138: Why I am Starting a Real Estate Brokerage

I had big goals for 2018, and so far it is starting out with a bang. I bought a 68,000-square-foot commercial property a couple of weeks ago. I wanted to buy a 50,000-square-foot or larger building this year, and along with that goal, I wanted to start my own real estate brokerage. Now that I have the building, I have already started to remodel the space I am going to move into. I wanted to start my own brokerage for a while, but I have had a lot of things going on, and I wanted to be able to rent space from myself. On this podcast, I will go over why I want to start a brokerage and some of the things I have to do to make it all work.

Why I did not start a real estate brokerage sooner

I have been a licensed real estate agent for over 15 years. I have worked for the same company and broker my entire career. My dad helped start the company in 1992 but sold his shares before I started working with him. My dad and I worked together for over 10 years before I bought him out in 2013. I have been running my own team at this office for a few years, which is like running a brokerage. When I was most active as a real estate agent, I was selling bank foreclosures and HUD homes. I sold over 200 houses per year when things were really busy. When you are an REO agent, you have to solicit banks and the government to get listings. It is not easy to get those accounts, and technically the accounts are with the broker and not the agent. I was the point of contact for my REO accounts, but if I ever left the office, I would have to reapply with every company and hope they approved my new office. There was no guarantee that my accounts would move over with my new office.

In the last few years, I have focused more and more on the investing side of the business and not the agent side. I still have a team of agents, but I rarely sell anything myself. I sold one REO last year! I like the investing side much more than the agent side, and I do not plan to be an REO agent again, even if foreclosures come back in full force.

Why do I want to start my own real estate brokerage?

In my current situation, I pay my broker for three offices plus a flat fee every month. The flat fee allows me to keep 100% of my commissions and add as many people to my team as I want. It is a pretty nice setup, but I still have to pay quite a bit to run my team. We are also in a very tough house-selling market because there are so few houses for sale. There are only 82 houses for sale in our entire town of 100,000 people. If I started my own office, I would save a ton of money because:

  • I would not have to pay my broker the flat fee anymore.
  • I would have my own space that I am renting from myself and my partner in the deal.
  • I would have complete control of who I hire and who I work with.
  • I would be able to design and build a cool work space.
  • I would not have to worry about an office I was not in charge of changing without my control.

Even if I was not paying rent to myself, I would be saving money paying for my own office space over paying my broker. I already pay for staff to help the agents on my team and myself, so there would not be many more expenses running my own office either. I can also charge other agents desk fees to be in my office instead of paying my broker desk fees for me to be in his office.

What do I need to do in order to start a real estate office?

Starting my own office won’t be easy. I have a lot going on already with 18 active flips, having bought the large building, and this blog. However, I am a big fan of hiring people to help me get more done. In fact, we are looking to hire more people for our team. We are looking for more agents, and more administrative help. If you are in the Northern Colorado, area and interested, please email me at Mark@investfourmore.com.

With today’s technology it is not too hard to set up your own office, but I will need:

  • A broker manual.
  • Additional insurance.
  • Set up with the local MLS.
  • A showing service.
  • A nice office to put people in.

We are already working on the office, and I have a goal to be completely set up and running by June 1st

[0:00:13.9] MF: Welcome to the InvestFourMore Real Estate Podcast. My name is Mark Ferguson and I am your host. I am an active real estate investor. I flip 15 to 30 houses a year. I've got residential and commercial rental properties. I’m an agent with nine people on my real estate team who sold thousands of houses over the years, and I talk about what's going on in my career as well as interview other amazing agents, investors, landlords, flippers, wholesalers and companies who can help those people succeed. 

I want to give a quick shout out to my sponsor, Patch of Land. They funded a flip for me in six days. I emailed them on a Sunday afternoon. They responded in less than 15 minutes. They have rates below 8%, work in 45 states, will fund 85% of a deal and fund the repairs as well. Great company, who I love working with, Patch of Land. 

For my podcast listeners, I've a special discount page for my products, investfourmore.com\discount. That's investfourmore.com/discount. We’ve got coupons on all my coaching programs. Some of those programs involve calls with me, consulting, video training, and much, much more. 

