The Insider’s Edge to Real Estate Investing with James Nelson | S3SP21
In the newest episode of the A.CRE Audio Series, James Nelson, principal and head of Avison Young’s Tri-State Investment Sales Group (as well as an active CRE investor himself), shares his insights and expertise on various aspects of real estate investing to help CRE professionals develop an insider’s edge with their investments. James and the guys discuss multiple topics such as finding opportunities, leveraging partnerships, understanding seller motivations, and the importance of transparency in the buying and selling process. He emphasizes the need for a comprehensive understanding of the market, the importance of due diligence, and the value of building strong relationships with industry professionals. James’s practical advice and approach provide valuable guidance for both experienced investors and those new to the real estate industry.
Watch, listen, or read this episode below to hear about James’s insights and expertise to help you gain an insider’s edge in your real estate pursuits.
The Insider’s Edge to Real Estate Investing
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Resources from this Episode
- A.CRE Real Estate Financial Modeling Career Accelerator
- Education in Real Estate
- A.CRE Career Articles
Episode Transcript
Announcer (00:01):
Welcome to the Adventures in CRE audio series. Join Michael Belasco and Spencer Burton as they pull back the curtain on everything commercial real estate, and introduce you to some of the top minds in the industry. If you want to take your skills to the next level and be part of a growing community of CRE professionals across the world, this is for you.
Sam Carlson (00:26):
Hello, and welcome back to the podcast. We are here with author and real estate investor, James Nelson. We’re going to be talking about an amazing book he wrote, Why it’s Different, and I think also how it pertains to what’s going on in the real estate market today. To get us started, I’m going to kick over to Spencer.
Spencer Burton (00:42):
Yeah, James, great to have you. For the audience, a bit of an intro to James. He’s one of the top investment sales brokers in the tri-state New York City area. As principal and head of Avison Young’s Tri-State Investment Sales Group, he sold more than 500 properties and or loans, I think over 5 billion. Beyond that though, and I think this is where we’re going to spend a lot of our time today, not to discount 5 billion of sales activity in a 25-year career, but he’s an active investor himself, GP, LP, dozens of transactions. I think you sponsored two funds, 350 million of value. And he’s the author of the Insider’s Edge to Real Estate Investing.
(01:27):
And what I love about James, the book, is that it’s so practical and it’s something that we care a lot about at A.CRE. It’s like we were grad students studying real estate at a great university. Phenomenal professors. You, yourself, right, have guest lectured at Columbia, NYU, Cornell, and the likes. But there’s a big gap between the practical and the theoretical. And what I love about this book is that you take 25 years of experience, 500 plus transactions, plus the investments you’re doing on your own, and you condense it down to, I think it’s 11 areas that matter in real estate. What did I miss, James, in terms of intro?
James Nelson (02:10):
Well, Spencer, Michael, and Sam, thank you so much for having me. That was an incredible introduction, and I think it’s my turn to thank you all for what you do for the real estate community. A day does not go by, and I’m serious, that I don’t recommend your platform to someone looking to get into the business because yes, there are a lot of practical applications lessons from this book, but there’s certainly no substitute for still understanding the numbers, and no one does it better than you all. So, I’m just really excited to come on the show and share some value with your audience.
Spencer Burton (02:46):
So, your book lines out, and it’s 10 proven steps, right? 10 proven steps to have an insider’s edge to real estate. And what’s interesting, your book juxtaposes traditional investing stocks, bonds, and the like, which are highly transparent with real estate, which is a largely inefficient and opaque industry. Now, I would argue that it’s becoming more efficient and less opaque, which means that investors like us have a bit less of an edge, but it’s still relative to the entire basket of investment opportunities, a opaque and inefficient industry. So, you line out, call it, 10 proven steps. And the first one that jumps out to me is the spot the gems. That was the step number three is spot the gems. Elaborate on that a bit further. How does someone… They come out of a great school, they’re armed with the technical skills, maybe they take the A.CRE Accelerator, they’ve got the technical skills, they can underwrite that. How do they actually spot the gems? What is that all about?
