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The Capital Stack Letter #76

The Capital Stack Letter #76

Direct to Seller OR Embrace Brokers🤔

June 10, 2023

The Capital Stack

Embracing Brokers

In the dynamic world of real estate investing, success lies in an investor’s ability to identify and capitalize on the right opportunities. As an active investment company that has transacted over $70 million in the past three years, we've discovered the benefits of going direct to sellers, securing deals at lower prices, and enjoying a strong source of deal flow. Recently, we have received some interesting feedback on this approach.

What got us ThinkingEarlier this week, we sent out a mailer and received a phone call from another property owner with well over 10,000 units. He expressed his dissatisfaction with us contacting him directly instead of going through a broker. Fortunately, we were able to reason with him and find common ground and explain the reasons behind our inquiry, as many property owners want to avoid paying any commissions. We ended the call on a very positive note, but it got us thinking that perhaps we should evaluate this strategy going forward. Coincidently I just listened to a favorite podcast of mine, The Fort by Chris Powers, featured Gabe Bodhi, a Wall Street to Real Estate investor who specializes in purchasing sub-institutional multifamily properties in Denver, Colorado. Gabe has led more than $50mm in multifamily purchases. On the podcast, He shared his evolving perspective on brokers throughout his career. Early in his career, he was solely focused on getting the best price and would frequently bypass brokers to directly approach sellers and would often ask for brokers to lower their commissions. As time went on, he recognized the value that brokers bring to a transaction, today he makes a point to involve brokers and even pay them a bonus commission when buying properties. This has led to increased deal flow as it lines the brokers pockets when they bring him a deal. Acknowledging the considerable value that brokers bring to the real estate market is crucial. Let's explore the rationale behind placing greater emphasis on collaborating with brokers.

Expanded Outreach

Brokers possess an extensive network. They have their finger on the pulse of the market, allowing them to identify and uncover opportunities that might have escaped individual investment companies. By collaborating with brokers, we gain access to their vast pool of contacts, including off-market listings, pocket listings, and exclusive opportunities that can significantly enhance our deal flow. They also know which deals are being quietly shopped in the broker network, which deals may be falling through, or a potential seller that is softly preparing their property for sale. Brokers frequently receive inquiries from prospective sellers requesting Broker Opinion of Value (BOV) assessments. The period between obtaining a BOV and bringing a property to the market can be quite lengthy, sometimes extending beyond a year. By cultivating strong relationships with brokers, we increase the likelihood of being informed of such deals before they hit the market. This gives us a significant competitive advantage, and quite possibly the opportunity to proactively approach the seller with an offer before the property even reaches the market. If the offer meets the seller’s expectations, he/she may decide to bypass the traditional sales process altogether and simply accept our offer.

Leveraging Expertise

Real estate brokers can help us identify emerging trends, anticipate shifts in supply and demand, and navigate regulatory changes. Their knowledge extends beyond individual transactions, allowing us to make well-informed investment decisions that align with our long-term goals. Moreover, brokers possess insights into the composition of the buyer pool. Given their active involvement in the market, brokers receive inquiries from other potential buyers. By leveraging their experience and network, we gain a better understanding of our competition and the number of buyers we are up against. This knowledge extends not only to our buying endeavors but also to potential sales. If we are considering selling a property, brokers can provide us with a sense of the number of active buyers in the market for such properties. This information equips us with valuable intelligence for making informed decisions and tailoring our approach.

Enhancing Credibility and Deal Execution

Collaborating with brokers enhances our credibility as an investor to many sellers. Brokers typically work with reputable investors, and when we establish a positive reputation among brokers, it can open doors to exclusive deals and slightly preferential treatment. Sellers often prioritize working with investors who have a proven track record and established relationships within the industry. By leveraging the broker's network and reputation, we increase our chances of securing highly sought-after properties and gaining a competitive edge.

What do Brokers Think

We asked a few brokers in our network to share their perspectives on groups that use the direct-to-seller approach. There was mixed feedback but the general consensus is that if an investor is going direct to a seller they are potentially taking money out of the broker’s pocket and are viewed as competition. If we are seen as competition, those brokers will never present us with off-market opportunities and will favor other buyers whom they believe would yield higher financial returns for them.

Our Take

This realization has sparked a slight shift in our strategy, prompting us to rely more on brokers for our deal-sourcing efforts. For properties that we are closely evaluating but have yet to establish contact with the owner, we will engage the services of a broker to reach out to the owner on our behalf. If the seller expresses hesitation due to broker involvement, we will consider direct communication while still maintaining the initial outreach through the broker. Adopting this approach will strengthen our current relationships with brokers and help us in gaining access to genuine off-market opportunities.

Major Market News

The Fort with Chris Powers

We frequently tune in to The Fort podcast hosted by Chris Powers, and it was particularly interesting and timely to hear Gabe Bodhi's perspective on the direct-to-seller strategy versus leveraging brokers. Link to the podcast below.The Fort: Episode 129 - Gabe Bodhi on Sub-Institutional Multifamily in Denver, CO. The Fort with Chris Powers: An Entrepreneurship Podcasthttps://www.thefortpod.com/gabe-bodhi-ceo-of-tekton-group-expert-in-sub-institutional-multi-family-investments/

Tips and Tricks

Term- Direct to Seller-

The "direct-to-seller" approach refers to a strategy employed by investors in real estate where they bypass the involvement of brokers or intermediaries and directly approach property owners for potential purchases or negotiations. This

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