Why You NEVER Ask the Broker What the Cap Rate Is!

blog Sep 08, 2019
If you don't start collecting information, you will have to go on what the broker tells you! You have got to understand the numbers!

The reason why I come up with some of these topics is because I see students doing things incorrectly while some students are doing things perfectly. And I want to get everybody on the same page. One thing is that investors, students and new investors, they just go. They're running all over the place as far as the market, what markets they should be in and where they should go. So much so that they never become experts in their market. 

So I want to identify some of the mistakes I see new investors are making when they are not the experts in the marketplaces that they're looking for. If you just focus your business on one particular area and capture the data from every property you evaluate in that marketplace, you will be able to move on a dime when the opportunity presents itself. No one will be able to bamboozle you. You'll know the numbers better than everyone else. And I got to tell you, my wife was such a numbers wonk in some of the markets that we were in. She was actually educating the sellers as to what's going on in the marketplace based upon the numbers because they just didn't even know. 

Here's a mistake number one that I see new investors make, and I cringe, absolutely cringe when I see this. Don't ever ask the broker, "What's the cap rate? 

"What's the cap rate? Oh my gosh. That's like the fox guarding the hen house. You should never say that to the broker. You might as well tell them that you have no idea what you're doing. You should be telling the broker what the deal is in that particular marketplace is. If you do not know the cap rate in your market, you are never going to know the value of that property and anyone is going to be able to run circles around you. 

The sellers, the brokers, everyone is going to tell you, hey, you know, this is what the property's worth. Prove me wrong. But if you are out there capturing the data on every single property that you evaluate in your marketplace, you're going to be the one with the perfect information that you'll be able to put back on the place of the brokers.

It's crucial because, think about it this way, how would you look to your investors, including the people that you're going to sit in front of and the people that you're going to ask for $100,000 from, if they knew that you found out what that cap rate was in this property by asking the broker. If I were to find out that that's how you valued this property, I wouldn't put money in your deal, because I don't feel confident that you know what's going on in that marketplace. 

If you have to ask the enemy what the value of the property is, you don't know your own market. And if you don't know the basic cap rate of your market, you're not going to know all the other things going' on in that place either. So never ask the broker what the cap rate is. You dictate to him. Number one rule. Always remain in control of the deal. When you tell him what the cap rate is on a property like that, and you've got the proof to back it up, you are in the drivers' seat.

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