James Nelson (03:54):
So, it’s a great question, and Spencer, I want to first go back to something that you said about the opportunities to invest in real estate and the inefficiencies the market. I would agree with you that, yes, we are doing a better job of perfecting this, making it more of an efficient market. But a lot of the opportunities here to invest in real estate are in finding these gems, are finding opportunities which are not being widely listed. It still amazes me, here I am 25 years later in my career, and when I started, I’d say half the transactions, if not more, were off market. Now, you see the brokerage, landscape has become a lot more pronounced, and you see a lot of these offerings being put on multiple listing platforms. But still, there’s so many of these transactions that we see where an owner says, “Oh, well I got an offer, and I don’t really need to share this with a mass audience.”
(04:57):
They take a sale, and they end up leaving a lot of money on the table. So, I think that’s part of it. There’s only one part of a transaction that you can’t change, and that’s where you purchase the property. Hopefully, your audience is taking away the fact you need to look at a lot of opportunities. And it’s not just on market, off market because I want to be clear, because it’s off market, that doesn’t automatically make it a great deal. It certainly helps when you’re not competing with the whole world. But the spot the gems is really about, I think the fun part of real estate investing, which is adding the value in unlocking the potential. So, a seller who might think, oh, I’ve got this rundown building, and it’s a huge headache, and the rents are… I’m barely breaking even, someone who is properly armed understands the market and how to reposition that asset can really turn around that asset.
(05:51):
And that’s by the way, also what I love about the business. I’m learning new things every day. So, what are uses? How can I leverage air rights, zoning changes in ways that you can reposition properties? Because I would say especially right now, in this market, and hopefully, the interest rate increases have finally leveled off, but if your business plan is I’m going to just buy based on this cap rate, I’m going to try to sell and hope the cap rate compresses, that’s not a good recipe for success. I think really the way is to create value. So, understanding how are you going to reposition this property? So, that’s what we’re talking about when we’re talking about spotting gems. And of course, which could lead to the next question is how to go about finding them?
Michael Belasco (06:32):
Yeah. Well, back to what you said about repositioning, and I wanted to hit on another key step here, and we’re going a bit in reverse. So, yes, you can look at a deal that’s widely marketed, and you could try to fund the value based on that. However, the other side to that coin is how can you create value? How can you do something that maybe nobody else is thinking about, which then, could enable you to pay the highest price because you can realize the highest cashflow stream, and create something that increases the building’s value exponentially? This goes back a step into your step two, which is know the players.
(07:12):
And I wanted to talk to you, and I have personal experience of starting off early and solo, and not being able to get things done. And then, as my network grew and my team started to grow, things started happening. So, I wanted to go a step back with you with spot the gems and how that ties into know the players. So, could you elaborate a little more about that, maybe even give some personal anecdotes that you’ve had that goes along with that?
James Nelson (07:38):
Sure. It’s so important. This business is about the people, right? And I have my own podcast, the first interview I ever did was with this prolific New York developer, Bruce Ratner. And I asked him, how did you do it? How did you build up this portfolio? And it wasn’t about him. Everything was about I had the right people, the right team. If you all subscribe to Jim Collins, Good to Great, it’s having the right people in the right seats, right? And so, he mentioned in that hour-long interview, people are team over 50 times. The idea of having the right team in place of specialists, this is a business that really, to be successful, you need specializations. For you listening out there, if you’re thinking about acquiring a property and you know your family’s general attorney who did your will, that’s great.
(08:34):
But when it comes to acquiring commercial real estate, let’s get really specific. Is that attorney specialized in multifamily? Do they know the rules and regulations? Especially if you’re investing in a place like New York City, you really need to understand the landscape of how to operate because those professionals are going to help you execute at the highest level, and they can also open up a lot of more opportunities. One of the parts of my book is about how to work with the brokerage community. It amazes me today that I still spend 80, 90% of my time calling investors when I have something for sale. And you might say, “James, that’s your job. You’re a broker, you’re supposed to call me.”
