How to approach Commercial Brokers to purchase

Question

Hi all,

My family owns 2 properties (1 triplex and 1 mixed-use commercial property) in the Bay Area that we're wanting to sell in order to invest in multifamily commercial property (mostly thinking a large apartment complex, or several smaller ones) elsewhere. We're currently thinking Dallas, Austin, Atlanta, and/or Phoenix.

I'm not familiar with these markets, but I know that we want to get out of California as the laws are becoming so strict on landlords and I don't see it getting any better. In addition, we're wanting to focus on more cash flow markets and based on my research and what I've been hearing over the past few years, these cities seem to be solid bets. I'm wanting to follow David Green's suggestion of approaching brokers, interviewing them, narrowing it down to one broker per city, and then have them introduce me to their markets. Of course, I'm going to continue doing my own research and much more in depth, but I want to visit these cities and get on the ground information as well.

I'm trying to figure out what the best way to go about this would be. I understand that commercial brokers are tougher to approach and they don't take you seriously unless you have proof of funds. I obviously would prefer to do the research, meet the brokers, and see what kinds of properties they can provide me before we go ahead and sell. Ultimately, we're looking to make big purchases. The properties we own are fully paid off and are currently worth $5.5-$6 million. We're looking to use those funds as a 50% down payment(s). My intention isn't to brag, but these figures should mean something to a potential broker, enough to warrant them to work with us even though we haven't sold yet.

My questions are: 1. How do I best approach the best and most connected commercial brokers? 2. Should we sell before seriously beginning the buying search? Capital gains tax is not a real issue as these properties belonged to my father who passed away a year and a half ago, so we got a step up in basis.

Any thoughts would be helpful.

Steve Morris · Answer

Could you elaborate on the 1031 Exchange point? Why would a broker want to drag it past the 45 day limit?

If you sell an investment property to defer CapGains and depreciation recapture you have 45 days after the close of your relinquished property to nominate 3 like-kind replacement properties and then another 135 days to close on them (please talk with a 1031 qualified intermediary BEFORE you do anything, they're very helpful and no fee).

If they can keep you in deal past 45 days, then it kinda forces your hand as valid replacement property.  So instead of (being ridiculous here) tying up a bazillion properties with notes (yes, it happens), you can only close on 1 of the 3.  The broker can then play a lot more hardball with you on retrades since he knows odds are at least 1 in 3 you need to close this one to defer taxes.

Unfortunately, as I've told sellers, you need to consider taxes when selling, but it can't drive a deal.  I've seen guys get stuck in properties at high price and then sell it a year later.

Steve Morris · Answer

"how do you determine or scope out an agent with a lot of experience, the right connections based on the references from the local broker?"

1) Well, I guess you can ask for referrals.  However, odds are you only hear the happy ones.

2) Does he listen to you?  Tell him what you want and he puts something not even close to it with a poor return that's not moving in front of you and sells it to you.

3) What does he do to keep you informed?  Can he explain the process, create timelines, organize info like books on cloud storage, etc.

4) Gut feel, does he treat you like you're worth his time.  If you're serious does he return calls basically?

Steve Morris · Answer

"Also, about 1031 exchange, you're saying that an agent would prevent me from changing (retrading) one of the 3 replacement properties or try to delay until I'm forced to consider that one property out of the other 2? Still don't quite follow."

Once you close on your sold property, you have 45 days to NOMINATE THREE replacements.  You can tie up as many as you want (believe me, I've seen guys use notes on offers which means they can do that since they only have so much cash for earnest money).

So in the listing brokers eyes, your offer BEFORE 45 days, could be one of 20 (being ridiculous) a buyer could choose from.

AFTER the 45 days, if you do NOMINATE their property, you are ONE of THREE (there's exceptions on 1031, but usually just 3).  If you want that tax-defferal, you have 135 more days to close on it.

Being extreme, if you told the listing I only have NOMINATED ONE property and it's yours and I need to close if I want the tax deferral, he knows you have fewer options.

If you select 3 properties, you have more, but still only 3 vs, an unlimited number BEFORE the NOMINATION.

If I'm a buyer, unless info like that is required, it's need-to-know.  I wish I could say playing these games wasn't needed, but it does change how you're treated as a buyer.

