I am seeing a ton of shit OMs from brokers labeling everything value-add for multifamily. This is nothing new but who is the potential buyer pool for these shit class B & C assets? To my main question, is it realistic to expect rents can be doubled at a property in 18 to 124 months at a 50 to 150 unit building?
For those with experience acquiring value-add multifamily, how challenging has it been once you implement the value-add strategy of washer & dryer, paint, renovation, etc to double rents at a property?
Brokers are using class A comps for class C shit value-add deals in an inferior location. The only way to make these deals work is to double rents and assume "slight" increase to taxes and insurance which will jump by 30-50% if you are doubling rents. Folks are definitely getting over their head to acquire deals in my market.
Is this the only way to win deals now? Thoughts on rents for value-add?
Thanks in advance!!
I assume you have a typo in your first paragraph, because doubling rents in 124 months is not out of the question.
Doubling rents isn't crazy, but here's the issue: you have to put real capital into it to make it work. Take a shitty, run down apartment building and splash some paint on it, and you won't get a bump to justify current cap rates. Put in a washer/dryer in every unit, and a gym, and a marble clad lobby w/ 24 hour doormen, and maybe you'll get there. But then your basis is so crazy that it doesn't matter, obviously.
Long story short, you shouldn't be trusting or expecting anything from brokers in the first place. They often don't know the market their peddling a property in, and even if they do, they don't work for you. You are a sucker and a mark, and nothing more. Of course they're taking rents from TriBeCa and applying them to Bushwick; that's their game, and since they've probably puffed their Seller so full of hot air of how valuable and unique their asset is to win the business, they now have pressure on the other side to keep pricing high.
As a purchaser, brokers don't represent or have fiduciary duty to me, won't represent that what they're showing me is actually true, and take no risk. My view on everything related to investing is that a party with no risk, can't be trusted. Brokers exist to siphon off a few points of every deal to lubricate velocity in an era when that's fast becoming an obsolete and useless value-add. Assume that on every OM, every cash inflow you see is subject to 10% inflation and that at least 20% of the outflows have been left out, and you'll be close to an honest view of a deal.
Right now there is a huge boom of syndication groups. (http://www.themichaelblank.com/ , https://thinkmultifamily.com/ , http://nighthawkequity.com/) These "gurus" bring in tons of people to their seminars where they hype them up and tell them how smart they are and how much money they can make buying and rehabbing multifamily properties. If they don't have the time to sponsor these deals, they can still invest their own money into these deals ( they are often unaccredited investors). If you're "lucky" one of the "gurus" will take you into his coaching program where he teaches you how to acquire multifamily properties after you pay him a ton of money. When you finally find a deal that works he will take about 75% of the GP promote and fees.
The sponsors I listed above will each have dozens of bird dogs out there chasing down deals and often competing against each other for these class C multifamily deals. They have literally 0 experience underwriting so they believe whatever the broker tells them. Push rents by 10% in the first year, absolutely. $4k of rehab work equates to $125 per unit premium, sure. You get the idea....
A fund we are invested in just sold an asset in suburban Atlanta and received 3 LOI's from the same group through 3 different parties. All the LOI's had a different price. These idiots are competing against each other needlessly. I sat in on the buyer interviews and listed to these people explain this system first hand. The brokers said the number of these types of sponsors is increasing dramatically.
On the other side of things over the past 12 - 18 months there have a been a lot of funds launched that focus on "work force" housing. These are real institutional players with a lot of capital to deploy and they are adding to the increasing interest in the Class C multifamily space.
Great responses! Lots of dry powder at the peak makes it nearly impossible to make a deal pencil which is very concerning. Sellers want B+ pricing for C- to almost D assets.. the disconnect is insane in a rising interest environment. From my experience, if you miss the proforma rents by $100 to $200 per unit, you are getting pounded in value add. The 15% IRR is now crap. Find it annoying the shoe sale guy type idiot brokers are consistently saying you can charge for parking when none of the comps in that submarket with a nicer product or location are charging for parking or they are CAP RATE BROKERS... put a 6% cap when all the comps are 4-5% but when you do the real analysis and use real value add rents, adjust for taxes, salaries, etc... you are at a 2-3% cap. These fucking idiots can't explain any of their assumptions in a logical manner and just try to get higher prices that will blow up in a couple of years.
It's a broker's job to get the best price for their client. It's investors' job to make sense of the information, do their own diligence, and price assets at returns they're comfortable with.
The issue is that buyers are paying up for assets and accepting lower returns because they have to in order to be competitive. When risk and reward is in imbalance, bad things happen.
Brokers don't create bubbles, buyers do.
This is objectively false.