All right, let's get to the show.


[0:01:47.4] MF: Hey, it’s Mark Ferguson, back with another podcast, today, we’re going to talk about the giant $2.1 million commercial property that I bought with a partner a couple of weeks ago. I wrote an article about this, I have been talking a little bit about it on my last podcast where I talked about starting in real estate brokerage. Today I’m going to talk more about that building, why I bought it, why I want to buy it, how it went down, all that good stuff.

If you’ve missed it, I did write a pretty in depth article on investfourmore.com if you want to check that out, I also have a video of the whole property where I did a walkthrough on it, I’ll be sure to post those in the show notes if you want to see that and yeah, it’s a really interesting, cool, building.

I will start from the very beginning on why I bought this property. Long time ago, probably eight years ago, I was kind of looking at buying a shop as I said, six years ago, some shop space, like you know, a separate commercial shop just to store some stuff, maybe put some cars because at that time, I had a three car garage, I had four cars so one had to park outside and I said, “Hey, I need to get some extra space, I knew I had some goals to buy some more cars, some exciting cars before I had the Lamborghini.“

I knew I had to have some space before I could do that. I was looking for shop space, I kind of found one that was going to work for me pretty well, and then it was under contract right away, I could not find any other small shop space in the entire area, it was crazy, there just was nothing available. I started kind of looking around and there was huge demand for the small shop space but almost nothing for rent, almost nothing for sale. 

Way back then I kind of got this idea, okay, there’s probably a good opportunity to create some shop space, buy a big building, something, divide it up into small, thousand to 2,000 square foot units, rent it out or sell them, I bet you, it would be a great investment.

I got this idea way back when, then, what ended up happening was, my wife and I sold our house that we’re living in and we bought another house that had a five car garage so that kind of solved my problem with story of my cars, the short term problem, because I still have that problem but I had enough space for the new cars, that was 2013 when we bought that house, I ended up buying the Lamborghini.

Now, you know, last year I bought the Lotus Espree so I’m out of space again but I ended up buying a commercial shop, a real small commercial space like I was talking about last year from a friend where I could store some cars and also our building materials. Now we’ve managed to fill that space up with building materials and there’s no more room for cars. I’ve got this problem again.

We’ll figure something out, you know, first world problems of course. That was where this whole idea of buying a big commercial building came from, was buying a really big warehouse, a big building, dividing it up into smaller spaces in renting them or selling them.

I’ve kind of had this idea for many years, you know, four or five years ago, I was in no position to really buy a big building like that. I didn’t have a clue about how commercial real estate worked and buying a lot of rentals, flipping houses so I just continued on that path. Well, a couple of years ago, I started to get the idea again of maybe buying commercial properties because I stopped to buy residential rentals in my market, our prices have skyrocketed since 2012. They’ve gone from 110,000 as a medium price to 290,000 now in six, seven years later.

The cash flow, the rent has not kept up with the value increases, it’s really hard to make any money with rentals in our market. Even if you’re getting amazing deals, repairing properties, still really hard to cash flow so I stop by in rentals in 2015.

I didn’t buy any rentals in 2016 and I really was looking at how can I buy more rentals in other states or what can I do and I have stumble upon commercial properties in my area, one that popped up on the MLS for 110,000, really cheap, got that in contract and that really peaked my interest about, hey, let’s look at commercial more and then buying this other small shop from a friend for 70 something thousand.

Bought another commercial property last year for 100,000 that was for sale on Facebook, ended up buying another commercial property last year for 292,000 that was a bigger property, 7,000 square feet office space, that we now have leased to an oil company, that worked out really well. We bought that for like I said, 292, put probably 50,000 of work into it, had it rented for 4,500 a month on the main floor now and we still have an unfinished basement which we could finish in the future and add even more rental units, the commercial things have worked out really well.

