Value add - multifamily ... RENTS, TAXES, WTF??

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!!

Comments (64)

Sep 10, 2018

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.

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Sep 18, 2018

Are brokers really that bad? I was interested in becoming one but I'd love to hear more about what you think

Sep 19, 2018

Some are. Some aren't. However, they totally are not a reliable source for CapEx costs.

Sep 11, 2018

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.

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Sep 11, 2018

Out of curiosity I looked into one of their deals and found the return to be above 8%, which is pretty good imo

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Sep 12, 2018

I'd be pretty wary of this. From what I have seen, the spread between the cash-on-cash return the proven sponsors* are offering on a quasi-institutional deal and what some of these yahoos are offering on a 75-unit deal in Spokane doesn't come close to compensating for the risk. I'll take a 7 on a 250 unit deal in riverside all day before I take an 8 for a 1972-built 100-unit deal in boise. The way these deals are leveraged, an unaccounted for roof replacement has the ability to turn your 8 into a zero (or less) pretty quickly.

*Many of the successful syndicators have a glut of capital at this point and will only take accredited investors so that might not be an option everyone. Also, everyone in the apartment industry's record is colored by a 20-year bull-market - rents going up and cap rates going down - I would want to make sure I have a very good operator who is going to keep my deal leased and cash flowing in the case of a market hiccup.

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Sep 11, 2018

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.

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Sep 11, 2018

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.

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Sep 10, 2018
Mark Queban:

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.

No one is disputing that, but the first paragraph tells anyone all they need to know about whether it's realistic to expect the rent increases or opex decreases that brokers promises. Broker's aren't and won't be honest with you as a Purchaser. You should assume that whatever they're saying is an attempt to scam or con you into overpaying for an asset, because as I said in an earlier post, they have no fiduciary or legal duty to represent the truth, and their client is the Seller.

All of this is even more amusing because if you got rid of the broker, Sellers would get to their numbers more easily. And since brokers provide marginal value and basically just leech the upside from deals, I suspect this is the direction in which the market will go.

Sep 12, 2018
Ozymandia]
[quote=Mark Queban:

All of this is even more amusing because if you got rid of the broker, Sellers would get to their numbers more easily. And since brokers provide marginal value and basically just leech the upside from deals, I suspect this is the direction in which the market will go.

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.

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Sep 10, 2018
CaR:

This is objectively false

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.

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Sep 12, 2018

This is an interesting point - technology is definitely going to make life harder for brokers marketing commodity product (although I think that niches will still exist there - such as advising family trusts/unsophisticated owners). I'm on the principal side and hate paying commissions as much as the next guy, but I don't agree that plastering every telephone pole in the country with a copy of the OM for my office building is the only value add a broker offers (or every deal would be on Loopnet). Good brokers are in tune with the market enough that they know how to present your deal so that buyers will be interested, and know who the interested buyers are going to be before blasting it to all corners of the universe.

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Sep 12, 2018

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.

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Most Helpful
Sep 12, 2018

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.

    • 13
Sep 10, 2018
CaR]

[quote=CaR:

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.

Oh come on, this is absurd. Maybe this is a function of my market, but no broker has that depth of knowledge. And none of this knowledge is all that important or meaningful. What do I care that a broker knows what a building sold for 10 years ago? I can look that up myself without paying someone 2 points. As a buyer, what helps me is knowing actual comps (which no broker is sharing with me), actual operating expenses (which any broker worth his/her salt is straight up lying about), political climate surrounding the entitlement process (I've not yet met a broker with an opinion on this worth the dirt under their feet) - you know, valuable info. Knowing the guy who owned the building 3 owners previously is nice, since maybe he/she was a slumlord or something, but ultimately meaningless, because I'll uncover this shit in my diligence.

So yeah... why is this knowledge valuable? Brokers exist in a niche of interpersonal connections and name-dropping that has no value unless you're another broker.

CaR:

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.

I agree that the importance of relationships will never fade. So... what does this have to do with the future of real estate brokers?

And your comparison is fundamentally flawed. Stockbrokers have a fiduciary duty to their clients on both ends of the transaction. Real estate brokers don't. Until you get over that hurdle, the rest of your point about the value of the relationship is less than meaningless.

CaR:

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.

So you didn't hire counsel to navigate the divorce court proceeding? You relied solely on the broker's knowledge and advice throughout the process? If so, then I admit you have found a broker who truly adds value.

