Commercial Real Estate Investment Sales Pt. 2 | Brokers Round Table
In today's episode we discussed the importance of valuing commercial real estate deals properly as a broker and charging for brokers opinions of value (BOV) to ensure thorough analysis and client investment. We also covered how to present the value of a BOV to clients and structure it as a paid service rather than free work.
Key Takeaways:
Charging for brokers opinions of value (BOV) can help ensure brokers put more time and effort into the analysis, and get clients more invested in working with them.
A BOV should include an in-depth analysis of the property through site visits, comparable property research beyond just Costar data, and a comprehensive written report.
Presenting BOV work as having value for the client's needs, rather than just doing it for free, helps establish the broker's professional expertise and value proposition.
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About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate developer and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. Welcome back to the commercial real estate investor podcast today we are going live with another brokers roundtable. If you ever want to jump in and ask us questions, feel free to do so we do this on YouTube every couple of weeks, you can typically find the schedule on our Instagram accounts whether that's mine, Chad's Adams Jesse's, we tend to all share it so that everybody's aware of it. Chad, what's going on? And it might just be you and me today.
0:48
It's more of a fireside chat as opposed to around.
0:53
That's right. That's right. We the tables not so round today. Man, you're all dressed up. You've been out pitching clients today, I
1:01
was actually working and I don't wear a suit often. But I'm trying to do one a suit at least once a week. And Bob Knakal, who, who's a legend in the world real estate space, he wears a suit and tie every day. And I think if a guy that's as wealthy and successful as Bob is, can wear suit and tie every day, I can do at least one a week. So today and again.
1:27
I love it, Bob Knakal is awesome. We had the opportunity to interview him at an event in Atlanta a couple of weeks ago. So really excited to get that video out. Well, today we're gonna be diving into part two of commercial real estate investment sales couple of weeks ago, we kicked it off thinking very naively, that we would be able to get through everything that you need to know about commercial real estate investment sales in a single episode. And we got through one of basically four parts that we had thrown together for this live stream in the entire hour that we had worked on this. So if you want to dive further into, you know, prospecting for off market opportunities, or off market, potential listings, as a commercial real estate broker, go listen to part one on the podcast. Today, we're gonna kick it off with valuing deals, you know, as a commercial real estate investment sales broker, you have to have the knowledge, the wherewithal to help a client properly, value their deal. Sometimes they want numbers that don't necessarily make sense. And it's also unused the broker to help guide them as to what that might be, right. I mean, I've had plenty of instances in chat, I'm sure you have to where client tells me oh, I want a million dollars for the property. Well, Mr. Jones, it's actually worth probably 1.4. I think that's where we should list it. It's your responsibility as the broker to make sure you're getting the highest and best price for your clients because that is in their best interest. So Chad, when you're when you're looking at commercial real estate investment sales opportunities, let's assume you've already gone through, and you've cold called an owner, and they say, You know what, yeah, I would be interested in and taking you up on your broker's opinion of value of my property, right? Because we're doing that for free. It's a it's a foot in the door? How are you going to go about copping out that opportunity? In the best way possible?