Last year, while I was buying some of the smaller stuff, I still had this goal of buying something big, finding a really cool place that could be subdivided, have a lot of units, have the shop space. I had been working with a local commercial agent to help me with this process because like I said, I’m not expert in commercial real estate, at least I was not back then I had a lot to learn so I wanted to have someone to help me along the way, we actually had a huge building under contract early, the end of 2017. 280,000 square feet, I had it under contract for just a couple of million dollars, amazing price to square foot, numbers. Had 23 acres with it, had a bunch of water with it, had a bunch of power with it, very valuable property. However, the building was a mess. It had been vacant for 13 years, had been vandalized, all the copper wiring had been stolen, a lot of the plumbing had frozen. Just, a lot of the windows had 400 and some windows, the whole outside with mostly windows, most of those were broken.

The heating system was done, you had to do the entire heating system and besides that, it was one big giant open building and to make it work for me, I want to split it up into smaller unit. I had that property under contract, even went through the process of having an architect design the layout for me, divided up the space, we had drawings for it, had bids from two contractors to do the renovations and that’s kind of where things fell apart on that property.

The bids to renovate it were in the five to six million dollar range where I thought they’d be about half that. The biggest problem was just the electrical HVAC, the major systems to make them work is just so many unknowns until they get in there, the company said they just had to bid them crazy high because they didn’t know exactly what it would take.

On top of that, there’s a school that actually moved into part of the property, the property was, had an older building built in the 70s and then a newer addition that was built in the 80s the owners of the property had split off the newer addition which is attached despite a corridor, actually, detach that building from the old building and sold that to a charter school. 

The charter school fixed that up, it’s actually up and running right now and the part of the problem was, when they split the charter school off, it created huge access proneness for the old building. The kind of cut off the roads, did not make any easy smooth entrances, it really created a lot of problem so that was kind of the deciding factor why I cancelled that deal was one, the repair cost were extremely high.

Two, the access issues made it very difficult to make that deal work. Then, you know, other issues of course as well where you’d be buying the property for a couple of million, putting another five million into it, finding the right lenders for that, I’d have to bring in a number of partners, have to do a lot of work convincing them that it would work, that worth all the risk and it would take years to complete that project as well, construction, road paving, dividing property, I think that would be a really cool project, I think it would make a ton of money for the right person but it probably needs someone who has a lot of money, can take some risks and make that project work.

Maybe that will be me in a couple of years but for right now, I cancelled that deal which is disappointing but at the same time, kind of a relief and ended up looking for other commercial properties.

Along the way, my commercial agent I had been working with who helped me find this other deal which actually technically wasn’t for sale, he just knew that was, the sellers wanted to sell it but it wasn’t technically for sale. Had another seller who wanted to sell a big property that was not listed as well and this property was, he said, 2.25 million, 68,000 square feet but much better condition.

Already had tenants in it, grocery store, coffee shop, restaurant and then another small office space it was rented. All in long term leases, mostly well maintained property, had a four or five acres, really good location and a very busy street. That one really piqued my interest because the income that was coming in made it about a nine or nine and a half cap rate deal.

Most properties, commercial properties like that selling in my area are at about a seven or less cap rate. Cap rates, if you don’t know how those work is basically the net income divided by the price of the pretty. The lower the cap rate, the more expensive the property is. If you’re buying a property, the higher the cap rate, the better. To have a nine or nine and a half cap rate, compared to 7% is a big difference, it’s like seven or $800,000 in value difference based just on the cap rate.

That one really peaked my interest, he actually showed me a couple of other properties as well that really peaked my interest, he actually showed me a couple of other properties as well that were kind of listed, kind of not really, it’s weird in a commercial world, completely different than residential, a lot of properties are actually kind of for sale but not really  listed, you don’t’ really know if they’re for sale unless you have some connections, some agents, some people who know the business really well. That’s another reason I was glad I used a commercial agent because I never would have found this deal if I had not used him. 

We looked at the property, I had a partner who has lent me money on some of my flips who has been wanting to do a bigger deal with me for a long time. I talked to him about it, he was super interested in it, we saw a few other properties as well but this one just kept coming back as the best deal. And it’s funny because I can see it right now as I’m recording this podcast, I look across the street and there’s the building right there.

