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June 7, 2022

How Marcus Millichap Top DFW Broker Nick Fluellen Views State Of The Multifamily Market [EP104]

If you're interested in multifamily investments, you won't want to miss this interview. Nick Fluellen is one of the top Marcus Millichap multifamily brokers in the DFW area. He's seen a lot of changes over the years and he remains bullish on multifamily investments. In addition to brokering deals, he puts his own money into multifamily investments. He's a GP in 12 deals and a passive investor in close to 50 deals. Hear Nick talk about how rising interest rates with lower loan proceeds and higher property taxes and insurance are impacting the market today.

He also talks about agency debt vs bridge debt, the cost of interest rate caps in today's market, how to develop relationships with brokers, and the value of being a part of a 2,500 Marcus Millichap agent network in the US. You'll learn a lot from this interview, but most importantly, you'll get Nick's insights into where he thinks the market is headed. This information could be invaluable as you make your own investment decisions. Listen and learn!

Table of Contents:

A Multifamily Brokerage Business With Marcus Millichap

A Multifamily Brokerage Business With Marcus Millichap
Photographer: Towfiqu barbhuiya | Source: Unsplash

Darin: A little background on Nick Fluellen before we start the show. Nick lives in the DFW area with his family. He has been in the multifamily brokerage business with Marcus Millichap for close to 20 years.

He’s seen a lot of deals trade over the years, and he's learned a great deal over that timeframe. He loves people and values building relationships and watching people grow in the industry. He's seen the market shift quickly recently with rising interest rates. Yet he remains bullish on the industry.

So just a little bit on how I know Nick. My first syndication deal was a 76-unit townhome community about 20 minutes south of Fort Worth in a town called Crowley in the DFW area. There was an individual that worked for Nick, Trey Caldwell, he was one of the salespeople working in Nick's group. I bought that deal from them.

Three plus years later, I came back to Nick and said, "Can you sell it for us?" He did an amazing job. We had an amazing return for our investors and I'm going to miss that property. But I'm so glad for what you guys did. For bringing the deal to me, helping me along the way, and finding a good buyer to come and take it to the next level.

I typically ask how many properties and how many units you're invested in, but Nick is the first broker that I'm bringing on the show. He is one of the top brokers in the DFW area.

Discover How To Save Taxes and Build Wealth

A Really Great Asset

Darin: Share the size of the deals that you guys do in total volume? I know that you also invest in multifamily. So, share a little bit about where you're invested as well.

Nick: I'm quite sure, first of all, you're going to miss that deal. That was a really great asset. You all did an amazing job with that one. It's always rewarding when you sell somebody a deal and you get to turn around three years later and make them and their investors happy with a great sale on the back end. So, congratulations on that.

Darin: Thank you for being part of the team.

Nick: It was our pleasure for sure. It's going to be a good one for the next guy and that's what it's all about: keeping it going. I’ve been with Marcus & Millichap since 2004, straight out of grad school. I was hired and it's just been a really amazing time and an amazing experience.

Back then, any and every deal we'd get our hands-on, we were working on. So, we'd do a 10 unit, a 16 unit, and a 40 unit. I can remember the first 100-plus unit deal I did was a 138-unit deal which I've since sold a few times. Back then, a big deal was maybe 4 or 5 million bucks and now it's rare that we have anything under 10 or 15 million. I’d say with where the market and our team have gone over the years, on a normal year at this point we would probably do a billion dollars in multifamily transactions.

The Pipeline of Marcus Millichap

Darin: One billion per year?

Nick: Yes. In the last few years, it's been at least that. But again, in the first 10 years, when values were much lower than what they are today, that number is compounding pretty significantly over these last few years. It used to be; we'd do maybe 30 deals a year. Well, to start maybe we do 15, 20 deals a year, then we're getting into the mid-30s. As of right now, which we're in May, I think we have 93 deals that have either closed or in Escrow or on the market agreed to as of right now. That should be our pipeline through to August. Overall, we've done right around six billion in multifamily deals and that's 600 plus transactions over the years, and so it's been fun. It's been really neat to see.

I'll tell you one thing that's really interesting and hopefully serves as an encouragement for people that are buying right now. They may think, "Oh my goodness, I'm paying so much for some of these deals." That first 100-plus unit deal that I sold back in 2005, I think it was worth 32 a door. Last year when it was 16, 17 years older than it was back then, it was mid 140s a door.