3:24
Yeah, and it's a great question. And even just before we jump into that, so interestingly, I started charging for POVs A while back, and you got to be careful, depending on what jurisdiction you're in, that you're not acting or holding yourself out as an appraisal, you've got a very specific language in there. And there's got to be disclosure. And so I'd say if you are going to consider doing it, make sure that you're abiding by your local state rules. But I started charging them for them for a while, for the reason that I, early in my career, I gave out a ton of POVs for free, and that never materialized. Maybe you get the odd one. But I just thought that I didn't want to run the same model that a contractor does, where a construction company might give out 20 bids, with hoping of winning a couple of them, I wanted to have a higher probability of successfully getting those after. So my, my sales pitch was pretty simple, and I still use it to this day, is that I charge anywhere from 15 to $2,500 for a POV. And it's pretty simple. I say, I can give you a simple POV for free. But if you want me to dive into this and really go and get all the comparables we're talking about to do a real analysis on this just takes time. It can take 10 to 20 hours to do one of those. So for me to do that properly, I have to charge for my time. However, if we list end up listing the property and we sell it down the road, I'll credit that back to you. So it does a couple of things. One is it incentive advises the broker to actually put more time into it, knowing that it might not just go into the abyss. And quite often people can use those POVs and try and sell it to someone else and use your report that you put time into, to sell it to a tenant or sell it to their accountant or whatever it is. So if by having some money come in, it's not a large amount of money, but it does help offset costs. And it just motivates you to put more time into it. So you fully understand it better, then they're also more invested in you has actually given you a $1,500, check or $2,000 Check. So the chances of them saying, Okay, well, you put together a really good report, because you get paid for it. And you're going to credit me that back. And now you know the property as well as anybody, there's just there's a lot of reason to be considered that as just a another way, not just to make a little bit of money, which is always great. I mean, getting a $2,000 check versus not getting one is always better than than the alternative. But you're just you're you're spending more time on that property. And then you're, you're getting them more invested in you. So I think there's a lot of reasons to actually charge for one. But if if it comes up that you can't, and the owner just says, I've got an investment property I want to sell, what's your opinion, you're valuable? Maybe you do have to make a decision to do it for free. But I would challenge agents out there to consider actually charging for one for those those reasons that I mentioned. Yeah, I mean, investment be absurd. Petroff don't.
6:29
And I was gonna say I really, I really liked that approach. Because it, it gets them bought into working with you, right? It's that like, you know, you get a client to spend $1. So they'll spend 10, right, just get them to spend that first dollar. And it makes a lot of sense, right? Because if you think about it, you get what you pay for. And as a property owner, if I'm paying somebody $2,000 for a broker's opinion of value, I'm expecting that to be a lot better than one that's free, right? Because the guy that's going to do it for free, he's probably gonna go on to costar, he's probably just gonna pull off a couple of you know, three to five sales comps that costar has, which we all know is not always accurate. And send it over with, Hey, I think your property is worth X. Except, you know, it might not actually be worth that it's not you didn't spend any time on it. And it may not actually matter. I mean, my approach has always been, you know what, we'll do a free broker's opinion of value, which I might, I might talk to the team about, you know, using your strategy there. And I think that's pretty great. I need to meet you out on the property and walk through it with you and hear from you like everything that's going on there, I need to see inside outside, let's walk through it. And you know, I'll get together a full report for you. Because it gives me that opportunity to build a relationship with the owner. And it sounds like that's kind of what you're doing too.
7:50
I think that's exactly it is if you are asked to do a B O V on a property and you do do it for free with the hope that you're going to get business down the road. I think that undervalues first of all, just what you bring to the table, you're charging nothing for that report with the hope that you get a listing on it. But if you don't end up getting that listing, when the owner decides that the price isn't right, or he sells it to somebody else, you just did all that work for free. And I think that undermines our profession where we do bring a lot to the table. If nothing else, getting a good sense of the property, like you said, walking through it with them and really getting to understand what you're dealing with. And then digging up all the comps, which most often isn't just on coaster, you have to go a lot further than that, you have to get a lot more information, we're relying on a lot of contacts, we're relying on all the shoe with leather that we were out in our careers just walking up and down streets and talking to people, there is a significant value to that. And it's almost to me, a an initial test. If the owner isn't willing to spend $2,000 on a report that is worth that every day. Assuming that you do it correctly and actually spend the time on it, that's worth $2,000 Every day, if the owner is not willing to do it, that's almost a bit of a flag to me at the beginning. So get them invested, get