(09:20):
But what I find is the most successful buyers out there are the ones who are cultivating relationships. They’re calling me saying, “Hey, James, what’s going on? I just saw you came out with this, but what’s in the pipeline?” That is a great question to ask your broker. What else are you working on? And inevitably, and phone calls are great, but if we have that cup of coffee, we go out to lunch, and we start talking about ideas, that’s when some of these real opportunities come to the forefront. Again, it’s about who you know and the teams that you’re putting in place.
Michael Belasco (09:54):
Let’s dive into that actually, if you guys don’t mind. Talking to a broker, this is your world. You’re talking to a lot of people probably listening to this that are just getting involved. They might not know many brokers. What’s the protocols? How do I get in, start cultivating these relationships? What’s the best practice? How do I get, first of all, to start the relationships, and then, to get insights and maybe valuable information that a broker might disclose to me because we have a great relationship as opposed to the rest of the market? Give us some practical guidance.
James Nelson (10:30):
Sure. Well, it starts, the end game is what you were just talking about, the relationship. And what is that relationship? It’s going beyond something just transactional. It’s really getting to know that person and whether it’s going out to lunch or going out to a game, really getting to know them. And also, a relationship is a two-way street. It’s not just, “Hey, I’m going to sit here and wait for you, the broker to call me up.” It’s, “Hey, I’m going to provide you if I see something interesting, or maybe it’s a deal that I saw off market that’s not for me, but I’m going to share.” So, there’s this two-way street, but I think the question probably for a lot of your listeners who are maybe new to the game and saying, “I don’t have a track record yet. This is my first purchase.” See, brokers typically, certainly they’ve been hired on an assignment, they are looking for the easiest way to execute, the known buyer who is tried and true, who are going to perform.
(11:24):
So, the worst possible thing that could happen with a broker is they give you a shot as the new buyer, you don’t perform. Worse, you retrade, they have egg on their face. That’s a real problem. So, you need to address that and you need to give comfort, and look, it is tough if you are brand new to investing. And that is why a big part of my book right off the bat is finding a great partner. And then, your role, what do you bring to the table? You bring the opportunity. You’ve studied the market, you have that expertise, you have that incredible opportunity which you bring to a partner that has that track record. When you call that broker, you can say, “Look, I’ve been studying this market. This is the exact kind of asset I look to buy, and I have partnered with this platform that has done multiple transactions before.” And you get that credibility. So, that’s really, really important. And the last thing you want to do is try to convince a broker that you’ve got some track record that you don’t have. You want to be prepared. Hopefully, that’s helpful.
Spencer Burton (12:35):
No, I think that knowing the players and how that relates to finding the gems, knowing the players is part of understanding who’s on your team, but also part understanding who’s who are stakeholders to that transaction? And one perfect example is the broker and demonstrating credibility to the broker such that you have a shot at winning the deal. And there’s various ways to demonstrate credibility. And James, that one is a great one, which is find a partner. Find a partner who already has credibility and borrow their credibility to get yourself started. Do you have any examples? Over 25 years of finding a gem, and you don’t have to give specifics, but something for the audience that would help them internalize that, an example from your career that you might be willing to share?
James Nelson (13:27):
Yeah, I think about certainly the work that we did with our real estate fund where what we were doing was providing JV equity. In our mind, what we were doing is we were finding the sponsors who had the opportunities, and then, bringing in investors to the table. So, we were that credibility that we’re talking about. And for some of these newer emerging sponsors, we were the ones to give them credibility. But I think on my side, I’m always very quick to bring in a partner because I think it’s really important for you to understand what your strengths are, and also be realistic with your time. I have a full-time job.
(14:05):
So, when I went out to buy several multi-family properties in Brooklyn, I did not do this, I did not take the lead on it. I had a partner who happened to be a managing agent. That was a really good partner to have because they were able to do the day-to-day. I’m helpful in finding the opportunities, understanding how to structure them. So, I think that’s also really important when you think about who makes for a good partner is someone who’s complimentary of your skillset.
