Category Archives: Commercial Real Estate Investing

Idiot Brokers / Sellers Trying to Manipulate the Numbers!


Brokers and Multifamily Apartment Sellers should always be considered liars!

What amazes me are the brokers who have no understanding of P&L’s. Of course, the other thing to watch out for are the sellers who fudge the numbers.

Let me give you an example in the following e-mail trail from a broker who sent us what he considered a deal that met our criteria :

Subject: Country Creek Apts. 336 Units – New Documents Notice: Nov 2013 Rental Report Up 4.24%

Thank you for your interest in the Country Creek Apartments, 336 Units, located in Glendale, AZ.

Income collected rose 4.24% for the month of November 2013. Attached is the updated rental report and current rent roll. Please be advise the property is partially managed by Dick James and Associates and part by owner. Dick James manages the rental operations while the owner manages all other expenses so there are 2 sets of operating statements. The KUMS Inc P&L is the ownership P&L which the Dick James statements flow through to. (Please note we do not yet have the November KUMS P&L report)

The following link will provide you with access to the Documents Vault: Click Here. Feel free to contact us with any questions or to schedule a property tour (24-48 hour notice, please).

Best Regards

Eddie

______________

On Thu, Dec 19, 2013 at 5:05 PM, we replied:

Eddie:

Can you explain what the ‘City Tax Collected’ Income is as well as the ‘Net Security Deposits’ Income?

Thanks

____________________________________

His REPLY

City Tax Collected is Rent Tax.

Net Security Deposits are Security Deposits collected from tenants when they sign a lease.

Hope that helps.

Eddie

________________

On Fri, Dec 20, 2013 at 2:36 PM, we replied:

Eddie ,

First, why would ‘Rent Tax’ be considered income on a profit and loss statement? This is not income and should not be used to increase the NOI of the property. There is no corresponding expense to offset this.

Second, I cannot understand under what circumstances an accountant would categorize ‘Security Deposits’ as income. This is a liability and should not be included on a P&L but instead on a Balance Sheet.

This additional ‘Income” that is not really income, at a 5.9 Cap, artificially increases the value by $1,813,000.

Can you explain this for me?

_______________________________________________

He replies

The corresponding expense is in the KUMS statements. In my underwriting and pro forma I extract the rent tax collected from the income.

Traditionally security deposits are considered income because not all is refundable and even the refundable portion is conditional.

__________________________________________________

Our reply :

Thanks for that explanation. I will go back and connect the dots for the City Tax from the different P&Ls.

Respectfully, I must disagree with your contention that security deposits are considered income. According to all GAAP standards, security deposits are considered a liability on the books of a multifamily property until they have been forfeited by the resident. At that time, it becomes Security Deposit Forfeiture Income. Increasing the NOI by approximately $75,000 in security deposits inflates the value to a level that any DUS-lender would not support.

If you can show me any documentation in support of your contention, I would be more than willing to review it.

END …

You’ve got to be kidding me!   Is this broker on drugs? This is a great training example that we have now used in the “ Understanding Multifamily Financial Statements” video for our mastermind group.

Here is a 20 minute video that I put out to everyone here: http://multifamilysharktank.com/?page_id=91

Multifamily Investing Coaching – Beware of the Devil


I deal with new investors all day long. They have many traits in common. One of them is that they are so anxious to succeed in this business that they are willing to believe almost anything they hear as long as they can get their first deal done. They are willing to sign away their professional lives to a devil if only that guru (whoops I meant to say devil) will just shine down upon them and lead them to the Promised Land. It reminds me of that line from Man of La Mancha, ‘cross their palm with a coin and they’ll willingly show you the rest.’

I was recently approached by one of those investors. He had gone to some bootcamp training and was offered a once in a lifetime opportunity. For just the princely sum of five-digits, he could work with one of their coaches /consultants/ trainers and actually become partners with them on his next deal. They would split it fifty-fifty and they MIGHT be willing to bring the earnest money to the table if the deal met their requirements.

Sound good? Sound like the easiest way to get into your first deal? Would you like to have someone looking over your shoulder that supposedly has personal experience with doing real estate deals? If only it was so. The problem is that the devil is in the fine print.