them understanding what you're given them. And it can be very simple. Like, I can give you a simple report, if you just want a one or two page letter, I can do that. And if you need that for for whatever reason, and you just don't want to pay, I can do that. But if you want a comprehensive report, and it's going to take me 10 to 20 hours, there's just there's a cost for my time. So that that's where i i Always circle back and I've done this on large properties too. This isn't just like a small property where someone's willing to do it. It's the first property first large property ever sold. Actually, this goes back 15 years now was was a seven and a half million dollar building. And at that time, I was mostly working on smaller stuff. I did this with with that owner and that took some and balls to do because he could have just said, Well, I'm not going to, I'm not going to pay for an opinion of value, I'll just go and find another guy. But I broke it down. And it's, it's presenting why it makes sense to do it. And again, who's I broke it down, I can give you a quick number, if that's what you want, I can do that. But for me to go and put together a comprehensive report and show everything about this building, and dig into all the comparables and get access to information that isn't publicly available, and then synthesize this and put this together into a report, just it, it takes time. So I hope you can appreciate my time on that. And again, if if we're successful in selling the building, you use me for it or credit you that anyways. So it's it's like, to me, that's, that's selling, that's what a job of a broker is when it comes to selling, selling isn't using cheesy lines or trying to trick somebody into doing something or trying to be overly persuasive. I don't think that that's professional selling, I think what brokers do to sell is presenting an option, telling them why that's an option that makes sense for them, and then letting them give you an answer on it. And that's, that's how you present that is, here's the value, here's why there's a cost to that value, here's what this is going to do for you. And then this is how we'll work together in partnership going forward, that that's selling. And I think that that's really what a job of a broker is, we're we're probably running off the second episode of this, we're already running off topic, just like we did on the first one. But I think that that's like something that a new broker, or experienced broker can do to just really change the way that we look at doing free work. Because in my mind, a good broker brings so much to the table, that we don't necessarily need to look at everything we do is free. There's there's value for what we do.
11:56
Yeah, I agree. I mean, I think that there's too much of an expectation in the world of real estate that brokers should be doing free stuff, you know, and we get plenty of that anyway, with working on deals until they actually close and you know, getting paid when the landlord gets paid or the seller gets paid. You know, it's it's not an easy business, that's for sure. Am is jumping in the live chat. Always a pleasure listen to listening to both you guys, would you be opposed to receiving off market property deals? I mean, Chad, I don't want to speak for you. But I think everybody's always interested in seeing some off market opportunities, if they're good deals. I mean, if it's, you know, if it's an off market opportunity, and and the seller wants twice market rate, then I'm probably not, I'm probably not gonna be interested. But if it's a good deal, yeah, shoot them away. I think it'd be interesting to look at him. Yeah,
12:42
I'm with you. I would look at I'd look at any off market deal. And, and I think that that's a speaks actually quite neatly to this topic that we're having is that there's there's ways you can evaluate a deal really quickly, that back of the napkin or back of the envelope math, and, and get a sense for it. So I'd love to look at anything. And I'll either give a quick no or yes, I'm interested in let's talk further. Yeah,
13:07
I love those. So let's, let's talk more about your broker's opinion of value. Because I do think that, you know, like, if we're going to turn this into a three part four part series, that's fine. It's it's a very in depth topic. But I think the brokers opinion value is very important, because it's one thing that can really set you apart as a commercial real estate broker. If you have a professional report that's pulled together, that makes sense. So So Chad, what does your bo v look like?
13:35
This is an really interesting part about commercial real estate is that it's a full spectrum of sophistication, you might have a brand new commercial real estate buyer, who perhaps says owned a few houses. And they ran a very, very simple model of cash flow and cash flow out. And that's just how they continue to evaluate deals, all the way up to very sophisticated institutional money, which runs super sophisticated investment analysis. And I don't know the best way still, after nearly 20 years of being in this business, I still don't know the best way of trying to come up with a package that speaks to everybody. If the easy answer is that if you're evaluating a $50 million institutional investment, perhaps like a large distribution center lease to FedEx, that's speaking specifically to that institutional investor. And for the most part, they're running their own models. Anyways, they've looked at what brokers put together as probably, they probably say, that's cute. We'll take your we'll take your numbers under advisement, but we're running everything anyways, just give us the raw data. We're going to run it on your own. And on that other end, you're going to be dealing with a small investor who, who isn't gonna understand internal rates of return and net present value and discounted cash flow analysis and sensitivity analysis and you're just speaking way over their head. So I think I