Spencer Burton (14:34):
So, one part is as we think about stakeholders, the right people, one is called the broker, and the listing broker, and the likelihood that you’re going to demonstrate credibility. So, you bring a partner in. What about raising LP capital? Especially as a younger sponsor, how do you demonstrate credibility to an LP partner?
James Nelson (14:54):
Yeah, that is why it is so important, that partner that you can leverage their track record as well. But let’s say you are starting off on your own and you start with the friends and family. I think you have to be able to demonstrate your expertise. And what that means for a lot of emerging sponsors is maybe they worked at a big firm before, and so, they’ve demonstrated maybe it wasn’t their deal, but they worked on it. But I think going into this, having never done it, not having the experience, that that’s not something I would say even if they’re friends and family, you want to make sure they stay friends and family.
Sam Carlson (15:32):
I want to jump in here for just a second, and I just have this podcast that we did a long time ago just rattling around my brain, and we’re talking about how to spot gems, and I remember, and I won’t name anybody, but I remember getting off a call with a podcast we did, and I noticed a lot just in business in general, there’s two ways to approach a business. There’s the convergent way, and then, there’s divergent thinking. And there’s the way that this has always been done. I think, Spencer, you’ve talked about just the traditional ways that people do real estate, and that’s the conversion approach to doing business. Now, I remember we got off a podcast, this has been a long time ago, with somebody that told us about their investment strategy, and it was good. It was really good, it was a great podcast. But as soon as we got off, I remembered the lease up time of this investment strategy, and I thought to myself, I could do that in a third of the time.
(16:34):
And I listened to the way that he was talking about how they lease up the property and what they do. And I’m thinking, oh my gosh, look at the inefficiencies that are in this one little thing. And that makes me a different… In our team, I’m not a real estate guy. I come from marketing, advertising, and sales, and business strategy background. And I remember talking with Michael and Spencer afterwards. I’m like, “How much more would that project be worth if I could lease it up in a year?” And you look at a model, and all of a sudden, it goes crazy, and it’s way more valuable. And I started thinking, it’s one thing to find a gem. It’s another thing to be a gem. I think a lot of times, when people bring opportunities, when people bring a convergent approach to a deal, if you don’t have a track record, then you’re not really a gem, so what can you bring to it?
(17:34):
Maybe you should try and look for unique opportunities. And unique opportunities, you can find in a variety of different ways. Most of the time, we’ve heard the riches are in the niches, and I think that niches are so… They’re very convergent too. We all talk about the same niches. Well, how can you take a niche, layer something on top of it, a new opportunity, and then, make it a unique approach? So, if you have an investment strategy, whatever the case may be, is approaching that in a new way, an attractive way to… And you could give any example, like lease up time in this situation that I was talking about. If I were to go to a LP, even as a inexperienced GP, and have something like that, this is our USP, we’re going to be able to lease this up and here’s my proof that we’re going to do that. Does that then give you an edge even without a track record? Are there other ways to demonstrate credibility and to grow that audience even faster to find and place those gems?
(18:42):
I don’t know if I’m being articulate enough on that, but this has been rattling in my head the entire time. I’m thinking there’s so many ways and times when people do it the same way over and over. Is there a different way? And is that welcome in real estate right now?
James Nelson (18:59):
You bring up a lot of great points, and I think first and foremost, when finding an opportunity, it’s not just that you got a great price. What is the business plan? And then, to your point, why are you the one who has the skillset to execute on it? So, being specific and having that expertise is really important to be successful. But I don’t want to say that if you’ve stumbled onto something entirely new and it’s never been done before, and then, you bring that to a room of investors, everybody will say, “That’s great.” Because then, there’s also the herd mentality where people want to see, okay, this makes sense. I’ve seen this done multiple times before.
(19:42):
But no, I think you should have a fresh perspective. And I think what’s so exciting today is with the amount of data that’s available out there, and are you leveraging data to make better informed decisions? So, what is your secret sauce? Is it AI? How are you analyzing these situations? Is your approach different? I don’t know if anyone is changing the way that buildings are actually acquired or repositioned, but you might have a fresh take on it and certainly a competitive advantage that will help. But I still think there’s no substitute for having that track record as well.