It’s literally a block away from where my office is right now, the brokerage I work at. The building really interested us, made good money, had eight, 9,000 square feet of vacant space as well, there’s also the opportunity to add even more value to it by getting that space rented, we could increase the cap rate to 10, 11% even, based on our purchase price if we rented that space, it increased the value a ton more as well.

We talk to our agent, talked to each other, we ended up offering two million dollars on the property even though my agent kept telling me, hey, offer full price, its’ a great deal, it’s not going to – someone else is going to buy it even though technically it was never listed, I think we’re the only ones who knew about it. 

We offer two million, they countered us at 2.1 million, we accepted. We went through the whole process of getting the loan. It is much different on a commercial property than it is on a residential property, at least a giant one like this, we had to get inspection, appraisal, talked to a lender, it took us a good month before we even figured out what lender we wanted to use.

We talked to a number of local banks and we ended up using a lender that my partner had worked with many times in the past, really easy to work with, did not require a ton of paper work, a ton of information from us which is nice. We ended up getting, the loan was 20 year amortization, 10 year balloon so what that means is your loan payment is calculated over a 20 year loan, your payments are based on a loan being completely paid off in 20 years. A balloon means after a certain amount of time, they can call the note due, 10 year balloon means, after 120 years, if the bank wanted to, they could say, “Hey, you have to pay us back all the money, we’re calling this note due. We don’t want to have this loan anymore.” Then it’s a five year fixed rate period at 4.6% interest rate. What that means, our interest rate will stay exactly the same, on the sixth year, they can adjust the rate one time based on the current interest rates in liable rate and all that stuff for the remaining five years.

Along the way, we also paid a half a percent origination fee which was better than most the other lenders, that’s one reason why we use them. We did have to of course get an appraisal, we have the appraisal ordered, the inspection ordered and we’re on our way to getting this deal done.

First off, we did the inspection which was about $4,000 for the whole building and like I said, it’s 68,000 square feet, we had to go through a lot. Really is like 50 pages long, I was pretty impressed with it, you know, I was kind of worried about wasting money or do we have to really have to spend that much money for an inspection but after seeing everything he went through, I was impressed with it.

We did find some issues with the property, some of the HVAC units were a little older, there were some issues with part of the roof that was leaking a little bit, may need be fixed in the future but most of the roof was okay, the property kind of has 40,000 square feet at one level where it’s got probably 12 foot ceiling or so and then it’s got another 20,000 some square feet that has two levels or higher ceilings. Half of the building has a mezzanine, you know, two levels, the other part where the grocery stores, they took out the mezzanine, just has some really tall ceilings and that part of the roof was the part that needed some work.

The inspector estimated it needed $60,000 of roof work, some other work to the property, you know, some electrical stuff, really minor stuff, he kind of tried to come up with every possible thing he could to fix on the property and I think his total cost of estimate to fix everything was 180,000.

We came back and talked to our agents and said “Hey, can we get the buyer or the seller to pay some of this stuff, can we get him to give us some concessions, fixing it a bit,” and our agents said, “Sure, I think you can, you know, our agent was working with both us,” the buyer and the seller and I kept looking for some direction and what to ask for, what he thought was reasonable, didn’t get a whole lot.

I said hey, let’s ask for 150,000 on credit, see what he says. We didn’t hear anything for literally weeks on this and we had extended inspection, kept not hearing anything, finally I heard from our agent and he said, “Hey, the seller got back to me, he’s not going to budge, he’s not going to do anything, he doesn’t want to be jerked around. He just want to sell the property if we don’t want it for the price that’s under contract for, he’ll just list it again and be done with it.” 

That was pretty disappointed to us, our agent had kind of implied, he thought he would get concessions and some credit back, we had to make some decisions and in the end, there were some communication problems between our agent and the seller and us and we decided to move forward with the property without asking for any inspection items, however, our agent kicked back some money to us, part of his commission because he’s representing both sides to smooth the deal over. We did get some money back out of it, definitely enough to make the inspection worthwhile and then got the deal, you know, saved the deal which at one point, it looked like it was going to die in the water which we’re both really disappointed that my partner and I because we thought it was a really good deal, we managed to save it.

