Last Updated: 5/11/2011
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This article reviews the methods and procedures an income property broker employs to gather operating data from the property owner and comprehensibly present that data to prospective buyers, who then use it to determine the property’s suitability as an investment in their portfolio.
Facilitate a positive buyer reaction
In an agent’s effort to locate a buyer as a match for listed income property, the listing agent will present the property’s marketing information to many eyes. Most will be casual looky-loos; few will be ready and able to buy. Even fewer – perhaps only one or two – will have the will to acquire the property. Most importantly, these crucial few will only make a purchase if they are able to conveniently access the property’s income and expense data and then make sufficient sense of that data to set a price and make an offer.
Prospective buyers need property operating data before they can analyze the integrity of the property’s net operating income (NOI). In turn, the NOI is a figure used to determine the price a buyer is willing to pay to produce the yield they desire. If a buyer is to be located in a timely manner, the property’s operating data must be complete, accurate and readily available. The agent’s compilation of these property operating data, and the accompanying charts and tables of data analysis prepared by the listing agent, are combined with all other property disclosures to form the marketing package.
It is well known that a buyer of income property needs data to act upon: no data, no action. However, far too many listing agents want to merely present their conclusions about the property’s operations, and then move on to a discussion about their listing, the marketplace and the current owner.
A good marketing package does the opposite by presenting the property’s operating information in a self-explanatory format. This allows a buyer or buyer’s agent to quickly form their own conclusions about whether the property’s expected performance meets their standards. The buyer is simply unable to set the price to be offered for a property unless he has operating data on that property. Popularly bandied figures, such as the gross rent multiplier (GRM), net income multiplier (NIM) or rate of capitalization (cap rate) on the seller’s asking price are useful but not sufficient.
To attract and retain the attention of the one buyer who will ultimately close on a purchase of an income property listing, the listing agent must marshal the property’s current income and expense data, mortgage information and conditions of the land and improvements from information readily available to the owner or the agent. Once gathered, the listing agent must present this data and information in a meaningful manner so prospective buyers can instantly recognize the property’s suitability. [See the first tuesday Income Property Brokerage (IPB) suite of forms; download a free copy by clicking the button at the top of the article.]
It is easy to flaunt general figures such as GRMs, NIMs and tax deduction amounts, and these figures are certainly of some value to the prospective buyer. However, without the underlying substance of specific operating data, such generalizations are a stall, or worse, a shield that prevents the prospective buyer from seeing the itemized numbers a prudent buyer actually cares about: data that produces the bottom line dollar return the property will actually generate for the buyer. This data is needed if the buyer is to set the cap rate, a percentage figure which is set by the buyer based on the risks he considers to exist in the ownership of the property. All buyers need and are fully entitled to the knowledge about the property possessed by the owner or the listing agent. Transparency is needed to avoid asymmetry of information in a sales transaction, and prevent disputes before or after closing.
The buyer’s return on an investment always relates to NOI, the cap rate, existing or new mortgage financing, cash-on-cash returns (spendable income) and, lastly, after-tax returns. To get to these figures, the listing agent (with the cooperation and help of the owner) must engage in a little homework, completing his research before he ever exposes the property to a possible buyer. Then, to make the operating figures available to prospective buyers, the listing agent needs to put them into an effective and intuitive format as part of the marketing package.
The marketing package: style is substance
You, as a listing agent handing out information on a property, have three seconds to attract attention to your listing, 30 seconds to hold that attention, and then, if the viewer is still interested, three minutes to convince them that this is the property to buy: this is sometimes termed the 3 + 30 + 3 Rule. The opportunity you have to harness the attention of an actual buyer, for whom your property is the perfect fit, will happen quickly or not at all. Thus, you must ask yourself: is your marketing package dressed for success as an informative sales device, or is it just a piece of glitz?
It is beneficial to think of the marketing package as your star salesman: silently performing magic on those very few who will actually buy, finding the ideal taker of your listed property and enticing him to acquire it. A listing agent’s time, effort and talent must be spent assembling an excellent marketing package before the potential buyer ever encounters the property as available to acquire.
When that package you prepare is complete and handed to a prospective buyer, it will be the buyer’s first and most lasting impression of your listing. A prompt and thorough listing package promptly handed to prospective buyers will assure the agents involved that they have the best chance of retaining the true buyer’s attention throughout negotiations – and on to closing an escrow.
Brokers and agents keen to understand the 3 + 30 + 3 real estate sales formula for Income Property Brokerage will:
- take the time needed to package their listing for sale and dress up their marketing package as the most capable and best-informed sales agent they have for the job (not the standard dog and pony show);
- make the effort to gather all relevant income and expense data and related operating information, and place it on income property brokerage (IPB) spreadsheets to wow that one buyer they need;
- demonstrate the character needed to do their homework up front before presenting the property for examination by the very, very few serious prospective buyers for whom this property is a perfect fit;
- kindly ask prospective buyers and their agents to submit an offer, now that the listing agent has fully performed his duties owed to the owner to make the property so transparent to the ultimate buyer that nothing substantive remains to be discussed about its income and expenses; and
- include, as part of the basic marketing package delivered to prospective buyers, disclosures about the property’s physical condition, title and natural and environmental hazards on or about the property.