We ran a market study of all market comps for the past two decades comparing sales prices (including P/SFT, p/unit, p/LSFT, etc) when listing brokers were vs. weren't involved on deals, and broker-less deals traded at HUGE discounts, on average, to listed and marketed properties. Even net of fees, sellers that sold off-market left money on the table.
As a buyer, off-market deals are my wet dream. No competition, no deal visibility, more breathing room. No brokered-up OM's to navigate through.
As a seller, not using a broker is a great way to sell to the lowest-paying possible client. I don't have the time or resources to scour the earth for every investor out there. Frankly, it's to the broker's benefit to get you the highest price possible, so why on earth wouldn't they do that? If there's some Chinese yahoo in San Francisco in a 1031 exchange willing to pay a 3% cap, why wouldn't I sell to him? And how would I locate him if I didn't have a broker?
Believe me, I full well understand how frustrating buying from brokers can be. We won't compete in best & final deals simply because our market is so hot that we'll be undoubtedly left with winner's remorse. But if you're a seller, not using a broker is stupid. You're only making it easier for buyers to get a good deal.
Read a bit upthread. I am not disputing that in the past, there has been a marginal value for using a broker.
My point is that going forward, brokers are poised to lose almost all their value. Increasing digitization and the accelerated flow of information means that in the near future, you'll probably have a full open MLS type database that is accessible to all buyers. The moment you get buy-in on that concept, brokers become obsolete. To pretend like anyone will need a broker to find your Chinese yahoo in San Francisco is silly; technology and the way the market is moving in general points firmly in that direction.
To reiterate, right now the value of a broker is in disseminating a deal to the largest number of potential buyers. That's it. That is their sole value-add. Once Sellers start direct marketing their properties on an open market (which I think we can all admit is inevitable), the entire concept of a listing broker becomes obsolete. Hire someone to put together a deck for a couple grand instead of a couple points on the sale price.
You must deal with some shitty brokers. I've interacted with plenty that more than earn their fee and create real value. Agreed that a shitty broker is not worth what you pay them, but a good one is invaluable as a seller.
That said, my experience is generally in the institutional type space, and I'm sure interacting with some 2 bit broker in Frankenstein, Missouri will make you want to kill every broker on the planet.
I think this is what companies like CoStar are trying to do. I find it odd you used MLS as an example though, given it's completely dominated by unsophisticated and hyperbolic brokers.
I think about it this way. An active investor acquires, say, 2 or 3 properties annually. A good broker does one or two deals per month. Over the course of ten years, the broker will have advised on two hundred more deals than the investor and done 12X the volume. He/she will know every lender, mortgage broker, title company, buyer, and seller in the region. I can point at any apartment building in the city and they'll know the previous four owners by heart and at what price they transacted. They'll probably know one of the parties personally.
You are ill-advised if you think information is or ever will become symmetrical. There's a reason brokers exist in stocks, commodities, derivatives, etc in spite of there being standardized and highly-regulated exchanges. I began my career in physical commodity trading and risk management, and can tell you with 100% confidence that a machine will never make the power of relationships obsolete. That industry is infinitely more digitized than real estate, but the same is true.
Example: two years ago a broker I have a relationship with called me, telling me his client was in the middle of a divorce and needed to unload his portfolio in a particular region ASAP. Having worked with estate sales before (I never had), he navigated us through probate court and settlement proceedings, all the attorney and litigation BS, ultimately closing our most profitable deal to date, while ultimately satisfying the seller's need to move quickly and reliably. No computer or algorithm would've gotten that done for me.
I am not sure what kind of brokers you use, but I have far more important things to do than typical broker activities. Coordinating tours, showings, offer negotiations, inspections and on-site visits, appraisals, etc... I sold a duplex on my own once and it was one of the worst, most time-consuming experiences of my life. I can't imagine the wasted productivity doing all that on my own on a mid-to-institutional sized building. I will happily pay a couple points and focus my resources elsewhere.
I agree that for the moment, brokers provide some small value for what they do. But if their only value is in connecting Sellers with the highest purchase price, then they have very little utility going forward, because that is an extremely easy skill to replicate via the magic of the internet.
And I'm not so sure it's that easy for a broker to get a higher price, anyway. What are they doing except blasting out an OM? Why can't an owner do that? I'm shocked no broker has retired and done this yet, just kept a database of potential buyers and sold access to it for a fixed fee, just a sales lead list. No work, steady income... someone will innovate that. And as everyone seems to tacitly acknowledge, brokers don't have a skill which cannot be replicated. What they have is control over the flow of information, and only one very specific field of information at that. If the last ten years of tech disruption have taught us anything, it's that a business built on exploiting an information asymmetry is one that is going the way of the dinosaurs.
I would LOVE to buy a building from you
He'll have his maintenance tech give you a tour and answer anything you need!