Khaled Seirafi · Answer

@Charles Carillo When you say that a smaller broker might not know how to value a larger sized property than they typically work with, wouldn't that be a disadvantage for me?

Khaled Seirafi · Answer

@Steve Morris I think that that's probably the best and most efficient way to do it. I'm thinking that signing an exclusive agency agreement with the local SFO agent of a national chain would give me access to a larger network of agents within the same franchise in the markets I'm interested in.

But since commercial agents aren't utilized by average investors as much as residential ones, and thus aren't reviewed as much online, how do you determine or scope out an agent with a lot of experience, the right connections based on the references from the local broker? One person recommended that I get some references from the Association of Realtors of the said state. However, I'm thinking that if a local agent is going to help with that, I'd want several agents to talk to. But any thoughts as to how to vet them? I get that they're vetting me as well, but it's kind of a catch 22 since I know nothing about them. Also, about 1031 exchange, you're saying that an agent would prevent me from changing (retrading) one of the 3 replacement properties or try to delay until I'm forced to consider that one property out of the other 2? Still don't quite follow.

Steve Morris · Answer

If approaching a local agent of a national chain, would that just help put me in touch with brokers in the cities I'm interested in? Or could there be some sort of arrangement whereby I agree to utilize the local broker to sell our properties after the broker in the other city finds a property we want to close on?

Up to you, however, you let the local guy sell it in SFO and it ups your bonafides as a serious buyer 500%!!!!  If you just bring in cash, you may be talking to any broker, but selecting that franchise shows some loyalty.  Plus it may allow you to negotiate on the listing commission (brokers love that :)

BTW - You may want to look at FL and NC also.  You can get pretty good prices and the job growth/demand is there.

Khaled Seirafi · Answer

@Steve Morris

I would probably narrow it down to 2-3 cities. But all good points.

Could you elaborate on the 1031 Exchange point? Why would a broker want to drag it past the 45 day limit? Is it pure laziness or they're working multiple deals and figured that they've got you on the hook and so they'll leave your deal to the last minute or beyond? If approaching a local agent of a national chain, would that just help put me in touch with brokers in the cities I'm interested in? Or could there be some sort of arrangement whereby I agree to utilize the local broker to sell our properties after the broker in the other city finds a property we want to close on?

Khaled Seirafi · Answer

@Charles Carillo I honestly hesitate to work with smaller brokers who don't usually get the larger properties only because I need someone with the right experience and knowledge to get me those deals. Might be a catch 22 because those brokers don't know me. I might try my luck at finding some that would be willing to work with us. And if not, then I think at that point we'd sell our current properties to have cash in hand. Like I said, capital gains wouldn't be significant. And I really like the idea of putting together a resume. Thanks!

Steve Morris · Answer

If they don't know you, you'll probably get a junior in the office.  I get these calls, so this is what I ask to qualify:

1) If we do a deal, are you willing to give proof of funds

2) Are you looking only in XXX?  If they give me 20 cities they're looking at, not a real high priority to me

3) Give them a rough envelope of what you want and see how responsive and if you like what they send

4) Make sure they are focused on the property types you want and know how they work

5) Tell them what is important to you.

6) Be careful if you're in a 1031, a lot of brokers exploit that.  i.e. They'll get you in a deal and then drag their feet until you get past the 45-day point, even if its a bad deal.

7) Alternatively, if you are looking all over the place, you may want to call the local office of a national chain of brokers.  They usually have co-op referral fees for the local guy so he stays motivated and you can work thru him.

Charles Carillo · Answer

@Kal Seirafi

I would start researching these areas and ultimately start reviewing brokers; their current listings and their sold properties. Check Loopnet, who is listing, what are they listing? Is what they are selling matching what you want to buy? Join their mailing lists. All of this can be done relatively easily.

In my experience, any broker that asks for proof of funds for larger commercial multifamily properties is vetting you since it is not a normal requirement because these properties are traditionally syndicated.

When I look for brokers, I work a little differently and try to find ones that are smaller, handle smaller properties but occasionally receives a larger property that fits my criteria. These brokers typically do not have a buyer's list for a property like this and might not know how to value it.

Lastly, I would create a resume or a credibility book that shows your current holdings and email it to brokers when you speak to them.

How to approach Commercial Brokers to purchase

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