Then came the appraisal, the appraisal again was 3,800, 4000, right around there as well, kept waiting for the appraisal to go allocate it and get it done but we got it back. It came in at 2.4 million as is so that was really cool for us to see that, if you have experience with appraisals at all, it is rare to see an appraisal come in above the contract price, our contract price was 2.1 million.

Appraisal came in at 2.48 million something like that, we’re like, sweet, the appraisal even said he had a really hard time getting it down that low. We figured we’re going to get a really good deal if the appraiser thinks we got a good deal as that rarely happens. The appraiser also said it’s the property was all rented, he thought it would be worth 2.7 or 2.8 million, that was even better news.

If you can get the property rented, we can make, having it more value, make more money every month. That all worked out, got the appraisal done, got the inspection done and we ended up closing it on, I think it was January 31st, is when we closed the deal, we bought it ended up getting the keys to the vacant unit. That was really cool to see, really cool, to have happen and we’re often running on our, this is definitely my first experience with a giant commercial property like this. My partner has had some bigger ones but not this big in his portfolio before.

It was nice to have him as well to help with some of this stuff,  he’s had experience with it. Of course some of the problems along the way, there are always some hiccups but talk about the inspection. Another one was the insurance, we have been talking about with different insurance companies for months trying to get this nailed down.

There’s questions about the roof, other issues, lot of just misinformation from the insurance companies, finally we settled on one for like 23,000 and we thought hat was really high, the problem was the replacement value kept coming in at like seven million dollars and the insurance companies would not insure it for less than seven million. They want to insure it for replacement value so we’re paying a lot of insurance not based on what we paid for the property but for what it would cost to rebuild it. Another good sign that we got a good deal but still, very expensive insurance. 

We struggled with that, finally we got “Okay, well, we’ll go with this $23,000 insurance bid.” Well, my insurance agent who got bid actually stopped working for the insurance company like two days after we told them we’re going to go with it. He said, “Don’t worry, the new agent will take care of it, he’ll get it going, you’ll be fine.”

Took a week after every day promising us a new policy would be ready and when that new agent gave  us a policy, he didn’t say a word, sent it to me and it was $34,000 like $11,000 more than the quote and he pretended like it was not a big deal, that’s just the way it was and just sign the paperwork.

We shopped around some more, found some insurance with another agent, who actually used to be my baseball coach when I was a kid and we got our insurance down to 13,000. We’re very happy with that, really pays to shop around for insurance on a property like this and any properties you have, whether you’re flipping, renting your homeowners, there can be such a huge difference in the cost of insurance. We almost paid twice as much for insurance but ended up getting it lower, that was nice.

Some information on rents, how this commercial property works for leases, all that stuff. Something really different on commercial properties like this as supposed to residential is every unit has triple end leases on it. What that means is the tenant is basically responsible for every cost on this property.

They’re responsible for maintenance, repairs, utilities, property taxes, property insurance, even our own accounting costs, even property management costs, all of those are calculated into their rent as additional costs. Even though we’re trying to fight for that insurance to get it lower, technically the tenants would be paying that insurance back to us but still we want to make it as low as fair to them as possible just because – and we’ll also be paying that insurance ourselves in the vacant unit instead are currently rented. 

So how the triple end lease works is let’s say the grocery store occupies 50% of the building which they have much more than that but to make the mess simpler, if they occupy 50% of the building, the pay 50% of the expense for the building as far as maintenance, repairs, utilities, taxes, all of that.

The other tenants would pay a percentage of what they occupy as far as square footage of the costs as well. Right now, we have maybe 15% of this building is vacant, as the owners, we’re paying 15% of all those expenses while those units are vacant. 

It’s really advantageous to have a commercial property with triple end leases, fully rented because not only are you bringing in that rent every month from having them rent the space but they’re paying the triple end costs as well which can really add up. In this building, we’re making about 20 to $21,000 in rents from everybody right now, gross rents. Then, there is more expenses that the previous owners was paying like some of the taxes, some of the utilities, some of the repairs, maintenance things like that on the vacant units and then  will also have our loan cost, the loan payment on this property is about $10,000 a month but as we get the property rented, if we get t hose units rented, that will greatly increase our return because we’ll have additional rent coming in and we’ll have less expenses with that tenant paying those triple end leases.

