All Forum Posts by: Craig Sparling

One follow-up.  The agent was getting pushed pretty hard by his brokerage to get this signed before putting in an offer, so I caved, but limited the date.  Noone bring me any REALLY good deals for the next 1-15 days, or I am subject to counter claims...

Real estate industry.... get your act together.

First of all, let me pay my respects to the hardworking people in real estate and the treacherous waters they navigate—fronting hours of effort with only the chance of commissions and an abundance of non-forthright people out there. AND it just got harder with Burnett et al. v. The National Association of Realtors.

That said, I will not be signing an Exclusive Right to Represent as an established real estate investor, and I’m honestly a little annoyed to be asked.

I also realize this may qualify for Reddit’s AITAH channel. Here’s the scenario:

I went to see a few places this weekend. My realtor/contractor/friend agreed to show them to me. This friend and I have done 2–3 deals together, and there’s never been a payment dispute or even a hint of cutting him out of something. He’d likely play the role of buyer’s agent, contractor, and rental listing agent—something we successfully did last June. However, he asked me to sign a one-year Exclusive Right to Represent agreement, as presented to him by his brokerage.

His interpretation is that it applies only when he materially assists me, but I think the boilerplate brokerage language he was given reads much more broadly:
"If during the term of this Agreement Buyer enters into a contract for the purchase of Property through the services or efforts of the Broker or Buyer’s Brokerage Firm, or by or through any other persons during the term of this Agreement" (emphasis mine).

My concern is that, under my interpretation, if a fellow real estate investor wants to unload a property or if I get pointed to an opportunity by a former agent, colleague, or friend, this agreement could create an obstacle to moving forward with the deal.

In the end, I didn’t sign. We went to the showings, and we’ll likely still do a deal together.  I'll happily pay the commission and his GC fees, and we'll hopefully do this a few dozen times over the coming years.

My general question is: how are other people handling this awkwardness? The Exclusive Right to Represent makes sense for prospective individual homebuyers, but for real estate investors, it seems unfair and limiting.

Thanks for being open on the lessons learned.  I've had my share of expensive lessons. I console myself with the fact that compared to higher education that is relatively cheap tuition.  Don't give up the pursuit.

Fail fast works better in software than in real estate: reset the server, push a patch, etc.  Fail forward is generally just great life advice.  God speed friend!

Quote from @Dennis Bragg:

Hey @Craig Sparling

Love seeing someone approach real estate like Benjamin Graham or Warren Buffett might tackle stocks... methodical, data-driven, and grounded in fundamentals. Your mention of using GRM as a first pass and then diving deeper into cap rates and IRR is exactly how I've seen some of the sharpest investors I know operate.

I had a buddy in Chicago who bought a four-unit last year in Pilsen. We spent weeks analyzing the details. GRM and cap rate both looked great, but when we pulled utility records, we found heating costs in winter were brutal because of old, inefficient systems. That added a 12% expense bump- totally changed the vacancy dynamics. Little details like that are why I obsess over digging deeper than just the metrics.

Metrics I find useful:

Expense Ratio: Look at operating expenses as a percentage of gross income. If it's way out of whack with the market average, dig deeper.

Debt Service Coverage Ratio: Key for nderstanding if the property's cash flow will cover financing comfortably.

Historical Vacancy Trends: Especially in areas like Chicago, where local job markets fluctuate, knowing vacancy trends can help you anticipate rough patches.

Rent Growth vs. Property Appreciation: For long-term holds, I always compare rent growth with broader market appreciation. For example, I once walked away from a deal in Austin becaus rents lagged behind the crazy property appreciation there.

You mentioned employment levels and income-to-rent ratios... great calls. One other market-wide factor I’d throw in is local government policies. For instance, cities like Chicago are known for landlord-tenant laws that skew heavily in favor of tenants, and that risk should be baked into your underwriting.

What’s your take on balancing short-term cash flow with long-term equity growth? Always curious how others weigh that trade-off.

When it comes to balancing cashflow with long term equity, allow me a slight running start. A good chunk of my career of day jobs has been in analyzing data and forecasting the future. I have come to believe that no one knows the future much better than others. Nicholas Nassim Taleb helped me get there too.

I find cashflow mostly a present gauge and thus much more highly accurate. Betting on future price appreciation and equity growth is just that "betting".  I don't think the fact that prices have gone up 5 years in a row is a good clean indicator that they will continue to do so, if it cashflows today and I can hold it for 20 years inflation should do most of the heavy lifting for me.

I consider myself an old school fundamentals guys.  I've read about Benjamin Graham and Warren Buffets approach to investing at large and it resonates with me more so than the crypto-generation.  Real estate's "gross rent multiplier" is Wall Street's "sales to revenue",  "cap rate" is roughly "P/E ratio".

When evaluating markets and investments I tend to start with GRM (or lazily the 1% rule), then attempt to return a cap rate based on assumptions about costs, then I work my way to multiple years of projections (assumptions about inflation, amortization, tax benefits, etc), and if I am partnering with one of my smart friends I have to pull up an IRR (internal rate of return).

I also look at regional employment levels, median income to rent ratio in the zip code etc.  And here in Chicago I always check my favorite local homicide tracker whose name violates usage restrictions.

Is there other favorite metrics out there that I am missing?  Is anyone else willing to share the math-side property screening process? Is there other market wide metrics that apply here?

One small word in defense of retrospection.  One of my favorite authors, Nicholas Nassim Taleb, sold me on the concept of Skin in the Game and holding all pundits accountable for prior predictions, myself included.  Only by reviewing past buy/walk decisions and market decisions will I be able to hone my chops for future decisions.

Quote from @Dan H.:

For me it is not the markets i did not invest in as much as the properties i did not purchase.  I lost one once that projected great return because i requested an estoppel before accepting the offer.  Another offer came in and was accepted.  I have lost properties for a few $k that were projecting return hat would have done outstanding even if my offer was noticeably higher.  

back then, it was not whether you would make a lot of money as mych as if there was a different purchase that would produce a better return.  I should have bought all of them 😀.  I sort of believed that RE would always have plenty of opportunities.  

Good luck

I love the "I should have bought them all." I have also looked through my files of non-buys: scared off on inspection, fell apart in negotiations, numbers didn't quite crunch.  Looking backwards I think I would have made money on ALMOST all of them with the market tailwinds the last few years.  Tough to stay disciplined as "Past performance is no guarantee of future results".

Good points all.  @Max Ferguson In the end it is all about what is next.

@John Clark I think the viable path to a presence element is huge. Reliance on a team a flight away wasn't for me as I was getting started, I am considering bending that approach.  Indiana wasn't on my radar, but it seems like I could likely get some better fundamentals and escape Chicago's fiscal vortex.

@Aaron Zimmerman my old Chicago buy box (Albany Park, Rogers Park, Irving Park, Lincoln Square, Ravenswood Manor) has moved pretty far away from my preferred fundamentals. But I may need to dig a bit deeper or expand my parameters.

I've been investing in Chicago for almost 15 years.  I've been incredibly lucky with tenants, turnover, properties, appreciation, connections etc.

That said I do occasionally find myself wondering, what if....

If I had bought in Florida or Texas or a booming college town.  Would slow and steady be replaced with meteoric?

Am I suffering from greener grass syndrome, or should I have "Lived where I want to live and invested where the money made sense."? What do you think the best "markets that got away" are?

I've had two sewer backups in the last couple of years.  One during a torrential rain storm and last week.  We do preventive rodding, but I guess it didn't get the job done.  

The city really screwed a lot of people with it's zoning and drainage.  Insurance was a no go since it was backed up.