moving there, which is gonna generate 10,000 new jobs in the next five years.” Again, show that you’re serious, credible and can close on a deal.
Number five is gonna be to provide information on how you’ll fund the deal from an equity and a debt standpoint, which I’ve already talked about, so I’m not gonna focus on that one too much.
Next is gonna be to bring on a sponsor or a mentor. If a broker asks you “Have you had a deal before?” and you say “No, but my partner…”, who in reality is like a mentor, who might be signing on the loan, but you say your partner, because at the end of the day they’re gonna be a general partner – “…my partner has closed on over 460 million dollars in real estate, so there’s that.” That will be very wowing to the broker, and lets them know that they’re in good hands.
And then lastly – and this is just kind of general – follow up and contact the broker frequently. Try to have a point of contact with them every two weeks, with some new relevant piece of information. It could be after you drive their recent sales, and then for each deal that you underwrite, and then if you see interesting economic development, you can send that to them… If you brought in a new investor that would change the size of deal you can take down, you can let them know that. If your mentor closed on a deal, you can say that your partner closed on a new deal… And in general, just try to keep yourself in front of them constantly, to let them know, again, that you’re serious and that you’re in this for the long haul, because I guarantee you the majority of the people that reach out to these brokers just talk to them once and then disappear. You do not wanna be that person who disappears; instead, you wanna be that person that they see and hear about at least once every two weeks.
That concludes part two. In this episode we discussed how a top broker will qualify you, as well as the six or seven things you can do to win over a broker if you actually haven’t closed on a deal yet.
To listen to part one, as well as other Syndication School series about the how-to’s of apartment syndications, and to download your free documents – and there will be a free document for this series, just not for these first two parts – visit SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.