How to Respond to a Broker's Questions?

blog Jun 15, 2018
Always Remain in Control of the Deal!
How do you respond when an investor asks you what type of cash on cash return you are looking for? How do you respond when a broker asks you who you will be using for your lending source? How do you respond when a lender tells you that you are not entitled to an acquisition fee?

What I have done over the course of a week or of the last two weeks was accumulating stories or questions from students about stuff that's going on in their business. And we brought this to our weekly Monday Night calls. 

I'm going to give you three broker questions that people came up with. And just giving you an idea of how I teach. But more importantly, how I want my students to perform and what I want my students to do when they're in these types of situations. 

So the first situation is, I had one student who sent me this question from a broker. And the student asked me, “how do you respond to this brokerage’s question?” And so the broker asked this to the student, “what kind of return would you need in order to get into a new project?” And then he asked a question, “what locations are you looking for? I can search anywhere in the United States.” 

OK a two part question. And both questions, make me think that this broker doesn't know what he's doing. Think about the return. What's the return? The return is the cash on cash return. Well ok, it can be an internal rate of return. But for the sake of this discussion, let's say that it was the cash on cash return. 

Well, the cash on cash return has got nothing to do with the property. It has everything to do with the deal that I as the buyer have negotiated with the seller. Is my cash on cash return going to be different if I've negotiated seller financing? Of course it is. What if I negotiate a 100% seller financed deal, what's my cash on cash return going to be? Infinity. 

So the broker asks the question, “What kind of return will you need? Well, I'm going to need infinity. I only do deals with infinity returns. Well, that's just stupid. You're not going to even look for a property that has infinity returns. So why would the broker ask that question. The broker is asking that question because he doesn't know what he's doing. And I can prove it because the next question that he ask, “where do you want to do deals? I can search anywhere in the country.”

Well, bravo to you. I can too. “How about Alaska? Let's do a deal in Alaska.” How many leads do you have in Alaska, Mr. broker? “Hold on. Let me jump on Loopnet and find them for you.” Listen, I can go on Loopnet. I don't need a broker to do this. I want a broker that brings me his listings. I want to know what listings he has. That's how I'm going to know whether this guy's a real broker or not. 

Now what I then went on to tell people is. This is what I will be teaching. When I teach in Virginia, one of the things I do is I teach how to use Loopnet. Loopnet is where deals go to die. That's one of the things. But how do you use Loopnet for the deal? 

You use Loopnet by what I call the shotgun approach and the rifle approach. The rifle approach is once you decide where you want to find a deal, where you want to build your business, what location or what's your geographic location, put your geographical location into Loopnet and hit Search. No other search parameters, just a geographical location. It will pull up everything. It'll pull up mobile home parks. It will pull up warehouses. It'll pull up everything. Start going through each one of those properties and looking and connecting with the brokers that have those listings. Those are the guys that are doing deals. Those are the guys that can make things happen. Work with them. Don't work with some guy who says that he can search in all 50 states. Anybody can do that. You want to deal with brokers and business people who are doing deals.

Now here's another question I got from a student. He got a question from a broker that said, “hey congratulations! We're looking forward to getting this deal on a contract with you.” Now, because I accept that offer and then they ask, “who will be doing the loan for you? Who will be handling the debt in your capital stack. What's the right answer to that?” When a broker asks you that question, what do you say? None of your business. It is none of your business who I go to for my lender. And the conversation that came up. Why won't? 

While we're talking about this, some of the students are saying, “hey, I got a broker that works with a particular mortgage broker and he wants me to put it with that broker.” Not in your life. Use your own mortgage broker. use your own source for the debt. Think about it. The seller is your enemy. Don't give your enemy bullets for their gun. They will use it against you every chance they can. And that includes you turning over your private personal financial statement to the mortgage broker. They don't share this information or really they don't get lunch together? They'll do it. Hey You know that guy you went to see his credit rating. 

No, you do not give that information to the broker or the broker's lender. You are in business. You are in control of the deal. Go after that and make sure that you don't give up that information. Guard that with your life. Don't give your enemy bullets for their gun.

Then the final one, the lender. You know what, part of the way we get compensated as multifamily investors is through the acquisition fee. One new investor and a new student in my program was talking to a particular lender explaining to them about how he plans on capturing an acquisition fee and the lender says - oh you can't do that. No, no, no. That's illegal you cannot. I had to explain this to the student by saying, listen, it's not illegal. It's totally fine. It's actually just none of the lender's business. It's entirely about how you are structuring your deal and how you're being compensated for your deal. It's not illegal for the lender to make money on his side of the sale. That's not illegal for you to make money on the acquisition fee. Just make sure you disclose everything. 

Now why doesn't the lender know anything about this. Because it's none of his business, it doesn't even fall within his parameters. The acquisition fee is between you and your investor partners not between you and the bank. So understand that's how you set up the acquisition fee and you don't have to worry about what the lender's thinking about. But make sure that's always going to be in your subscription agreement and the private placement memorandum. This is where you're going to find the information about the acquisition fee. Disclose always disclose. 

So, that is how our call went tonight. It was fun. We had a couple of good laughs. Thanks, everybody. Have a good night. We'll talk to you soon!


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