In the business environment where success means promotion and promotion means more money; and, sales means profits and profits means distributions to investors, it is tempting for business people to sell their soul to the devil in exchange for their next big deal. I see this in the Denver Metro real estate market on a daily basis as I look over the new listings in the real estate data bases. It is still happening even after the lending meltdown that occurred because brokers overvalued their listed properties, appraisers went along with those values, and lenders blindly issued loans brokers are still listing properties above their realistic values.
A good example is the retail strip center built in the 1970s and tenanted with a marginal group of retailers who are barely surviving from on month to the next. The property is located on a secondary street and has limited street exposure. The property is currently 20% vacant and has been for more than two years. It is listed on the market at roughly $200 per square foot with a CAP rate of 6.5%. To make this example more interesting, the pro forma numbers that the CAP rate are based on indicates income as if the property is fully leased and the expenses indicate no cost for property management, no increase in property taxes or insurance that would most certainly occur when the property is sold; and, other expenses which are unrealistically low. If actual numbers were used a buyer would quickly realize that the property is being offered at a negative CAP rate.
Why would a broker list such a property knowing it won’t sell? The answer is pretty easy, to get the listing. The broker is competing with other brokers to get this particular listing. The brokers who are being honest with the seller will tell the seller what the property is actually work … $140 per square foot and at a true CAP rate of 12%. The seller, wanting to get the highest price for their property will choose the broker claiming it can be sold at the higher price of $200 per square foot. Once the dishonest broker has the listing it will be marketed at the unrealistically high price for a month or two. The listing broker will then go back to the seller to inform the seller that there have been no showings and that the price needs to be reduced. This process is repeated again and again over the next several months until the price finally gets to the fair value price that the honest brokers told the seller it should be listed for. The dishonest listing broker finally gets the property sold and picks up a fat commission check and the honest brokers are left still looking for their next deal.
Does the seller care that this process has occurred? No, the seller took the opportunity to list the property at a price they knew was unachievable in the market place hoping there would be an uneducated buyer. When no buyer came forward the seller accepted the slow reduction in prices hoping that there was still one uneducated buyer out there. When the property sold the seller walked away know that they got the highest possible price obtainable. I asked the dishonest broker how they could possibly list a property at such a ridiculous price and was told that they represented the seller and if a buyer was foolish enough to purchase the property at the inflated price it was their own problem. Under this scenario how can an honest broker ever win? They can’t! Nice guys do finish last.
Edward Boyle
CEO, Employing Broker
Katchen Company
Katchen Company, founded in 1962, is an integrated real estate company with its corporate headquarters in Lakewood, Colorado. The company offers real estate development, redevelopment, property management, brokerage, consulting services, construction oversight and maintenance services to individual and institutional real estate investors throughout the greater Denver metropolitan area in Denver with satellite offices in Chicago, Las Vegas and Miami market areas.