It is of utmost importance that income property listed for sale stand out above the noise created by other listings and marketing packages, whether online, on paper or on the street. The package must be memorable as a standout package, as the property being marketed will be the perfect fit for someone – if its measurements are known. [See the first tuesday Income Property Brokerage (IPB) suite of forms; download a free copy by clicking the button at the top of the article.]
The selling agent’s dilemma: getting information
While the buyer’s agent depends upon the listing agent to compile a large amount of data, both the listing and selling agents are dependent upon the caprice of the owner. The listing agent’s practical problem is a simple issue of getting the owner to produce the requisite details about the property’s operations. When the owner is lazy or (worse yet) obstructive, the listing agent cannot just conjure up a rent roll or pull scheduled income and expense amounts out of the phone book. They must have a source for the data they use to induce buyers to acquire the property. If they do not, the listing agent presenting the inaccurate information is intentionally misrepresenting facts which are readily available to them via the owner.
Each property is unique in its ability to generate rental income, and the expenses of each are different from any comparable property on the market; often dramatically different. It is the owner, if he has the desire to sell, who must be forthcoming with the operating data. Owners have the needed information readily available to them, and their failure to release this information to buyers upon request is equivalent to intentional deceit if negotiations continue.
The listing agent’s first effort to get operating data on the property is made at the time the listing is negotiated with the owner. The agent, at that moment, asks the owner for a profit and loss operating statement on the property for the past 12 months (one full year’s operations). Using the itemized data in the owner’s operating statement, the agent will fill out the marketing forms to be presented to prospective buyers.
On the other hand, the property owner may fail to honor the agent’s request for the owner’s operating statement on the property. If he does, the listing agent’s only prudent alternative is to hand the owner the relevant forms the agent would fill out for the marketing package and kindly request that the owner fill them out for the agent’s use in delivering an operating profile on the property to prospective buyers.
If, at this point, the necessary information is still not forthcoming and the owner has entered into a listing agreement, the owner is in breach of his good faith obligation to cooperate fully with the listing agent to market the property. Further, the agent’s fee under the listing has been earned and is immediately due the agent for the owner’s failure to provide information needed by the agent to accomplish the stated goal of his employment – the sale of the property.
At the listing stage, the agent should not take the listing unless the owner provides or agrees to provide marketing data on the property. Failure to willingly release (at least under a confidentiality agreement) the property’s operating information indicates a duplicitous desire of the owner to hide information, known to him, from prospective buyers.
On the other end of any match which produces a sale is the buyer’s agent. When the listing agent has an income property listing and provides insufficient data on the property’s operations on inquiry from a buyer’s agent, the next step for that buyer’s agent is to prepare and submit a letter of intent (LOI), not an offer to purchase. Part of the LOI (which may or may not contain a price) is a demand for property operating data. To encourage proper compliance with the request for information, the buyer’s agent might well hand the listing agent blank copies of the relevant sheets from the IPB forms for his preparation, to make sure that no misunderstanding exists about the type of data the owner and the listing agent are to deliver.
Until the information is provided by the listing agent, with the owner as the source of that information, the buyer’s agent submitting an LOI should not (and usually will not) proceed with further negotiations. The price cannot be set, and the risks of ownership for the property cannot be determined until the operating data is made available. When that data is delivered, it must include written assurance that the owner is the source of the data, not just the common but meaningless statement that the unidentified source was deemed reliable.
If the listing agent does not have a marketing package or some other method of delivering operating data on inquiry, the buyer’s agent needs to consider that he is probably the first agent with a buyer to express interest in the property. Had a prior interested buyer existed with a similarly assertive selling agent, or had any previous LOI been submitted on the property, the listing agent would already have the property’s operating data available in some fashion, even if a marketing package had not been prepared. Such behavior is negligent marketing by the listing agent, and it is both unproductive and unprofessional since it poses a risk for everyone who chooses to get involved.
The listing package
To provide the most comprehensive and straightforward income property analysis possible, the agents involved in the review of a listed income property need to compile all relevant information and identify its sources (to shift liability for its inaccuracy), arranging all in an accessible package. The format and spreadsheets essential to the creation of one such package appear in first tuesday’s Income Property Broker (IPB) Forms. Such a package is useful as a checklist, to make sure that no essential data is overlooked and to provide the buyer with a personalized package reflecting the efforts and talent of the agent who prepared it.
With that, welcome to the real world of IPB forms, the solution to your 3 + 30 + 3 marketing challenge.
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