Income Property Brokerage (IPB) Package
Marketing homework and positive investor response
A seller’s agent’s objective is to locate a buyer to acquire a property they market for sale. The moment a prospective buyer comes forward, the seller’s agent needs to be able to hand them marketing information relevant to the property’s value in a package which cohesively lays out:
- the physical attributes and condition of the property;
- the property’s location, zoning and uses permitted; and
- the current, and if feasible, anticipated operating figures for the property.
While many individuals will likely respond to the agent’s marketing efforts, only a very few will earnestly consider acquiring the property beyond a fleeting moment glancing at information and data packaged and handed over. For these brief encounters, an agent can methodically increase the odds of retaining a buyer’s attention and receiving a proposal by giving the property life in a marketing package brimming with all the details on its:
- current profit and loss (P&L) for operations;
- physical condition; and
An attractive package, unquestionably sufficient to fully inform a prudent investor, automatically triggers their setting a price they might value the property for acquisition. A marketing package is built by compiling property operating data in combination with other critical property disclosures. [See the RPI Income Property Brokerage (IPB) suite of forms]
Buyers come in two basic classifications:
- investors and end users; or
Buyers also tend to appear at different stages in a business cycle from boom to bust and back. Investors and end users purchase property for the income potential or rent to be saved over the long haul of an ownership. They generally surface at the end of recessions, the early part of a recovery when property owners and tenants appear to be stabilizing from the disruption of a recent recession. For investors and users, the marketing package with its income and expense analysis section is the evidence they need of the property’s inherent fundamentals which support a flow of net income in the future.
On the other hand, speculators acquire real estate for the profit it yields on a quick resale, tenants at current rents being a detriment. Speculators do not venture into the calculus of income, expenses, capitalization rates (cap rates), mortgage rates or tenant turnover to determine value.
When they do enter the market, they come in abundance and buy with near abandon, either:
- at the bottom of the market in the depths of a recession (to fill their portfolio with assets on the cheap); or
- in a boom when sales volume momentum is dramatically driving prices up (to ride a pricing tsunami for a quick flip without concern for any sort of valuation analysis).
Thus, with speculators, the package becomes the imperative line of defense for a seller’s agent against a speculator’s gamble and later loss on a resale. As the cause for their losses on a resale, they make claims of nondisclosure by the seller’s agent. As always, the last speculators in before sales volume gives out and prices tumble take losses, or they simply retain the property, adjust their business model and wait out the current downside in pricing.
Either way, the seller’s agent has an increase in the risk of claims compared to those associated with an investor who has made a studied purchase decision based on data the seller’s agent produced in a package replete with the agent’s due diligence results.
For investors, data presented in a marketing package is used to set the rate of return — the cap rate — justified based on the property fundamentals presented in the agent’s package. As always, a cap rate comprises the rate of consumer inflation foreseen by the investor, an annual risk-free and management-free profit margin on capital invested, plus a premium rate for risks of ownership unique to the property.
On setting a cap rate, the optimal price is quickly determined by dividing the net operating income (NOI) by the annual cap rate. Thus, the formula is simply:
NOI ÷ cap rate = price
It is well known that a buyer of income property needs data to act upon — no data, no action. However, far too many sellers’ agents tend to merely present their conclusions about the property’s operations, then move on to a friendly discussion about their listing, the marketplace and the current owner’s issues.
A good marketing package avoids all loose talk — it presents the property in a self-explanatory format that is quickly digested by the potential buyer. The package functions as a full up-front operating and property disclosure. When timely delivered, the package allows a buyer or buyer’s agent to quickly form their own conclusions on whether the property’s historical performance meets their standards and investment objectives. If so, the yield they need on this class of investment opportunity quickly sets the price they will be willing to pay.
Without operating data, the buyer is simply unable to set the price to be offered for a property — they are flying blind in the murky clouds of abstraction Popularly bandied figures, such as the gross rent multiplier (GRM), net income multiplier (NIM) or cap rate driven solely by the seller’s asking price are not particularly useful to attract buyers — insufficient for an analysis of property operations actually being experienced by the seller.