think the best thing that I found is that you really need to speak the language of who the buyer is going to be. So and you get a pretty good sense of it, right? If someone calls you and they have a small little strip center that they want to sell, and it's a million dollars, you're probably not going to put together the same level of detail as you would if it was a shopping mall for $100 million. So I think that that's the first step is really get a sense of what you're dealing with, because that's the language you're going to have to speak for the ultimate buyer. So it ranges like for me as an investor as well. And I'd say this very confidently, that I, I got a much better understanding of investment properties. When I bought my first investment property, I had a pretty good idea of it beforehand, I did my CCM designation when I was really into my career, and I helped people buy investment properties, but it wasn't until I bought my first one. And then subsequently more over the course we actually learn a little bit more every time. And I'm sure the same with you Tyler's that you're a much better investor now having gone through the process several times than when you were dipping your toe in the water and saying, Well, what exactly am I doing here? So it's the it's a fascinating area of the business. And I think that this is what people really enjoy about it and, and why it's such a career that people can stick with it for so long, is that you're never dealing with the same property twice. In even if you did have the same property or very similar one, the buyer is going to be completely different. And they're going to have completely different expectations on it as well. So perhaps I could frame it first, as I'll talk about it from my standpoint of as an investor, and then I'd love to hear your thoughts on it too. And then I think that that could help frame how I would now advise someone on an investment property. But my my first thing and this is just from owning a decent amount of property right now and is I always look at my downside risk first. First and foremost, that's that's what I'm identifying. Because I've I've found and this, this probably didn't really resonate with me until I started doing myself is that pro formas can be manipulated to say virtually any number that you want it to, you make one little tweak to a cap rate, and that heavily distorts the value, you make some assumption that you're going to renew one of the leases in three years at a 20% escalation versus a 10%. Well, now you just do the numbers up what your exit cap rate is, like there's so all those numbers can be manipulated. And pro formas can look really good if you want them to. But what's your downside risk? And to me, that's what happens if that property went vacant, maybe you have a single tenant building, or maybe it's five tenants in a building, maybe all of them just decide to leave for one reason or another. What's that property worth beaconed. And that that really just comes down to what your basis is. So that's the first thing that I'm always going to look at is what's the cost per square foot. And if if I know what the cost per square foot on what to buy it at. And I can ascertain what the lease rate is fairly quickly, which isn't difficult, I could find out the lease rate for an asset class relatively quickly in almost any market. So if I know that cost basis is $100, a square foot and my lease rate is $10 a square foot. And no matter what leases are currently at or whatever the pro forma gets manipulated to say, if I can know those numbers that I've done, I can at least evaluate what my downside risk is. And I think that this is, again, this is just experience in mind is I think that this is overlooked, where buyers will look at a property and they'll just look at the cash flow. And they'll say, Oh, this is a great property, there's a large tenant, and they're paying $15 a square foot for the next five years. And they just see that attractive return. And that's great. And if that did come to fruition, you just had a great investment. But what happens if that tenant leaves, they go bankrupt, you just didn't anticipate the the they were in financial trouble and they go bankrupt. And now that space is worth $10? Well, if you've evaluated it based on a $15 square foot rent, and the market rent is $10 a square foot, you just lost a third of your investment right off the bat. So before I do anything like step one, and if it doesn't go past step one, I stopped immediately. I don't even go through the exercise of designing a pro forma. What's my downside risk? Like that's, that's just where we're begins and potentially ends. If, if that looks good, and that's why I can usually just give a pretty good number on a property is I don't even care if there's 10 years left on the lease and there's tenants in there if that if the numbers don't make sense with that building being empty. I'm not interested even if it does have tenants Then once you start going through it, I become rather I don't say cynical, but definitely more laissez faire when it comes to actually in place cash flows, because everything changes. It's like we went through a pandemic in 2020, where a number of tenants couldn't even pay their rent. There's, there's so many scenarios that can come up a tenant loses a contract, and now they can't pay their rent. I like to look at it that you can build your pro forma based on a rent roll. And you can make a lot of assumptions and let me Who would have known expected interest rates to go up as fast as they did. So I, I don't many people had that in their in their tenure, pro forma 2021. I don't know many people anticipated that in their cash flow. So there's just so many assumptions to make that my foundation as an investor, this probably sounds very simple and if there's an analyst listening, they probably roll their eyes at me as being a simplifying this so much but if you
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