This post could have been titled Why You Cannot Trust Your REALTOR. But either way, I thought we would take a moment and look at a classic case of serial incompetence or dishonesty. I don’t know which it is. You be the judge.
Editor’s Note: It’s interesting to me that this photo will no longer post. Hmmm. I erased the photo on my hard drive after having posted it. But now the WordPress version will not show no matter what I do. Of course, I could redo the photo. But why bother. The point is still the same. If you are working with a real estate agent regarding real estate investments in Kansas City, or anywhere, work with an agent that understands real estate investing. Simple as that.
Let’s look at this actual listing on the Heartland MLS that serves the Kansas City area. I’ve marked through the address, agent name and info that doesn’t concern you. Suffice it to say that the agent is one that has been in business for years, sells numerous duplexes, fourplexes, etc., Yes, the agent works mostly in the investment side of real estate and still does crap like this.
You will see Gross Income is represented at $31,900, Gross Expenses at $2,640 and Cap Rate as 9. (To see a good definition of Cap Rate go here.) If I were an investor looking for a Cap Rate in Kansas City between 8 & 10 I’d be all over this. I’d give the guy/gal a call. Heck, if I was from out of state I might even make an offer sight unseen to make sure I got it under contract.
But is the Cap Rate really 9? If you followed the link you know that Cap Rate is simply the ratio between cash flow & cost. Cash flow is determined by adding all the income and subtracting all the expenses. Let’s concentrate on the expenses here.
Look at the top right hand corner next to the arrow and check mark in red. You’ll see HOA dues are $220 per month. That’s neither good nor bad. Depends on what you get. But if you multiply that times 12 you come up with the $2,640 the agent has marked as Gross Expenses. So we’ve already hit his/her expenses total and we haven’t added repairs, maintenance, capital improvements, property management, insurance, etc.
What’s worse is we haven’t even totaled all the other expenses he/she has listed!!! What are those you might ask? Look at the taxes check marked in red at the top right at $2,856. Then, just to the left, you will notice vacancy listed as 95%. Probably not exactly true, either. But an un-producing unit is considered an expense in my book.
Just by adding up HOA of $2,640, taxes of $2,856, vacancies at 5% for another $1595, insurance probably around $1,800 and let’s say at least $2,000 for improvements (I’m being kind, very kind – remember the building is 41-50 year old) and we have expenses of $10,891. Subtract that from $31,900 and you have $21,009 income before debt service.
Now divide that $21,900 by the asking price of $339,990 (we’ll hope the seller is paying all closing costs) and you have a Cap Rate of 6.2.
How does that sound compared to 9?
Listen. I hesitate to call anyone dishonest or incompetent. But it can only be one of the following considering this agent isn’t new to the business:
- A fundamental misunderstanding of how to calculate returns.
- Choosing to remain ignorant of how to calculate returns on investment property.
- A desire to bait & switch a potential real estate investor.
- Using an untrained assistant to enter information therefore showing a lack of oversight ability.
I’m not nitpicking here. This is big stuff. And it’s consistent through all of this agent’s listings. Plus, I’m still pissed off the agent didn’t ever call me back on one of their listings despite the fact that I called 3 or 4 times over the course of a 48 hour period several months ago.
If you are a real estate investor you need to be darn sure the agent you choose to work with is both competent and honest. You cannot possibly know the latter for sure. But you can quiz on the former.