A PISSED OFF RANT!

There are lessons to be learned from new situations that arise. This just happened and I am pissed off!  It is a cautionary tale which I hope you can learn from. 

    The normal process works this way… Julian and I find every property for sale in the area – this requires contact with every broker in the area at least every week.  Julian pulls rent comps, analyzes the rent roll and financials, then utilizes my Quick Analysis from to give the first glance at a property for sale – this process takes 1-2 hours per property.  I review the information and numbers – another 30 minutes.  We then contact the broker, ask more questions, and refine the numbers again.  Our next step is to arrange a property tour on the property – again to verify our numbers and further refine our business plan for the investment.  This includes Julian (a buyer’s agent), Jeremy (investor relations), Ken (our management company), Edwin (our contractor), and whomever else is needed to verify our assumptions. In this current market the brokers give a ‘whisper price’.  This is the price the seller and owner hope to get for their asset.  The broker can also give pricing guidance.  Both of these are normal practices in a hot market since prices go up so quickly and the competition to buy turns into a frenzied auction.  The brokers set a call for offers date.  This is the date all prospective buyers can submit their offers to the broker who then summarizes them and presents them to the seller.  The broker gives buyer history, experience, and other relevant data to the seller.  Together they come up with the top few buyers and invite them to submit a ‘best and final’ offer – meaning – they are allowing you to bid against yourself in the hopes to get the deal.  After those bids are reviewed, the broker gets back with the best offer and awards the deal – which means they committed to the deal and start negotiating a contract.  

    Variations.  The seller can accept an offer at any time and pull it from the market.  The is called preempting and allows you skip the bullshit of the call for offers and best and final fiasco.  If the call for offers is not preempted, the seller typically receives multiple competing offers and the broker can go back to the buyer they like best and have them meet or exceed the other highest offers, to get the deal.  Yes, brokers do play favorites. In their defense, they are getting the best price for their seller (their client) and matching them with the best buyer.  Both of these options are perfectly acceptable.  The broker has a legal fiduciary responsibility to their client to get the highest and best price for their seller (with full disclosure) and they are required to treat all others honestly and fairly.

    Not that the table has been set, here is what happened last week.

    Julian, Jeremy, and I toured a property with a broker, let’s call him ‘Broker’.  Broker spends and hour showing us the property. I have Ken and Edwin look at the property separately.  I have run my numbers and I am ready to make an offer.  The tour goes great and my numbers look good. I want to get this deal.  I ask broker Broker if the seller will skip the call for offers and accept my $16 million (actual offer/pricing has been changed) offer price right now.  For good measure I also offer $200k nonrefundable earnest money. His reply is that call for offers is the next day. Remember, I just offered $16m.  I ask him where he thinks this deal will trade at.  His reply, it will trade for $15.5 and $15.7m. Perfect. He is guiding me to buy it for less.  I immediately send in a Letter of Intent (LOI) for $15,775,000 with $200k nonrefundable earnest money to beat out what the broker said it would trade for. That is when the shit hit the fan.

    I start calling people that may be connected with the transaction who can put a good word in for my offer to be accepted.  I then learn that Broker and seller have already accepted a letter of intent and have been negotiating a contract. I was not too upset at this juncture because they were still accepting offers and I did not want to be premature in my judgement.  They had a call for offers and he expected it to trade for $15.5-$15.7 and my offer was higher, therefore I would at least then be able to bump my offer up if someone else came along.

    The next morning arrives and I learn even more.  Not only has an offer been accepted, but the contract has been finalized and was just awaiting signatures.  I also learned that the other buyer was another friend of mine, let’s call him ‘Buyer’.  I also discover that the price they negotiated was $15.7m.  I am now getting very upset.  Broker steered me to a price under what they already have – a violation of the Texas Real Estate Commission laws. He is also protecting Buyer to the detriment of his client (the seller).  I was set to pay $16m.

    Broker is required to protect his client (the seller) and to get the best deal for him while treating everyone else honestly and ethically.  By lying to me and steering my offer down, he violated both legal obligations. I called his sponsoring broker and told him about the situation (he could be in trouble as well).  I receive a call from Broker who is backpedaling as fast as possible.  He states that his seller would consider a formal offer of $16m.  As I am in a very pissed off state, I tell him I will call him back later.  I try and relax and make a few phone calls.  One call is to my loan broker who then tells me that this is a property Buyer is purchasing for himself as an individual (not a syndication).  

    Taking everything into consideration, I decided to be a good-guy.  I sent an email to Buyer (and cc’d Broker) telling him what happened and that I decided to back off the transaction.  I could have pushed for the $16m contract (which would have made myself and my partners a lot of money), however, there was a 50/50 chance that the seller would go back to Buyer and ask him to match my offer, which would cost Buyer another $300k and I would not have the deal anyway.  Or, I could have received the deal, and pissed off Buyer.  This put my odds at 25% getting the deal and 100% pissing off my friend Buyer. I took what I believed to be the high road.

    This is a small world.  As a buyer of large apartment properties, the world is even smaller.  Over the last 28 years as a buyer/broker/manager of apartments in DFW, I believe I have developed a good professional reputation.  The people involved know that I fell on my sword and that I did what I felt was right – even if it cost me money.  I will not report Broker to TREC, even though he lied to me, cost me time and money, and cost his seller $300k. Its a small world, protect your reputation, keep your word, and treat everyone fairly and honestly – it will come back around to you. 

Copyright 2018 Darwin German Real Estate Investments ©  All Rights Reserved