To attract and retain the attention of the an investor who will ultimately close on a purchase of an income property listing, the seller’s agent needs to marshal data and information on the property’s current income and expense, and the condition of the improvements, and place it in the hands of all prospective buyers.
Any talk on GRMs, NIMs and tax benefits are a stall, preventing prospective buyers from getting the operating figures and management information fundamental to setting a price that is reasonable for the property. Without this simple transparency, an asymmetry of information in a sales transaction exists which inevitably leads to a disagreement or dispute. Informed by their personal experience, the owner intimately knows about the operating costs of the property — but the buyer does not.
A buyer’s purchase of income property always relates to:
- the cap rate;
- existing or new mortgage financing;
- cash-on-cash margin (spendable income); and
- after-tax returns.
To get to these figures calculated and properly presented, the seller’s agent, with the cooperation and help of the seller, engages in a little homework, completing their due diligence efforts and preparing marketing disclosures before they ever expose the property to possible buyers. Once gathered, the seller’s agent puts them into an effective format to make the operating figures immediately available to prospective buyers as part of the marketing package.
The format and spreadsheets essential to the creation of a marketing package for income property exist in the RPI (Realty Publications, Inc.) Income Property Broker (IPB) suite of forms. To be assured no essential aspect for pricing is overlooked, the IPB package is a checklist providing the buyer with information reflecting the due diligence talent of the agent who prepared it. [See the RPI Income Property Brokerage (IPB) suite of forms]
The IPB package is comprised of several forms. Together, they present the fundamentals for buyer analysis of an income property. Preparation of the IPB package begins with the seller’s agent’s completion of the preliminary Work-Up Sheet Template, used to enter approximations of recurring amounts. Data entered in the Work-Up Sheet Template automatically fills in corresponding fields in all the IPB forms.
Entries on the Work-Up Sheet Template are estimates automatically overridden with more accurate figures when detailed data is entered or calculated in other forms.
Further, as the different IPB forms are filled out in detail, prior figures are automatically recalculated and updated. The Work-Up Sheet Template is for the agent’s approximations before getting into details. It is not intended to be a page included in the package handed to the owner or the buyer.
The multiple forms which make up the IPB package for buyer analysis include:
- a Transmittal Cover Letter requesting the investor’s consideration of the property as an investment opportunity;
- the Property Location/Zoning, to include property pictures, maps and uses permitted [See the RPI Income Property Brokerage (IPB) suite Form 1];
- the Property Improvements, including physical attributes, systems and amenities [See the RPI Income Property Brokerage (IPB) suite Form 2];
- a Financial Summary showing the buyer’s annual return from ownership and percentage return on cash invested [See the RPI Income Property Brokerage (IPB) suite Form 3];
- the Price and Terms including the property’s fair market value (FMV) and GRM figure [See the RPI Income Property Brokerage (IPB) suite Form 4];
- the Loan Arrangements/Transactional Costs [See the RPI Income Property Brokerage (IPB) suite form 4-1];
- the Annual Property Operating Data (APOD) figures displaying the property’s gross operating income, expenses, NOI and spendable income [See the RPI Income Property Brokerage (IPB) suite Form 5];
- the Income Tax Aspects estimating the investor’s reportable income (or loss) and net annual after-tax cash flow [See the RPI Income Property Brokerage (IPB) suite Form 6];
- the Rent Roll displaying a multiple-tenant property’s current or estimated monthly rental income by unit or space [See the RPI Income Property Brokerage (IPB) suite Form 7];
- the Annual Operating Expenses as an itemized breakdown of the operating expenses the property is experiencing [See the RPI Income Property Brokerage (IPB) suite Form 8]; and
- a Disclosure of Providers listing the source of servicers who now maintain the property. [See the RPI Income Property Brokerage (IPB) suite form 9]
The Financial Summary page brings the critical data from all IPB forms together in a concise and easy to interpret summary. With it, the investor is presented with all the various financial calculations used to determine a property’s value in one singular location in the series.
Further, to inform owners and buyers about the significance of real estate terms used in the IPB forms, the seller’s agent includes the IPB’s Glossary of Terms in their final marketing package.