Archive for July 2010

Why Commercial Real Estate Is Not a Hammer and Nail Business

You've heard the expression, "When the only tool you have is a hammer, everything looks like a nail."  When you have one formula for capitalizing on commercial property investments, you try to make your deals work one way. A broker called to ask how we sold a commercial property investment he had competed against us to list. We sold the investment for 35% more than he estimated based on his review of the property's numbers.  It didn't add up. He took the owner's gross income, subtracted the vacancy/credit loss and operating expenses to derive the net operating income.  He applied a market cap rate to the deal, derived the commercial property's income value, made his recommendation and hoped to be hired for the listing. They didn't like his price. Here's why his hammer didn't work:

• The owners were debt-free on this specific commercial property.
• There were 3 stakeholders hoping to sell the investment for an above market value.
• Cash flow was important to one because she was retiring during the sale.
• The debt market was frozen and deals were difficult to finance.
• One of the owners sought to pay off a primary residence mortgage with the sale proceeds.

After our stakeholder interest analysis, we presented a solution to the owners that allowed them to convert their equity to cash flow with an installment sale.  To achieve above market value, we sold the commercial property with below-market financing terms that gave the new owner ample cash flow to operate the property, pay his annual debt service, and time to secure new financing once the property was stabilized at its highest and best use. The recurring cash flow supported the owner looking for a retirement income.  We bypassed the debt market because the sellers carried the paper.  And we required the new owner to make a 17% down payment, which extinguished the other owner's mortgage obligation and paid for the cost of sale. If you haven't done an investment deal lately or are having trouble finding the "right" opportunity, start by looking at the property investment strategies you've been using.  Is there a pattern in your deals that could be your hammer and nail? To get different results, you have to try different things.  Put your hammer away and ask questions in the deals you're considering. You may find new information and new opportunities that will become new ways of making your investment goals come to fruition.

Why Your Commercial Real Estate Broker Doesn't Find You Deals

You call commercial real estate brokers in your market, tell them about what you're looking for, and meet with a few.  It feels like you're making progress. The word is on the street, you're looking to buy a commercial real estate investment property with great cash flows, upside potential, and at distressed prices.  Every commercial real estate broker knows.  You wait by the phone and check your email for the wealth building deals to roll in. Here they come....the emails you've been waiting for.  You open them. You see a pattern.  These commercial property listings are all the same.  You chock it up to the fact that you contacted the commercial real estate brokers at the same time and they're sending you what's available on the market.  A few weeks go by, and the investment property sales lists dwindle and no agents are calling. What happened? You're every commercial broker's business and no broker's responsibility. Rewind a few weeks. You're a commercial real estate broker. You receive a phone call from an investor who's looking for a good deal in your market. He wants you to send him a good investment property to buy, so keep your eyes open and start hunting. You want a commission right? Well, sure. But here's the catch.  You get at least one phone call like that every day.  You're asked to find a good deal for this investor, maybe go hunting for him, and start sending him listings.  He's probably not a hot horse who's going to buy a property off the first list you send him and he's likely having the same conversation with other investment property brokers in your market. He's everyone's business and no one's responsibility. You add him to your database. Maybe you put him in your email distribution list and figure that something might happen, but if not, you may get a call one day when he has a property he needs to lease or sell is commercial property. After a few weeks, you stop sending him lists of investment properties for sale because you've also been asked by 15-20 other investors in the same period of time to do the same activity.  Somehow, they think you're out there working for them, too, because they're getting the same listings as everyone else.  What they don't know is that no commercial broker's out there hunting, they're just entering a search and clicking the send button. You've been selling investment properties long enough to know that most of these calls are a fool's errand.  The promise of a commission looms on the horizon, but you know you're going to have to spend more in time and resources to maybe get that commission than you'll likely earn, plus you have no commitment from any one investor that they'll honor your commission if you bring them a commercial real estate investment opportunity.  Pretty risky if you're a broker. You decide you're better served investing in those who have hired you to help them acquire and dispose of investment property. Ultimately, as an investor, ask yourself, when you repeat the same behaviors as everyone else by calling a bunch of brokers to tell them what you want, should you expect an outcome that's different than everyone else who's doing the same? The next time you're on the phone with a commercial broker, try asking him how many calls he's had from investors "looking for a good deal" in the last 30 days.  Then ask him how many of those investors he's spoken to after the initial conversation. Chances are you already know the answer. To get different results than everyone else, change your approach. Ask your investment property brokers how many investors they're representing.  The ones who have clients are getting deals done, while the ones who aren't....well, just check your email box for the latest commercial property listings. By taking a different approach and employing an investment property broker to execute a search and acquisition on your behalf, you may be delighted that when you become someone's responsibility, you're everyone's envy. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.

Commercial Real Estate Investment - What a Sniper Can Teach You

Few commercial real estate investment decision makers succeed when they make fast decisions, based on little information and gut instinct. The odds may play in your favor, but the lack of a commercial property investment plan that includes due diligence, market intelligence, timing, decisiveness and massive action will mean that your outcome be survivable. Understanding commercial real estate investment can be taken from U.S. Army sniper school.  When you undergo training, you are taught to stalk a target for days and that you may or may not ever get a shot.  You have to be willing to walk away from your mission without ever taking out your target, without being emotionally invested in the outcome such that you would endanger your life or those around you. You learn that your window of opportunity may last for seconds and that if you are distracted, you may miss your chance.  You rely on your spotter to assist you in identifying your target and helping you research the field as well as time your shot.  You don't shoot off mission.  If your target does not present itself, you walk away. Here are some tips to help you slow down your commercial real investment decision making to create fast results for your property portfolio: 1.  Define your real estate investment target. Why are you buying investment property? And what kind of property are you trying to buy? 2.  Take the high ground.  Use available resources and commercial property listings databases such as commercial real estate brokers, CoStar, Loopnet, and CCIM resources to scout out the market, gather intelligence, and get the information about where the flow of opportunities in your market. 3.  Use a spotter.  Consider hiring commercial real estate agents to source, qualify, and confirm that your target has been acquired. 4.  Be willing to walk away. If the deal isn't right for you, don't do it.  You'll often make more on deals you don't do. 5. Don't get distracted.  Other targets will present themselves. If they aren't a match, don't invest in them. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.