After I had the opportunity to review the contract that he had signed and showed it to a good friend of mine who is an attorney and an expert in multifamily acquisitions, I had to break the bad news to the new investor. “Congratulations,” I said, “you will never own a multifamily property because of this contract.” He didn’t believe me until I sat him down and started laying out for him all the reasons why no bank or investor would touch him if they knew he was under this contract burden. Here’s why.

POINT ONE – You have to split the net profits of a deal with the coach fifty/fifty.

OK. You may think that that’s OK. That’s what you agreed to. You would split deals with the coach.

Right? WRONG!

The contract says that you have to give up 50% of the Net Profits. Well, in any other business, you would think that net profits are those dollars that you get to keep after you have paid off all your bills and other obligations. But in this contract, the coach defines net profits as, in addition to other things, “rental income”. That means that if the property collected $10,000 this month from all the tenants, the coach gets to walk into your bank account and take out $5,000.

I’m not kidding folks. This is what it says.

Think about that as the new investor. “Hey Grandma, would you like to invest in a multifamily property with me and my coach?” “Sure son, what’s the return?” “Well, after we pay the coach, half of the gross, not much. What do you say, Grandma?”

Then think about what the bank would do if they know that fifty percent of the gross was going to go to someone that you had entered into a contract with. Do you think you would qualify for the loan? Finally, if you were raising private money, do you think that this material fact would need to be disclosed to potential investors? Do you think that the SEC might be interested in you if you failed to let everyone know?

POINT TWO – I only have to pay $2,000,000 in Net Profits and then I satisfy the deal split obligation.

When you are signing on the dotted line and giving them your credit card, the idea of splitting $2MM sounds pretty good. Hey, that means that I get $2MM also. But is that really all you are obligated to do?

Another reading of that provision says that the new investor is obligated for fifty percent of the deal to the coach on the first five transactions or $2,000,000, whichever is greater. GREATER! So if you do your first deal and you pay them $2MM, then lordy, lordy they’ll be chitlins for dinner. But you are not off the hook. Now you owe them another four deals. What if they are all for $2MM? That’s a pretty expensive coaching contract. Uggh!

POINT THREE – OK, But this is just for deals that I work on with them, right? WRONG!

Remember Grandma? She died. Sorry. You know that house that she and Grandpappy built with their own hands? The ones that they scrimped and saved for all those years? The one that you just inherited and you plan on selling to pay for your kids’ education?

Guess what. Your coach owns half of it? WT? Seriously, that coaching contract says that the deal split is for “any transactions put under contract or worked on by Client.” But that can’t possibly mean Grandma’s North Forty? Yes it can! READ THE CONTRACT! (It clearly says that you understood what you were signing and that you could have had a lawyer review it for you if you wanted. Why didn’t you?)

POINT FOUR – Well, at least I still have my fix and flip business with Duncan that I can operate if I can’t do any multifamily deals, right?

WRONG!

They own you! I’m not kidding. THEY OWN YOU!

The coaching contract states that you “agree to dedicate all {your} real estate investing time and efforts to projects worked on with the Consultant . . . in an effort not to circumvent or compromise the Client’s agreed upon Deal Split Structure.” Are you kidding? Nope. Read the fine print. (By this stage of the game, it’s not even fine any more). I just can’t help but imagine these guys sitting around a room drafting this contract wondering who would be stupid enough to sign it.

POINT FIVE – Can it get any worse? Yes. And it just did.

Remember I said that he now owns half of Grandma’s house? I lied. He actually has an option on Grandma’s house and every other real estate that you own for $1.

No, you cannot be serious. I am. Read the contract. Here’s what it says, “this is not a general partnership, but merely an option for consultant to purchase their interest in Client’s real estate transactions for $1 until the Deal Split Obligation is fulfilled.”

OMG. What have I done!!!

You just signed away your professional career in real estate before you even got started. Shame on them, but seriously folks, shame on you. You have to watch everything that you do. If it says seek advice, here’s a clue, SEEK ADVICE!

We are cleaning up the mess that this investor got into but these “gurus” are still out there promoting this program. Now don’t get me wrong. You need coaching. Everyone needs coaching. Tiger Woods needs coaching (probably some life coaching) but you can’t be successful in this business without them. Watch for another post of mine soon that will help you understand what I am getting at. Just remember, only and always surround yourself with good people and READ THE FINE PRINT!