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What you’ll see in DFW, historically speaking, is that values are going to continue to rise. With the in-migration and inflation and the disconnect between the price to buy a home and the price to rent an apartment, you got to feel pretty good about investing in multifamily right now. We're really bullish on the opportunities that this DFW market has.

The Front Row Seat

Nick: Then to your second comment about investing deals I think we obviously have a front-row seat to seeing people like you buying deals and making money on the back end. Obviously, that's a great investment vehicle for people who are doing this day in and day out. Over the years, I think I've GP'd 12 deals myself, some solely by myself, some with clients. I am passively invested in, 50, or 60 deals. I'm not sure exactly how many, but it's just an amazing vehicle.

Darin: I had no idea that you were invested in that many deals. That says a lot about the asset class if you're trading and brokering these deals, time after time. You're also investing your own personal money in these types of deals.

Nick: I believe in the market, and I believe real estate as an inflation hedge. It's interesting, it's even deals that I've been in that you're like, "Oh, this one's off to a rocky start." Or "Maybe this is a harder deal to manage or had more deferred maintenance," or all the issues that everybody always runs into.

You see that ultimately, just having a good management team, a good operating partner, a good GP, and just time on your side, you're going to be taken care of if you can ride out the storms.

Fortunately, even the worst deals have been pretty dang good deals relative to what the other investment opportunities are out there right now. It's the place to be. Dallas Fort Worth multifamily or Texas multifamily for that matter is certainly one of the best markets to be in the country. I feel very fortunate to be in this market right now.

Right Place, Right Time

Darin: You're in the right place at the right time. But you know what? People say overnight success, you talked about it. In the beginning years, the values were down and you were slugging it out. You were learning the business, but now you're reaping the rewards. But you mentioned a rocky start and I would say that to the listeners. I invested in a lot of different passive deals, and I would have some people come to me and say, "What are your dogs? Who are the bad operators and good operators?"

I'm like, "I'm not talking like that about anybody." In my mind though, I'm picturing one of these rocky start deals. Like, "Oh, I've got this deal that's not going so well." A year later that deal, I start seeing some deals that are trading right around it. I'm like, "We're sitting on a gold mine with this thing." Sure enough, they turn around, the occupancy starts going back up, and it turned out to be a fantastic deal. More than double your money type deal.

Had I told somebody, "Watch out for this syndicator or this deal," or whatever is bad, those people would remember that forever. That's where you have to ride some of these deals out. They don't all go up in a straight line.

Nick: That's right. Anybody who's ever syndicated a deal, it's like anything else that we do in life. You get better at it over time, you learn from your mistakes. Hopefully, you're adjusting on the fly, you're seeing what's working, and what's not working. That could be staffing, that could be more macro-level management, that could be the upgrades you're doing, that could be your advertising.

The Beauty of Investment in Multifamily and Marcus Millichap

The Beauty of Investment in Multifamily and Marcus Millichap
Photographer: Precondo CA | Source: Unsplash

Nick: So that's the beauty of an investment in multifamily. There are so many levers that you can push and pull and affect how it's going versus being in a mutual fund or a stock or a pre-IPO or something along those lines. You have no say, no control, and your strategy is to hope and pray that it goes well.

Here, at least you can have a direct impact and at the same time, most of those things that you're able to do on these properties are taking care of people and giving people a better place to live and a better community to raise their kids in and all that. It's a very rewarding business and it's a rewarding place to park some money and invest.

Darin: Even the passives like, look, you invest in stocks, you can't call the CEO, but you can call the general partner. You can call the sponsor on the deal. Yes, you are not making the decision as a passive, but you could at least get insight as to whether the person managing the deal seems to have a handle on the issues and you could learn from how they're going to handle it.

Nick: I can't tell you how many times over the years that people that have been passives in other deals that we've sold have come back. They become the main partner, the lead GP, the lead sponsor, on a deal later because they went in with the idea of, "I'm going to invest with this person. Hopefully, it’ll make a nice return on my money. This also educates me on what they do well and learn from really good sponsors and operators."


Nick: That's a win-win if you can make a nice return and then learn skills that are going to set you up to keep repeating that process and even growing the pie even more.

Darin: You were talking about your group and the deal volume and production levels. A lot of people know about Marcus & Millichap, but not everybody does. Marcus & Millichap is one of the predominant leaders in all commercial real estate, not just multifamily, across the country. Talk a little bit about the company.

Nick: That's a great thing to highlight and it's really the reason I've stayed with this firm for all these years. First of all, we've got really spectacular leadership and a real entrepreneurial spirit in this firm. The firm was founded in the early 70s in California, so our first several offices were in California. Our Dallas office was actually our sixth office to be opened. Over the years, we're now at 85 to 90 offices. Marcus & Millichap does not do any leasing, solely focused on investment sales.