Spencer Burton (20:22):
Well, I think this is an interesting point, and that herd mentality is very real. The larger the herd, the more capital that follows it. The more capital that follows it, the lower the cap rate. The lower the cap rate, the higher the value. And we’ve seen especially over the last decade, 15 years, where we went from the four main food groups to NCREIF is expanding the definition of their Odyssey index to include self storage is its own category. It’s like self storage is its own category. And as self-storage has become institutional, or in other words, as the herd has recognized that as a staple now, cap rates have compressed. So, I think there is to a certain extent, Sam, the opportunity to create a herd.
(21:13):
But back to James’s point, you may have a really, really creative idea, whether it’s around execution or it’s around the investment itself, it’s going to be very hard to raise capital at first. You’re going to be raising capital at much higher cost, but what you have is a greater spread between the price and the opportunity. And if you can be at the front of a new herd, there’s incredible value that could go to you over time as you create that. But that’s a big risk. And most of us, right, James, it’s like we go where the herd is going because that’s where we can raise capital. It’s a proven model, and hopefully, we’ve already had the track record ourself that we can turn to.
Michael Belasco (21:57):
So, Sam, to your point, one of the ways to bridge that gap of what you’re talking about, Spencer, is to start to gain consensus among people that aren’t at high risk to invest with you, basically. And not to invest with you, but they’re not going to invest with you at first, but you start to talk with maybe some industry professionals or your network, and you gain some sort of insight from them. And then, one of the things you can do is create, and a lot of new sponsors start off this way, is they bring on an advisory board. They’re not necessarily working with you on the day-to-day, but you can borrow their credibility in that they’re on your team, which is something, Sam, that you talk about a lot, which is that borrowed credibility. While it may be really challenging, even with the advisory board, it’s still a challenge, but it helps a lot.
(22:46):
Not only do you get to borrow that credibility, but you also get that valuable insight from them as the experienced person in the industry as well. So, yeah, that’s great. I want to keep going because I want to get through some of these steps here. We did spot the gems, know the players, raise capital. And just to back up real quick, a lot of what we’re talking about here and something, James, that you said isn’t taught very well is actually how to do the deal. And that’s what we’re doing. We’re going through these steps and talking about how to really do the deal. So, let’s move on. So, initiate the underwriting process. I think we have pretty well covered with what we do here.
James Nelson (23:36):
It’s in the book. You guys saved me a whole chapter. You probably saved me a whole book.
Michael Belasco (23:44):
So, can we add on with spot? So, you have spot the gems, and then, you have know what to look for. What if we go back, maybe we covered a little bit, maybe it’s a bit redundant, is there anything to add to this step that’s step three to step four?
James Nelson (23:58):
Well, I think in today’s market, so where are we right now? We’re in a very uncertain time. We have a lot of buyers on the sidelines. We’ve seen rates go up at an unprecedented rate. So, what’s everyone doing? They’re waiting, right? Because everybody hopes that there’s going to be, if you’re a buyer, that there’s going to be more distress, there’s going to be better buying opportunities. And look, depending on what you’re talking about, it’s hard to paint the market with one brush, you might be right. But if you wait, there might be a lot more competition when everybody else jumps back into the game. So, what should you be looking for right now? What is the number one thing to determine if you are buying a great opportunity? And that is sellers motivation. And you would be surprised how rarely buyers ask me, “James, why is the owner selling right now?”
(24:50):
Look, depending on what the broker’s going to tell you, certainly, if my client is under financial distress, I am not going to divulge that. My fiduciary is to protect them, to maximize price. But there might be things that come out in the conversation. Certainly, if you’re talking about an estate sale, and I remember we had a contract out for a 72-unit apartment building with a restaurant in the heart of Greenwich Village. And I had a contract out in February of 2020, so you know where this story’s going, for $32 million. COVID hits. And in fairness, we didn’t know were we going to be in this for weeks, months, forever? Was it the end of the world? But 60 days later, once we started regrouping, the estate said, “Hey, we’ve got taxes to pay. This building is an unmitigated disaster. Where can we sell this for?”
