New CRE Broker ~ Input needed on my very first deal!
Hello everyone,
Hope all is well during such difficult times, COVID-19 has really affected me. It had a large impact on my life and we're back in lockdown....
My question is, am I focusing on the right things or should I change my strategy:
a) Should I stick to the strategy of finding strong development sites for my developer clients. Invest my commissions into the deal, and make my ROI after it's developed.
OR
b) Focus on finding & selling the larger multifamily complexes & Industrial properties.
FYI ~ My clients have mandated us to find them > $20M properties (they like to buy large). But It's incredibly hard to find motivated sellers off-market.
C) Or a combination of both A & B?
Anyways,
Here's my first deal broken down ~~~
I found this development site by cold calling off-market Owners.
My clients will only buy through my team and I if we bring off-market deals.
Thus, allowing us to take part in the development side as well :).
I think working to find off-market deals is much harder BUT! the benefits are much greater than listing (unless you're listing $100m+ properties for CBRE and etc).
My world of RE investing is a little different. I'm 23 right now and work as a commercial RE Broker. I don't have enough cash to go buy assets so what I do instead is... I find $1M - $10M development sites and bring that opportunity to one of my wealthy developer clients (He is someone who is well connected to my Head Broker).
They give me about 1.01% equity in the deal (If I take $0 in commissions). Next, I my partner develops the site (takes 1-3yrs) and I make my return.
Since I put nothing in the deal, my ROI is about 4,100% off the $7,00 investment (getting RE licence, and the expenses that I incur running this business).
I'm currently looking to do development deals right now so I can gain more cash and hopefully one day go out and buy properties.
For example: Just got a development deal 99% close to finalizing today.
The site costs $7M.
Construction will be about $235K per Unit.
We're building 35 townhomes and once finalized the homes will sell at $770K each. My developer client will also allow us to list the townhouses on the MLS and allow me to take another 0.5% commission on all 35 homes.
Therefore my end of day returns is as follows:
$118K (commissions from selling the development site)
-
$74K (the ROI from fully developing the site)
-
$134K (the commissions from selling 35 homes once developed).
Total = $293,000 over 2.5yrs
BTW this transaction has taken me 13 months into this business....
First year I made $0
Development Project breakdown
Total Costs:
Land price - $7M
Construction costs - $8.575M
Zoning, marketing, & etc- $3m
Total = $19m
+
Land Equity position - $2.1m
Land total interest payment - $200K
Total Construction costs - $4.28m
Construction total interest payment - $258K
Thus,
Am I focused on the wrong things? Please advise?
Your commissions are way, way too low for both the development site and the finished townhomes. 0.5% for a $750k townhome? Why agree to that? Isn't standard closer to 5-6%? A real partner will pay you real $ for sourcing a site. Your developer connection may just be a scoundrel, IMHO. Don't worry about getting carry right now, just stack some commission cash. Instead of getting off market deals and getting paid by your buyer, sign up your seller for a fee, then shop it around. Disclose it and you can collect fee from both sides.
Since my team is comprised of 3 people, we take splits evenly. Thus, my split is 0.5% of the 1.5% The standard is 5% -6% when buy-side & sell-side agents are involved.
One side usually gets 2%
While I’m not a broker, why take the development risk? Sure, it’s cool that you can be in a development and make more money. But if everything goes to plan only!
Take you commission check and move onto the next deal. Invest in clients deals when you have enough commission checks coming in and can live. Only invest money you can lose. As you have no money coming in if you invest it right into clients deals, you can lose everything you worked for if the deal goes bad.
Multi family > $20M isn’t trading off market right now so that seems like a waste of time. Think about it, deals are trading in 3 caps in some markets, no one is going to do off market right now and leave money on the table. I’d stick to traditional prospecting.
Actually this is wrong because it depends.
Right now I am working with a client who is looking to sell his Class A 400 unit multifamily tower in a class AA area. They WILL only sell off market and said no to all the big guys.
It's a unique situation. Thats why they are doing it off market.
Correct, there’s always an exception to the rule. But like you said, this is a unique situation. Will there be a couple owners who want to trade off market? Absolutely. But in the grand scheme of things most owners want full marketing exposure to take advantage of the MF market we’re in right now. My comment was more a response to your over all business plan. If you want to take full advantage of being a broker and the compensation that comes with it, controlling inventory is the name of the game. Focusing on listing assets, getting exposure and meeting new buyers will without a doubt pay far more than doing a couple off market to satisfy one buyer.
Honestly I wouldn’t do it, you’re 23 and if paid all commission it’s feast or famine. Save your commissions.
The developer is most likely entitled to fees so they’re getting $ besides what’s in the capital stack, the project is not guaranteed to do well, you need to look at the $ you’re putting in to total project costs. I’m at a developer and there’s no way you’re getting a $ to actual % you should own. It’s a bad deal for really any LP if you’re looking to actually make $. I would save and invest your commissions not in this. You’re 23 that commission check is likely a how you’re paying bills snd a majority of your NW. The developer will always sell the project as the next big thing and you don’t have enough experience to see the true risks and rewards and what makes a project do well vs not. IRR will always look the best prior to the deal actually commencing. It can only get worse due to cost overruns, not hitting timeline correctly, not leasing for what you thought. My point is the developer has ways to hedge their risk and money in the deal by other outside fees, they’re putting in a nominal amount for them. They have all the control here and especially since you’re owning 1% it’s nothing of the deal and you have 0 power while it seems you’d put all of the money you have now into it.
Save your money and do deals in 2-3 years.
Thank you for the response. I appreciate it!
One question, what would you say is the better route with regards to my commission payment?
Should I:
a) Invest it back into the CRE Sales business by getting access to better software, and meeting clients for dinner and etc?
b) Invest that amount into a diversified portfolio of stocks, crypto, and etc?
c) Invest a portion (let say $50k) into small VC deals?
I say this because I am looking at entrepreneurs who are early on in their business and would require capital to grow.
For example, a NYC based cousin of mine has grown his used-car lot business into a $400K per yr NOI company right now.
I was thinking out finding these types of business owners who can grow their operations in 3-5yrs by 10X.
Ex: Construction companies, Cleaning companies, and etc.
I’d recommend stocks and bonds. I was a broker, the business is very volatile depending on the market. You could close a deal now and the next one could be 6-12 months from now. Save enough until you have a few hundred k then I’d say look at outside ideas. For what you’d cousin is doing those take up all your time and you have to go all in on any business you’d do outside of sales.
I personally don’t invest in crypto, but also it’s very volatile. Do you really want to invest 20-30% of the commission you need that you may need for rent in 6-12 months and see it’s gone down 50% because crypto is finally falling depending a what coin you choose.
Any business you want to go into will take all your time to build it and you likely aren’t making $ the first maybe two years. There is no guarantee you’ll grow it 10x for 3-5 years. It’s a great goal to have and can definitely be a good path to making money. Is the 10x a grant cardone thing? Genuinely curious.
You need to focus on securing exclusive listing engagements so you can control inventory - because then and only then it doesn't matter who buys it you're getting paid if you have a motivated seller that's willing to transact at market.
That is not to say you don’t do off market deals, but you must focus your efforts on securing listings.
If you list you will last. That’s the only way you will scale a predictable revenue generating book.
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