Jansen Multifamily Team Blog – Insight and commentary on the Seattle/Puget Sound apartment market

The following post was guest written by Tom Hoban, Managing Director of Coast|Sperry Van Ness and CEO of the Coast Group of Companies:

The gap between our client’s offer and the seller’s asking price was huge.  Call it a “Cap Gap,” or just a market moving faster than the seller wanted to believe, but the reality was that the NOI (net operating income, the fundamental basis for value) of yesterday and the NOI of tomorrow were some distance apart.  As a result, the separation between the bid/ask would be of commensurate distance.

My broker, a very skilled, younger fellow hitting his stride, presents our client’s offer.  The broker on the other side is, by all accounts, one of the biggest names in the business.  It’s his mountain and he likes being on top.  My guy is just a another young bull trying to get up the hill to knock off the old bull.

It’s the first offer from our buyer and everyone expects it to be something less than the asking price.  The principals and the brokers are all in the same room, so people’s reactions once the offer is presented will dictate who moves further to get a deal done.  The old bull has seen this scene before.  Many young bulls have attempted to get to and stay on the top of his mountain.  The tension in the room is palpable.

My young bull presents our client’s offer.  Eyes train on the paperwork, foreheads are rubbed, and there’s silence in the air as the seller and the old bull examine the details.  Then the silence is broken as the old bull starts in.  That’s when things got interesting.  “It’s way too low, guys” says the old bull almost impulsively.  “Just way too low”.  And then he makes a fatal mistake.  “Do you know what you are doing?  This property has a lot of intrinsic value.”

My young bull is good.  Very good.  Terrific at underwriting, marketing, negotiating, and team building.  He’s a rising star and has been one of the top producing brokers in his category in the nation.  It’s no secret to the old bull.    And my young bull is competitive.  A little brash, even.  But backs it up with skill and intellect.

Insulted in front of his client and the old bull’s client, my young bull very coolly and diplomatically shifts in his chair, leans forward with eyes trained on the old bull and says “You’ve been doing this a long time.  Longer than me.  But if you can reach back somewhere into your history books right now and show me a definition of ‘intrinsic value’ that doesn’t say ‘blue sky’ or ‘broker BS’ next to it, then we’ll underwrite our offer to your number”.

He paused for effect, then went on, “The market has changed and you have obviously not changed with it.”

After some tense stare-downs, the meeting ended with our client’s offer – like a smelly pile of dog doo – sitting on the seller’s conference table.

Within days, the old bull’s client made a move.  A big move.  And the gap narrowed dramatically.

This story – embellished a bit for effect – is typical of the market dynamics of today.  Successful brokers of the past were successful using different tools and skills.   If you entered the market recently, though, you’d have to take it on its terms.  Today, that means complicated and very detailed up front underwriting both to secure listings and to represent buyers in a market that is moving so fast that a six-month old appraisal is essentially useless.

I’m intrigued by this dynamic.  As a leader of any real estate business today, we must throw out many of the “that’s-what-got-us-here” notions and manage our people and our brokerage businesses under new assumptions.  Concepts like “intrinsic value” mean nothing any more.  Underwriting that takes into account inflation and its impact is back into the mix suddenly.  The role and depth of bank financing and its costs are game changers.  So much has changed and tomorrow’s outlook is still so uncertain that a sharp pencil and operating experience with assets is a critical element of any successful broker’s tool kit today.

In the original old bull and young bull story, the two come together at the top of the hill they share.  The trouble today is that the hill moved.  He who finds the way to the new hill will get to the top first.

Tom Hoban is CEO and co-founder of Coast|Sperry Van Ness, a commercial real estate firm in Everett, WA.