Question For All You Brokers!!

Is every single deal thats truly transacting a negative leverage deal??? or all cash?

Broker: Price guidance is a 4% cap on this multifamily deal

Me: Ok but debt is pricing way higher. I'd be losing money. Comps dont support any more rent growth, mass supply coming and rents have gone down.

Broker: Sorry you're too late, while you were blabbering on it went under contract. Good luck on your search.

 

Right, so here's the thing.  Brokers don't do much.  They're not expected to - if they knew what a building was worth they wouldn't be brokers, they'd be owners.  What happened is that the owner of the building got an offer, hit what they thought it was worth internally, and gave it a couple weeks to see if some sucker wouldn't come forward.  Then they closed.

The broker may hawk the 4 cap, but the person in contract certainly didn't pay that, the broker probably doesn't know it, and even if they did would have no incentive to tell you how badly they mispriced it.  They thrive on the appearance of knowledge.

 
Most Helpful

Man you really hate brokers. It may be coincidence, but I see a comment from you dragging brokers every time I’m on this site. I would totally agree that 80% of brokers (at any level, including institutional) are middle men that lack a high level of sophistication. They don’t know anything about their deals, the underlying theory/principles of the asset class, and are deal guys that bring two groups together for a commission. However, to paint all brokers with the brush you always do is honestly disappointing to see. I believe the brokers I work for are in the 10-20% of brokers who truly are masters of their craft. The last few years have felt like we are more of a pseudo consulting/broker team, with many of our valuation calls having a focus on  advising these executives on how to develop or revise their investment strategy. And these are not average joes - they are very seasoned industry pros with decades and decades of experience, that undertand the opinion of a smart broker. The 80% I cited earlier for dumb brokers is equally as prevalent on the ownership side. The amount of C suite executives (reputable acquisition focused groups as well as developers) that I’ve heard on calls that have a clear lack of fundamentals and are truly an embarrassment to their investors is much more frequent than the calls that leave our team impressed. Your note about how brokers don’t know the value is also funny. The value of an asset is, arguably, what someone is willing to pay for it. Just because a broker sells it to an idiot at a 4.5% does not make the broker the idiot. We laugh, because we would personally never buy at that pricing, and count the days to closing once it goes under contract. What a broker think it is truly worth paying for the deal, and what they think they can get someone to pay are two different concepts. At the end of the day, there are fools on every side of the table, but to paint brokers with one brush every time you mention them is just wrong. It just tells me you’re probably not interacting with those sophisticated teams, and therefore just likely not in that space for those deals. Ted talk over.

 

Totally agree. I'm not and never have been in brokerage but the argument of "if they knew what a building was worth they wouldn't be brokers, they'd be owners" totally ignores the fact that some people might actually enjoy the sell side and not everyone wants to take on the risk and headaches of ownership. It's like saying someone who spends their career doing M&A in banking is an idiot because they aren't in private equity. And to echo your other point, a lot of owners clearly have no idea what a building is worth considering the current state of the real estate market and the amount of keys being handed back.

 
Holidayinn

Man you really hate brokers. It may be coincidence, but I see a comment from you dragging brokers every time I’m on this site.

I like a lot of brokers personally.  I think the industry is a relic of an earlier time, and that the complete refusal of brokers to either take on fiduciary duty or warrant that they're actually telling you the truth is a huge indictment of the industry as a whole.  The fact that not a year goes by where we don't see some kind of scandal where brokers are either discriminating against "clients" or colluding against them kind of proves the point.

This is not a normal state of affairs; we'd never tolerate this in another industry, and I'm happy to keep banging the drum for better practices.

I would totally agree that 80% of brokers (at any level, including institutional) are middle men that lack a high level of sophistication. They don’t know anything about their deals, the underlying theory/principles of the asset class, and are deal guys that bring two groups together for a commission. However, to paint all brokers with the brush you always do is honestly disappointing to see. I believe the brokers I work for are in the 10-20% of brokers who truly are masters of their craft.

Define it.  Define "master of their craft".  I always hear this assertion "yeah most brokers are trash but some are amazing!" and when that gets challenged, crickets.

The last few years have felt like we are more of a pseudo consulting/broker team, with many of our valuation calls having a focus on  advising these executives on how to develop or revise their investment strategy. And these are not average joes - they are very seasoned industry pros with decades and decades of experience, that undertand the opinion of a smart broker.

I'm not sure what you are trying to say here - that real estate executives listen to brokers?  Of course they do, or at least nod in that direction: brokers exist, in part, as a CYA mechanism.  They also hear a lot of what's going on in the market.  For the moment it's the system we have, so people have to operate within it, but zero reason for a broker to exist.  An MLS service would do all of that equally well and far more cheaply.

The 80% I cited earlier for dumb brokers is equally as prevalent on the ownership side

See, this is where you're wrong.  Those owners?  They take risk.  Their dollars get wiped out, their guarantees get tapped, their careers end.  You don't get to equate that.  Brokers take no risk, have no fiduciary duty, no standard of honesty.  Stupid owners exist, I agree... maybe even 80% of owners are stupid.  But you earn the right to be stupid when you risk your own capital.

The amount of C suite executives (reputable acquisition focused groups as well as developers) that I’ve heard on calls that have a clear lack of fundamentals and are truly an embarrassment to their investors is much more frequent than the calls that leave our team impressed.

Probably the "seasoned executives" that are listening to brokers!  Also, executives don't always need to have "fundamentals."  The job of a CFO is not the same as that of a project manager.

Your note about how brokers don’t know the value is also funny. The value of an asset is, arguably, what someone is willing to pay for it. Just because a broker sells it to an idiot at a 4.5% does not make the broker the idiot.

No, but it doesn't make them intelligent. "Let me go look for someone dumber than me" is not an intelligent strategy, it's the strategy of the second dumbest person at the table.  I agree that value isn't always tethered to reality.  Or put differently, that some people will always have a reason to overpay.  But that has no connection to whether a broker or any other party understands the asset they're selling.

We laugh, because we would personally never buy at that pricing, and count the days to closing once it goes under contract. What a broker think it is truly worth paying for the deal, and what they think they can get someone to pay are two different concepts. At the end of the day, there are fools on every side of the table, but to paint brokers with one brush every time you mention them is just wrong. It just tells me you’re probably not interacting with those sophisticated teams, and therefore just likely not in that space for those deals. Ted talk over.

I paint brokers with one brush because usually people fail as comprehensively as you just did to defend them.  Every other person in this industry is legally or financially bound to represent their clients/investors to the best of their abilities.  Architects and engineers put their professional certifications on the line.  Lawyers and bankers have legal/fiduciary duties to represent their client's best interest in a clearly defined manner.  Owners and developers and investors put their own money on the line.

Notice who isn't in that group?  Guess which part of the industry gets away with saying, upfront, "you shouldn't trust anything we show or tell you"?

At the end of the day, that's the hurdle.  There are tons of smart, hardworking, personable brokers.  You want to make this about the individual, because individually many brokers are great people and maybe even better than their counterparts in other areas.  But as a group, they're not to be trust, by their own statement, and because they take no risk and make no representations, they serve no useful purpose and can certainly be done away with.  I know tons of idiots on the development side, I know tons of people in banking who are strictly "inside the box" thinkers, I know plenty of lawyers who just grind out boilerplate.  But all of them take a risk, or warrant the essential honesty of their services, and brokers don't, and there simply isn't a way around that.

 

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