Commercial Investing Guru’s


“I’m sick of it!”

“I can’t take it anymore!”

“I’m going to come clean with you about all of boot-camps and training seminars and every other program out there taught by some guy that has never done it or, for that matter, has done it but makes it sound like everything he touches turns to gold and he has never lost a dime.

 You’ve have to be kidding me!

I honestly believe that I have read almost every training program on the market today about commercial real estate. You know, apartment complexes, multifamily buildings, duplexes, triplexes, you name it. Some of them from an educational viewpoint are actually pretty good. Others are just retreads of someone else’s work.

 I have no idea how some of these guys can love  themselves selling that crap.

Here’s how it typically goes. First, you made the decision that you want to get into the real estate business. Then you decide that the right arena for you is in multifamily. So you then do what every other wide-eyed, future Trump does, you type into Google “multifamily investing education”.

Up pops thousands of sites that will help you every step of the way. But this is where it gets jiggy. What are you actually looking for? Education, right? But what do they end up selling you? Dreams! Ugggghhhh!

People, don’t make the same mistakes I have made!

If it’s education you want, then go ahead and buy the education. I can tell you from personal experience that if you walked into the local bookstore or even Ebay and picked up a copy of Commercial Real Estate Investing for Dummies,

you would learn as much, if not more, than what these experts are selling at their three-day, $5,000 boot camps.  (This book  is really a very good book and for many of you, it’s a great start).

But think about it.

The multifamily business is a very risky business.

Do they teach you that in these boot-camps? Or do they just teach you how to do No Money Down deals?

(C’mon. Really? Seriously?) 

Being a success in the multifamily business requires real, in-depth, hands-on education. Think about who you are for a second. You have never done a real estate deal in your life. You get roped into the long sales page offer on the internet. You plop down thousands of dollars for a mini-vacation at some beautiful place where you will learn how to be just like him and all you have to do is one deal! Really, that’s what they say. Just one deal!

Well, of course, you will first need to sign up for the mentoring program with a mentor who just finished their first deal. Don’t worry. They closed their first deal after working with their mentor who also had just finished their first deal. Get the idea?

And if that doesn’t get you that first deal, well, wait three months. They have more boot camps and training programs coming up that you must have  to be successful.

Wait a minute…. Are you trying to tell me that first course does not teach me everything I need to know to be successful?  Or,  just everything  I need to know to be dangerous?

 Enough! Enough! I can’t take it any more.

Do you want the truth? Do you think you can handle the truth?

Well here goes.

The multifamily real estate business is just that – a very challenging, exciting, lucrative, risky, dangerous, take-no-prisoners BUSINESS. And the most important thing I can share with you is this – IT IS NOT FOR EVERYONE!

That’s right! As much as they may tell you otherwise, you cannot do this business working just a few hours a day. Can you believe – there is one “expert” who actually says that you can buy a multifamily property in just a few hours. No, not a few hours a week or a month. He actually says a few hours. PERIOD!

(Can we file a class action against these guys for stupidity?)

They also tell you that you can buy property with no money down. OK, let’s explain in no uncertain terms exactly what this means.

There are two ways to buy property with no money down. The first is if the seller of the property just signs the deed over to you. In other words, you structure the deal such that you don’t give him any way cash and he gives you the property. OK, let’s take off the rose-colored glasses and think about that for a second.

Why, would anyone in their right mind just give away a property?

BECAUSE IT’S NOT WORTH ANYTHING!!!

In other words, the seller would probably be willing to pay YOU to get it off his hands. Is this really the type of property you want to start your real estate career with? Do you think that “expert” would do that deal? My guess is that they wouldn’t touch it!

 The other way to buy property with no money down is to use other people’s money. In other words, you find a property, put together the funds from friends and family and then you have to run that property and that investment for the next five to ten years.

 Wow, what do you know about running a property?

Would you invest your hard-earned money with someone who has never done a deal in their life, has never run a property in their life and has never run a BUSINESS in their life?

If you answered no to any of those questions, then you are being more truthful than those “experts”

I could go on and on but let me stop now and tell you exactly what I plan on doing about it . . . . . to be continued.

PS. There are only THREE people I would trust with my education.. There are 12 I would not touch with a 100 yard pole!