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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…