(25:49):
And after that $32 million buyer was long gone, after bringing in some tens and some fifteens, finally, we had a buyer that came in, the contract closed for $22 million. Now, look, maybe that’s what it was worth at the time, but how many sellers would take a $10 million discount in 60 days that there was not motivation, and PS, they just resold the building for $48 million? So, that seemed to work out pretty well for them. But the point is that you want to make sure and be engaging with an owner who has a reason to sell because unless if you really need to sell right now, you probably are not. So, where we are seeing the most business right now as a broker, and the first thing we’re looking at is how much debt do you have on the property? And we are seeing a lot of situations where the loans are coming due, forget about cash out refis, they’re cash in refis.
(26:44):
Do you want to pay down the loan? So, are you going to double down on your property? Do you have the ability to? And so, we’re working with an assignment right now, 40-year ownership. And if you asked them a year ago, do you have conservative debt? Absolutely, we have conservative debt. But when they went to the bank to refinance, they said, “You got to pay the loan down.” And they said, “Well, we’ve been giving our partners their quarterly distributions for decades. We’re not about to do a capital call.” They’re sellers, and they’re going to sell no matter what. So, really important as buyers to play detective. Why are they selling? And even I talk about on the property tour, you talk to the super, there’s certain things that you can listen for to determine why.
(27:28):
And by the way, it doesn’t have to be… So, you can be a predatory buyer. Sometimes, finding out what an owner’s motivation is or what they’re trying to accomplish, you can create a win-win. Someone might say, “Hey, I’m kind of done operating this apartment building, I’m just looking for something more passive. Maybe we can just 1031 exchange, and do a triple net.” Great. “Are you okay with the flexible closing? Why don’t I give you more time to close, which might be better for me as a buyer to go out and raise capital?” So, I think the more you can understand about the situation. That’s going to really help you find the best opportunities.
Spencer Burton (28:02):
So, some really good advice here, and let me condense it down, and I’d love for you to expand a bit more. You’d identified two forms of sellers that have motivation, an estate with some tax event that’s coming. I’ve dealt with that several times in my career. Incredible opportunities. And from the perspective of the estate, it’s actually, it’s a win-win. Yeah, the estate took a big haircut to what their expectations were, but they solved their needs. The buyer was a win because that buyer acquired an asset at a discount to perhaps what a fully marketed or a deal in a more stable time would’ve had.
(28:43):
The other one you identified was a refinance event where the refinance terms do not meet the seller’s needs. Either the seller can’t bring cash to pay the loan down and or they’re refinancing into a rate that makes their cash on cash such that is no longer worthwhile to hold that asset long term. So, those are two that identified sellers that need to sell. Are there others that you see, other scenarios of examples of sellers’ situations to look out for that tell you how there’s a seller that needs to sell?
James Nelson (29:22):
So, I alluded in that last example of someone who’s it’s just a lifestyle decision. And even if you have that great third-party manager, you know. Still, if you run a multifamily building, it has to be hands-on. So, a lot of people are looking to retire, they’re often great time candidates. Look, there’s been a lot of movement. I see it here in New York where there’s been a lot of legislation passed, which has made it a lot more challenging to operate. So, as a result, those investors have been saying, “Look, I’m going to sell. I’m making a strategic move. I’m looking to make a move out of New York and buy into other markets or different asset classes.” So, there’s certainly that.
(30:04):
A lot of end users, for those of you looking to buy vacant properties, the business that is either closing down or relocating, there’s a vacant building. We’ve also found a lot of success in the win-win category working with not-for-profits. There are so many not-for-profits out there, churches, synagogues, other organizations who they have their real estate, but maybe it’s fallen into disrepair. Is there not opportunity where you can go in, reposition? Here in New York, we see a lot of development. So, maybe it’s a brand new development, and then, that organization gets a brand new space back. So, there’s a lot of opportunities out there depending on what you’re looking for.