It’s very confusing to me to figure out all this, figure out how it all works, wondering about commercial, there’s a lot to learn but it’s been really interesting, really different from how I kind of perceive things to work form the beginning. Something else that is interesting is you know, our agent has had some other tenants who have been interested in renting the property and they brought us some proposals to rent it and those tenants kind of expect the owner to spend a lot of money on improvement or TI.

I did not know what TI meant before, I remember sitting in the meeting with our agent, talking about this and they started talking about TI  and I’m like, “I don’t know what TI means, I’m not going to say anything, I’ll just nod my head and agree with them and then I’ll look it up later on Google,” it’s tenant improvement.

For one of these tenants, they’re expecting the owner to pay like 150 grand in tenant improvement from the beginning and then their rent was only going to be like $1,700 a month and it would take like 10 years to pay back that 150 grand that you spent, it just did not make sense to me, that’s ridiculous, I’d rather have a tenant move in who needs less work in a much lower rate than spend all that money for the tenant.

There’s other things to consider, the restaurant who moved in there a few years ago, the owner spent 150,000 for them to do tenant improvements before they moved in. But that restaurant’s paying a lot more rent versus that tenant improvement than what this other lease proposal was for us.

That one kind of made more sense but still, I think you definitely want to limit your tenant improvement if you can. We have started remodeling the back unit because if you listen to my podcast last week, I am starting my own real estate brokerage, we are moving into one of the units so I’ll include some pictures of that and that already will add rent to the property, what am I paying? I think it’s like if you include the rent per square footage, and the tenant improvement, I’ll be paying about $2,700 a month for 5,000 square feet or so. It was really good deal, it’s actually less than I’d be paying my current brokerage where I work at now from my whole team.

It will save me money even if I wasn’t paying half of that rent to myself. As an even better deal, when you think about it because half of that rent will go to me, I’m actually paying 1,300 and some, in rent, since I own the building. Yes, you know, you had to think about, yeah, we could have rented that space to someone else and brought that money in but the space was kind of a mess, it needed some work and there wasn’t anybody just banging down the door to rent that space so I think it would have taken a while for us to rent it.

Now we’re going to get immediate rent, I’m in there, increase the value of the property tremendously by doing that and we increased our cash flow, plus I could have my own office space which I can design and create, I’m one of the owners of the building, the either owner is super laid back and easy to work with. I can pretty much do whatever is reasonable so as not too crazy to the space without having to worry about the landlord telling me what I can and can’t do. It really worked out well, we’ve already gone in there, tore up the carpet, sat it down, the glue on the carpet, taking out some walls, taking out all the furniture and we’re going to ask the same to the floors, do some painting, do some other cool stuff in there, make it a really sweet office.

That’s the other really exciting part of this building, and also the other really big reason why I wanted to buy commercial property like this was because I’ve had a plan to start my own office for a while as well. It sure makes it easy to start yo8ur own office if you can lease space from yourself, own the building than lease from someone else and have to worry about possibly moving, who knows what’s going to, you know, what you can fix, what you can’t fix, all that stuff.

Property’s been really cool so far, we’re still transitioning, trying to get rents from February from the previous owners because that was sent to them, try to figure out all the utilities, all that, how that’s all set up, it’s been fun, it’s been exciting.

The roof, we can get away with without fixing it right away, the 2,800 fix to fix the immediate leaks and that should last a while. We don’t’ have to spend a ton of money in the roof right away. Yeah, in general, it’s been exciting, a little nerve wracking at the same time I’ve been going over there like every day like “Man, I actually own this building, this is so cool.” It’s been a lot of fun.

Yeah, that’s all I’ve got to say about this little project we have going on, I’ll continue to post videos, pictures as we fix up the space, as things change, any updates with leases or anything happens, I’ll update everybody. Again, you know, check out investfourmore.com for those articles.

My YouTube channel for new videos and our Facebook groups, you know, invest four more Facebook page, I’m always posting stuff as well. All right, thanks for watching, hope everyone has a great day and we’ll be back with more great information next week. All right, take care. 

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