Leveling the Playing Field in the Wild West of Commercial Real Estate Pricing

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Shocker: Apartment brokers misrepresent numbers. 

If you’re new to the market, you may trust the market cap rate displayed on the marketing package of a commercial property—but you really should be doing your own underwriting if you want to be successful. You can rest assured that brokers are upping their numbers, and the only way to combat that is by using the right suite of tools to do proper underwriting.

Here’s what you need to know.

The Conundrum of the Market

With apologies to Tom Hanks in the classic ’90s movie A League of Their Own, there’s no SEC in commercial real estate. There’s no regulation outside of the free market, which is often a beautiful thing. However, there is no organization to regulate day-to-day dealings in commercial real estate outside of reputation, MLSs, and each state’s real estate commissions. 

The MLS organization I’ve been involved with in both San Diego County and Los Angeles County are heavily regulated for residential real estate in regard to contract days/times, exposing what the co-op fee on a deal is, if that fee is higher or lower than the listing-side fee, and other verbiage and terms that you can and cannot use in your property descriptions. On the commercial side, CoStar/LoopNet, the predominant listing platform for commercial real estate nationwide, is not a governing organization protecting the consumer.

In a sense, commercial real estate, for all its glory, good and bad, is the Wild Wild West. And I’m not talking about a lame, soft, ’90s movie (again). I’m talking more like Jesse James, Billy the Kid, the Comanches, and Apache. There are the green pastures, the freedom, the fortunes to be found and built, but also the competitive nature and the feast-or-famine way of doing business that often leads to brokers, owners, and vendors doing some shady stuff just to make a buck.

One of the biggest jokes in the marketplace, and often the most obvious, is pricing, either below or above market price, usually in both cases, influenced by the broker for the broker’s benefit. After losing out on multiple listing opportunities for giving a fair market value, the one time I played the game of trying to buy a listing, the owner/seller amazingly said, no, sorry, your price is too high. We won’t be hiring you.

That was the first and last time I played that game. I was shocked! Then, I began to realize that other firms were constantly coming in 5% above their market value, almost to the dollar. Mispricing deals are a form of market manipulation that is often overlooked and often chalked up to either bad business, inexperience, or another factor, with the seller left holding a bag of cash that’s a little lighter than it probably should be. 

There’s not really a shortcut to learning in this business—there are so many tricks of the trade, ways to negotiate, ways to enforce the contract, and more that you can only learn from experience.

The business is really hard. In our market of San Diego, we have 30 fantastic brokers—talented and generally great people. I’ve looked at deals across the country and have represented both buyers and sellers of apartments in both LA and San Diego County. I’ve also underwritten deals across the country, with a primary focus on Southern California.

The consistency throughout the marketplace is that there is no consistency. So, in addition to manipulating market pricing, the metrics are often skewed in the listing’s favor. And information is often incomplete. Sometimes you get gross rate multipliers, sometimes you get cap rates, and sometimes you only get the “market” cap, which is code for “my listing is way overpriced.” 

And sometimes you get no info at all—just a few photos taken in the dark by the part-time residential agent who their uncle hired to sell his four-unit building.

The Solution

We built IntellCRE to help all of the above, cut through the BS, underwrite your own deals, pull your own data, and double-check your work. To get you to a point where you know the deal before you offer. 

Walk through a scenario with me: You’re a buyer interested in your first deal. You find four units on ABC Street, download the rent and expenses off LoopNet, log in to IntellCRE, type in the address, and the property information is auto-populated. You upload rents and expenses, and now you have income and expenses.

Next, select sales and rent comps, and then you’re done. You have a range of conservative, moderate, and aggressive pricing. 

As a listing agent, you basically repeat the process, though you can also export all the rents and cash flows and build a marketing package to market your deal. If you’re a residential agent not used to selling multiunit properties, this system will help you price the deal accurately for your client and provide all the details most buyers will ask you for. How often have you asked a residential agent for a rent roll, and they redirected you to the MLS? This isn’t a home you’re selling. Residential agent—send us a marketing package!

Owners, do you want to double-check the pricing brokers are giving you? If not, you should. IntellCRE is built to be easy to use and intuitive, so users, young and old, experienced and inexperienced, can use our platform for their benefit. 

Appraisers, residential agents, real estate attorneys, investors, novices and experts, and commercial brokers valuing high volumes—you name it, we’ve built IntellCRE to benefit anyone and everyone working on multifamily real estate investments of two to 200 units. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.