Are We Acting Responsibly?

[Daniel Kurkowski]

Hello everyone,

As the multifamily values in my market continue their radical ascent I am starting to think more about some of the consequences for real estate agents and their investor clients.

I focus primarily on commercial real estate in MN, but still am still involved in the occasional duplex-quad type deal and have been helping friends who are looking to sell their home and owner occupy a duplex somewhere, which was the impetus for this post.  

Our strategy is simple.  Because they want a place that they would consider "livable" by their standards, we are looking looking for a property in a location of average prestige that is able to remain cash flow neutral when they move out and rent both units.  We are budgeting conservatively on our pro formas, but to their benefit, they will be self managing which saves a considerable amount as a line item.

The reason we are comfortable taking these terms is they will be making a very small down payment (FHA or 5% conv) so we are not overly-worried about having to liquidate the capital in a down market. Our market values are still low enough relative to replacement cost that there is still room to appreciate in terms of both rents and property value on these properties. This is an application of some of the commercial concepts used by large apartment investors, in that it is about controlling a finite supply that is currently priced inefficiently.

When I am looking at the mainstream deal sources (MLS, Zillow) I am consistently finding that properties that are cashflow negative are being fought over in multiple offers. Curious about this, I spoke to a few buyer's agents I know who work in those small multi-families and they told me that this is simply the market.

These agents did not have any idea what their client's long term investment strategy was and were not able to put together any kind of pro forma of substance.  In fact, having sold many multi family properties myself, I was always amazed at the number of buyer's agents who had never asked me for any financials or wanted to know what utilities the tenant/landlord was responsible for.

I think it is our responsibility to be informed and to inform our clients.  If you don't know anything about investment real estate it is a violation of your fiduciary responsibility to represent someone in that arena.  We are tasked with reasonable care and skill and if you are careless providing advice, you are in doing everyone a disservice.

It is also our responsibility to be honest with all of our clients and give them good information about the market even if it isn't in our best interest.  We can't rush clients into bad deals that don't make sense because we want to be sure they close something quickly, instead of closing something that fits their objectives.

Are you guys seeing something similar happening in your part of the country as well?