Spencer Burton (30:49):
And then, actually, let’s stay on that for a second. And this is somewhat of a side comment or question, but right now, there’s a fairly large bid ask gap between seller expectation and buyer expectation. And for our younger audience, bid ask gap, essentially seller wants a lot more than what the pool of buyers that are in the market are willing to pay. Are you seeing that burning off finally? Are you seeing the sellers that have unrealistic expectations just holding onto their properties? What are you seeing as it relates to that bid ask gap?
James Nelson (31:28):
Well, again, it goes back to the seller’s motivation. If there’s real motivation, they have to be realistic. And I think the pressure, the timing, when you have events like a loan coming due, you have to make a decision unless you want to just give the keys back to the lender. And we’re certainly seeing some of that happen. But I think it really is a result of that because if you’re a discretionary seller, you’re never going to come down to meet the bid ask spread. So, when that broker tells you, “Well, I know the property’s only worth 15, 16 million,” but if the owner gets 20 million, they’ll sell. You probably never want to buy from that seller, but it really depends on their circumstances.
(32:12):
But no, I actually put as much blame because I get the bid ask spread all the time from buyers. And it’s, oh, it’s the sellers. Guess what, buyers? Get off the sidelines. The conversations I’m having now where if it used to be a three and a half four cap, and now, it’s a five and a half cap, and they’re telling me they want an eight cap. Okay, great, I’ll buy your portfolio for an eight cap. What do you have? So, it’s like, I understand. You want a great opportunity, you see this, but buyers also have to not try to just undercut the market and try to just low ball everything because that’s not a recipe for success either.
Spencer Burton (32:58):
And by the way there, there’s a fair number of motivated buyers right now in the market as well with a lot of dry powder that they need to deploy. So, we often talk about motivated sellers. There are motivated buyers also.
James Nelson (33:12):
And the 1031s are at the top of that list.
Spencer Burton (33:15):
Yes.
James Nelson (33:15):
Because most buyers will look to prolong decisions as long as possible hoping that pricing is going to continue to move in their favor. Now, that’s when the market is flat or declining. When the market’s on the upswing, then it’s the opposite. Buyers want to preempt right out of the gate. They want to buy it, they want to cut off the process before it gets bid up. But that 1031 buyer, they don’t have the option. They don’t have the luxury to wait it out.
Spencer Burton (33:38):
That’s right. So, the other side of this was understanding motivations of the counterparty, and we were talking specifically of sellers, but also this would be an interesting discussion around buyers. And you mentioned two pieces of advice. The first was just ask. And we tend to always ask, and we tend to never believe what we hear from the representing broker. And with good reason. You represent the seller. Whatever story you give us is going to be the rosiest of stories. And then, another suggestion you gave was in your tour ask management. Other tricks? And again, this goes for understanding the buyer motivation as well. What are some other tricks of the trade to help you understand the motivations of your counterpart?
James Nelson (34:25):
So, Spencer, I have to address that comment about the brokers, and yes, there are brokers out there who are doing a real disservice if they’re just trying to sell something at all costs. Everything’s great. I actually take the opposite approach, and this might seem very contrarian. But we tell you everything that is wrong about the property first, the good, the bad, the ugly, right? Because guess what? You’re going to find out about it anyways. Why waste all of our time where you’re putting an effort to come up with a bid, and then, 60 days later, during diligence, you find out that the tenant wasn’t paying rent? Why wouldn’t I just start with that to tell you what it is? And then, we can get over that, and you say, “Okay, James, I got it. We can deal with that. Fine. Let me put that into my assumptions.”
(35:14):
So, I think for the brokers listening to this right now, if you are glossing over the issues of the property, or in many cases, it’s not that they’re glossing it over, they’re not doing the work. They are not digging in and understanding the asset. They’re like, “Oh, I got this great property, I’m going to just slap a price on it, and we’re going to go out to market with it.” No, no, no, no. If you are doing your job as the broker, you really need to diligence yourself. And if we know there’s issues with the property, whether we don’t have a C of O, we don’t have the proper paperwork for the leases, we’re going to tell you right out of the gate. And if that’s not for you, fine. Let’s go find something else. So, I think that’s a really important distinction. And I just think it’s much better if just buyers, sellers, brokers, everybody is just upfront from the start. But as we all know, unfortunately, that’s not always the case.