If, as I suspect, you had a lawyer standing by your side who knew as much or more of the process as your broker, and on whose word you were relying, then I'm not sure what your point is. You hired someone else to do the job you are telling me the broker did for you.

CaR:

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.

Really? So on your 100mm building your happy to pay a broker 2mm to walk a couple buildings? When you sell a duplex for a couple hundred grand, I admit it's worth it. But I highly doubt your time is worth thousands of dollars an hour (I don't mean that as an insult, neither is mine). Hell, if you're selling a 20mm building, I don't know that it's worth $400-500,000.

But I'd like to point out something you yourself have highlighted. What brokers do takes no talent and no skill. By your own admission, all they're doing is scheduling and executing on various low-level, time consuming tasks that you find beneath you. So why does this warrant being paid hundreds of thousands if not millions of dollars?

Sep 17, 2018

When I worked on the principal side for a large balance sheet lender, we liked working with brokers because they serve as one point of contact for a large volume of deal flow. Say we look at 10-15 deals a year each from CBRE, Eastdil, HFF, JLL, Cushman, Northmarq, etc... that's 100+ total deals representing dozens of sponsors. It'd be impossible and extremely inefficient us to develop working relationships and a strong rapport with every one of those sponsors. It's much easier to work through broker that we're talking to on a daily/ weekly basis.

The Brokers that really bring value and make millions of dollars are the ones that have achieved an economy of scale in their deal volume and as a result have developed strong relationships / rapport with the capital sources they're sending deals to.

Obviously, the dream situation as a buyer or lender is to get an off-market deal and get pricing that is better than market - but that almost never happens because most sellers haven't achieved economies of scale and thus use a brokers.

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Sep 18, 2018

you should definitely handle your next dispo yourself and report back to us.

also, nobody is paying 2% on a $100mm deal. I've seen 35 bps on deals that size.

Sep 18, 2018

I think part of the hatred towards brokers comes from misinformation. Brokers are paid far less in commissions than what one thinks. That's the best kept secret in town. Because, if one openly advertises discounted commissions, then that lowers commissions for everybody and principals will start asking for discounts. For large deals- like for a 5 Billion deal, I have seen commissions be as low at .09 percent. Sure, that is still a commission of 5 million and that is a lot of money but nobody was going to pay 2 %

Sep 10, 2018
Ricky Sargulesh:

you should definitely handle your next dispo yourself and report back to us.

also, nobody is paying 2% on a $100mm deal. I've seen 35 bps on deals that size.

I've done it before. It isn't difficult. Or is emailing out due diligence items that much of a pain in the ass for you?

No one has really come up with a decent rebuttal to the question of "what do brokers do to earn a commission". I've heard some vague talk about relationships (as if I can't make those relationships myself) and saving time (as if it's economical to pay hundreds of dollars and hour or more to have a broker walk someone through your property). The only one that even remotely resonates is in being able to identify the potential universe of buyers, and as I said, that is a value-add that will go away in the near future as digitization interconnects people more quickly and more effectively than a guy with a phone and a rolodex.

If all a broker is doing (as a Seller) is making your life easier, then they're vastly overpaid. You pay your cleaning lady a fraction of that to save you the same amount of time. And, to get back to the original point I was making, if you are a Purchaser, a broker is not only not your friend, but is almost certainly looking to actively scam you.

Any party to a transaction that has no risk and no fiduciary duty is an actor that will disappear in the coming years. If spreads/yields tighten, the first people to feel the pinch are going to be the ones that take no risk, no obligation, and add easily-replaceable value. That could not be a more accurate description of the brokerage business model if it was in Merriam-Webster.

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Sep 18, 2018

To each his own

I think the pros/cons of using a broker are pretty straightforward

Curious how you'd handle tours if the property is in another market and 20+ groups want to tour

Speaking of fiduciary duty, many owners are required as fiduciary to go to market

Sep 17, 2018

You hire a broker because you think they can get a higher price (investment sales) or lower interest rate (mortgage broker) than the 50 - 100bps pay fee you pay them. Not that hard for a good broker to beat this hurdle to justify their fees. Additionally most investment funds would have to increase their staff size to manage the marketing / closing process for dispositions and/or financings.

Sep 10, 2018
Dupont29:

You hire a broker because you think they can get a higher price (investment sales) or lower interest rate (mortgage broker) than the 50 - 100bps pay fee you pay them. Not that hard for a good broker to beat this hurdle to justify their fees. Additionally most investment funds would have to increase their staff size to manage the marketing / closing process for dispositions and/or financings.

