Recently I posted a blog about the frustrations I have with agents who list investment property without the knowledge of the market they should have. Apparently that raised the ire of a few who felt it was condescending. Perhaps it was, thus the source of my frustration. All agents are not created equal, having a real estate license does not make you knowledgeable in all aspects of real estate.
Whether representing the buyer or the seller it is incumbent on the agent to have a knowledge of the market, the right tools for marketing and the ability to answer some basic questions that will be asked. If the property is tenanted it is the agents responsibility to know enough about landlord tenant law not to violate the tenants rights.
One agent even stated that selling a duplex is no different than selling a house. I suppose that may be somewhat true if the buyer plans to live there. However, it is in the best interest of your client that you have some idea what you are representing. How can you use income approach to valuation if you do not know what a CAP Rate is? Basing the price on comps alone is foolhardy at best with investment property.
So in the best interest of the active rain community I decided perhaps I should post a blog that would be of assistance to those who are interested in working in the multifamily or other investment property field.
The first thing you must do is know the terms. CAP Rate, IRR, MIRR, Cash-on-Cash Return, GRM NOI, The terms are infinite and depending on the investors education and background they may be differing or interchangeable. Your clients will want to feel that you have some knowledge of the investment side of the real estate market, if you can't answer financial questions you will be caught with your pants down. If the property was a tax credit property IE: LIHTC Section 42 you better know what your doing or your client may get a visit from the IRS!
Secondly you must know where and how to market investment property. While local sales are quite slow in the single family market, investors are quite actively seeking property in many areas of the country. The trend in the Midwest seems to be mostly coastal investors. They do not have access to the MLS so they rely on sites like http://www.loopnet.com/ for information. While some MLS listings are posted on http://www.realtor.com/ the information and layout is not intended to market investment property. Burying a statue of St. Joseph won't cut it!
Most importantly you must know the rental market, just because the seller claims the property is rented for $850 a month doesn't mean that the rental market will continue to provide that kind of rent if the property should become vacant. Do some research, http://www.rentclicks.com/, http://www.rentometer.com and http://www.craigslist.org/about/cities.html are a some great sites to search for rental comps. Yes I said rental comps, It is the agents responsibility to know what the actual rental market will bring if you are representing the buyer. Another great way to do this is to partner with a local property manager and have them evaluate the rental potential of specific properties. If you are marketing the property for sale and the rents should be higher you can use that as a marketing tool to justify the price.
A common ploy in multi-family is to fill the property up prior to sale with "warm bodies"! If your client buys a property with tenants that don't pay rent, and have not been paying rent you may be liable. Your due diligence should dictate that you researched the income and expense enough that you felt comfortable with the sellers numbers.
Pro-Forma: A pro-forma is a tool used to market investment property. Most pro-forma will either be actual or estimated. Estimated is basically worthless, You can estimate that a vacant property will rent for $1,500 but if the market won't bring that then your just guessing. Actual Pro-forma should include income and expense for a period of history. The longer that history the more accurate the projections. The more information the better. The only estimated pro-forma that has any bearing is one that uses comparable market analysis of other rentals.
Unit descriptions, unit mix information, insurance cost, maintenance cost, vacancy projections, management costs, capital improvements, advertising cost, utilities cost, etc. should all be included in the pro-forma to gauge an accurate prediction of potential NOI to come.
Maintenance. Pay special attention to these numbers, often the maintenance numbers will be skewed by the fact that the seller did some or all of their own maintenance. If the buyer does not plan to or have the aptitude for doing maintenance and repairs, your buyers must consider what the actual cost would be if they had to hire that service. Frequently some maintenance costs are diverted and capitalized. This lowers the pro-formas actual numbers and indicates that major improvements may have been done. Capital Improvements should be taken into consideration along with the maintenance. Make sure the seller outlines what went into capital improvements before you assume it was a new roof. Depending on their accounting methods it may have been some general maintenance expenses.
Do what you do and do it well, if you plan to expand your opportunities in this field then get educated in the basics. I've seen far to many investors come to me after making a horrible mistake they were led into by a eager agent.
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Thanks for the great information. I have a rather large investor business and you are correct...many Realtors do not understand this portion of the business....
Now maybe you could educate the late night, TV watchin, wanabe investor....naaahhhh!!
Steve