Michael Belasco (36:07):
That makes a world of difference for every party in the process. I could speak for myself, I know Spencer’s been through it, the difference… And that’s why James is 25 years 5 billion in-
Michael Belasco (36:19):
But you make the process real. That is incredible advice. Just as somebody sits on the other side and has dealt with brokers from all aspects of personalities, and enthusiasm, and momentum, and crossing their T’s, and dotting their I’s, it is a game changer. That’s a broker that will get repeat business forever, and it’s someone you trust right off the bat. So, I love that approach. And there’s still strategy in doing that. It’s not just like, “Hey, I’m just going to tell you everything and I’m throwing baby and bathwater out.” It’s like there’s a strategy from the seller’s perspective too because that actually creates value, creates trustworthiness, creates an energy there that could actually encourage the buyer to even go a bit higher because there’s just this good transactional relationship happening. So, I think that that advice is just such incredible thing to just say upfront and out loud here. So, I appreciate it.
Spencer Burton (37:15):
Yeah, I’m glad you said that because I think now too, there are called a half dozen brokers that we really respect, that we think of as partners and not salespeople. And when they call us with an opportunity, it’s the good, the bad, and the ugly. And they go through it, and we feel the transparency. It doesn’t change though, James, that they have a fiduciary duty to their client to keep certain things confidential, bankruptcy… Of course bankruptcy’s public, but there a certain financial distress that might make them a more motivated seller. And your job representing the seller is to get the best price for the seller. So, coming back to my original question, other ways that you can pry to get a motive, understand motivation of your counterparty, and just understanding that the representative for the seller may not be able to give you everything that’s going on. Are there other tips that you might offer?
James Nelson (38:25):
Yeah. And again, you want to respect the confidentialities. If you’ve signed an NDA, you don’t want to start asking up and down the block. But again, I was touring a building today and it is amazing how underrated the super is on the property. They have the history of the property, they know that good, the bad, the ugly that you’re looking for. And they also know where there’s opportunities. And I think a lot of the opportunities, sometimes, it’s with the property, but also how it’s positioned. So, how are they marketing their apartments for rent? Are they have the same old website that they’ve had? Do they even have a website? These are certain things that you should be looking for where you look at this and say, “Look, we could do a much better job by professionally running the property and marketing.” But yeah, I think that also having, going back to the right team, the right professionals, having a great attorney is really important to help. If it’s landlord, tenant issues, really understanding the leases, what’s involved. This is a business where you have to be willing to get really into the details.
Spencer Burton (39:30):
Well, James, it’s great to have you on. James’s book, The Insider’s Edge to Real Estate Investing. And you’ll see a really, from start to finish, the practical advice that goes into real estate. In fact, it reminded me, and I’m sorry for… As part of our graduate studies in real estate, we read this book called The Real Estate Game, written by a guy named William Poorvu, a professor at Harvard. And it was a great book and nothing against the real estate game. In fact, I think many on who are listening or watching have read it. It’s a great book. The difference is when you read The Insider’s Edge relative to The Real Estate Game, one gets into the actual weeds of what it takes to invest in real estate. The other is the theoretical. And both are interesting and valuable, I think of the importance is to bridge it. So, thank you, James, for coming on. We’re going to find more ways to collaborate. We really appreciate the frank look at the industry that you bring. But with that, I’ll turn it over to Sam to wrap us up.
Sam Carlson (40:40):
Yeah, this has been a lot of fun. I think a lot of really interesting and practical insights to the viewers, to the listeners. Thanks for tuning into this episode, and we’ll see you on the next.
Announcer (40:51):
Thanks for tuning into this episode of the Adventures in CRE audio series. For show notes and additional resources, head over to www.adventuresincre.com/audioseries.