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.

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Sep 12, 2018
Ozymandia:
Dupont29:

You hire a broker because you think they can get a higher price (investment sales) or lower interest rate (mortgage broker) than the 50 - 100bps pay fee you pay them. Not that hard for a good broker to beat this hurdle to justify their fees. Additionally most investment funds would have to increase their staff size to manage the marketing / closing process for dispositions and/or financings.

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

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Funniest
Sep 18, 2018

He'll have his maintenance tech give you a tour and answer anything you need!

Sep 19, 2018

@Ozymandia did you have a negative experience with a broker recently? Just trying to understand where you're coming from.

It seems the thread agrees brokers are paid for marketing efforts and to arrange a meeting of the minds, and the quality of those efforts and relationships vary by broker, as does the compensation. It's not a perfectly efficient system, but you're passionate about eliminating broker participation (or at least compensation). Others find the participation beneficial, so they negotiate a price for the services. Each principal chooses what's best based on their needs and abilities, no? Brokerage isn't forced on anyone, it's, as @Dupont29 noted, an immediate economy of scale that buyers and sellers can plug into if they desire.

Ozymandia:
Ricky Sargulesh:

you should definitely handle your next dispo yourself and report back to us.

I've done it before. It isn't difficult. Or is emailing out due diligence items that much of a pain in the ass for you?

In all sincerity, if it's easy work for you, perhaps you should become a broker. Being highly-paid to do easy work is the Holy Grail many of us seek.

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Sep 19, 2018

The intern already knows the drill. Messy non-stop work, much easier to sit in the ivory tower and manage third parties. That said, there is a reason why the studs routinely pull-in $3-5mm+ per year in fees...

Sep 19, 2018

Answering 50+ investor questions per day on a $100mm+ value-add mixed-use property when the Seller has hand scanned in hundreds of pages of crucial documentation is much harder than you think. Also, try driving 2+ hours round trip each day to cover 5-6 back-to-back tours on a 80+ acre property. How about when the original buyer drops the contract on the last day of DD after asking for $3mm+ in deferred maintenance discount and you have to pivot and do the entire process over again?

You are completely clueless when it comes to the amount of effort and determination it takes to perform in elite institutional brokerage. That said, many of the middle market guys are clowns, but don't lump everyone together.

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Sep 25, 2018

"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?"

Golden. There is your answer right there. A small group of people desperate to get money out of their country...until the music stops....

Sep 12, 2018

I would disagree as well. Our firm loves off market deals as you can get in at a much lower price than a widely marketed deal.

Agency debt brokers on the other hand...

Sep 21, 2018

So, the question is what value do brokers add and are they worth their commissions?
In my experience, all of their bullshittery and spin to purchasers, in my experience, generally does get purchasers more comfortable with things that initially pop up as big deals. This does translate to higher offer prices.

Do I think their over-paid for this value? Sure. But I do think they end up pushing purchase prices incrementally higher than their commission cost.

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Sep 19, 2018

I have never once trusted a broker's assumptions. Model the deal out your own way, find what price works for you, and see what you can get. I probably close 1 deal for every 50-100 OMs I receive.

In my experience you need one of two things to get a killer money making deal, 1) vision to see something that others don't (either in the neighborhood, the structure itself, or something buried in the financials), 2) A combination of luck and a tolerance for high risk.

Nearly everyone who owned real estate in NYC from 2009-2015 thinks they had #1 and are real estate geniuses. But the truth is most don't realize they were just lucky to be in a market where you literally could not lose (#2). As a result, people's expectation have climbed, which sets a dangerous precedent because people start to ignore certain risks. But the market has definitely softened (prices aren't declining, but the ludicrous growth rates have), and I think we'll see a lot more owners & brokers become more realistic and start putting more gettable deals out in the next year or so.

Edit: to add, always take a moment to look at the deal from the seller's perspective. Future values are baked in to sale prices so heavily these days that prices are more often a reflection of where the seller thinks the building will be (often with aggressive aspirations), rather than what it is currently. Sometimes it's just a matter of tempering their expectations.

Sep 19, 2018

My favorite is 2010/11 garden deals where you can "unlock" $100 rent premiums by replacing a lower quality cut of granite with a higher quality cut.

Sep 19, 2018

That's absurd. However, a fresh coast of interior paint, replacement of Formica counter with granite, and plank flooring can lead to unbelievable rent growth if the property is well located. We have clients who hit $250 per unit premiums solely doing this at 40%+ RoC.