From an investment sales standpoint, we're the largest broker of commercial real estate in the country. We have some offices in Canada as well. There are probably 22 to 2,500 agents across the firm now and that one shows the size of the firm. It also is super important because we have something called MNet, which is just a spectacular tool.

People will ask, "Give me something about Marcus & Millichap that would be an advantage for you guys." Aside from just, "We like you, we like your team, but on a more macro level, give us something about Marcus Millichap that would be a differentiator."

A Rental Guy

Nick: Our MNet system is like a proprietary MLS if you will. So, if I'm a retail guy in our California office or our Florida office, or at one of our New York offices if I have a client that says, "I'd like to look at apartments in Texas." Those guys can literally go into our system, pull up all the available inventory, and immediately within five minutes have that at the fingertips of their clients.

That all sounds good. What does that actually mean for a prospective seller? It means that we are constantly bringing buyers into this market that nobody else would know, including us. I just sold a deal in north Dallas to a guy that one of our west coast agents, who's a friend of mine, called and said, "I got a good client. I just sold this building out here."

It was a small building, but he did really well on it. And he wants to park it into a larger apartment deal in Texas. He doesn't know anything about apartments, he doesn't know any management companies, and he doesn't know any debt sources. But he's in a 1031 exchange and would like to move his money over there. So the guy flew out, we met and had a couple of deals to show him. He ended up making an offer on one, putting in an Escrow and successfully closing the deal.

That buyer would not have been procured by any other agent in the metroplex, because he had a relationship with one person, and it was our west coast agent. That's happened more times than I could count over the years. It's a pretty neat skill.

Connecting With the Right Investments

Nick: Another thing that is happening right now is some people are saying, "Hey, multifamily markets influx at the moment. I think what I'll do is sell my deal and then park my funds into a single-tenant, triple net-type deal." We’re the absolute category killer in that, nationwide.

We have some of the largest teams in each region of the country, on the single-tenant side. And so we're able to connect him with the right investment sales guy and transition him temporarily from multifamily into retail. That goes vice versa as well. Those are just a couple of things that I think are real advantages of our shop.

Overall, the entrepreneurial spirit from the top down is my favorite thing about the firm. It just really lets us go out and get creative with our clients and really brings them a lot of services and expertise that you don't find everywhere.

Darin: They say that multifamily business is a relationship business all the way through. As you're talking about that, that plays into that MNet platform and all the connections that you have across the nation. You have this common employer that you guys are all working under the same umbrella on, and then people have different relationships with people all over the place.

So, you know a guy in California who's an agent, you don't know his customer, but he can vouch for his customer. Because he vouches for his customer, you have confidence that this guy is the real deal. Where if he had just called you on the phone, you may not have had that same confidence.

Marcus Millichap Is Obliged To Help

Nick: 100%. You feel an obligation to help your colleague. If they're calling me and taking the time to say, "This is a valued client of mine," then obviously we want to make sure they're taken care of just like we would want our clients taken care of. We have done the same thing. We've had clients that have said, "Can you hook us up with your guys in Orlando, or hook us up with your guys in Atlanta," or various other markets.

We love making those introductions and getting them hooked up with somebody who hopefully can help them and make a splash in a new market. Brokers like to catch the guys on the front end too. You never know who the next big thing's going to be in any market. It's great to get to sell guys some of their first deals when they're entering a new space.

Darin: For the listener's perspective, what he’s talking about there is, say you have a syndicator who does a few deals in Dallas. All of a sudden, he decides "I want to go to Jacksonville and start buying deals in Jacksonville," but Nick and Bard are focused on Dallas. If they put that syndicator in contact with their counterpart in Jacksonville that they trust, it's a win-win for the agent in Jacksonville.

It's a huge win-win for the syndicator that asks for that introduction, so that's a huge value.

There’s No Shortage of Buyers

Nick: Even right now with what's happened in the market over the last month even, the value of that is compounded even more. Because there was no shortage of buyers 30 days ago or 60 days ago, but all of a sudden, the market's tightened up a little. Everybody's on hold or trying to figure out what's happening out there right now. So, when you can be working with somebody that maybe has their own bank relationship in another area, or is a low leverage buyer, we just closed a deal today with a buyer that we met out of California.

He’s a very low leverage buyer. He was a 60% LTV guy and financed the deal with a bank loan. Even though he was in Escrow when the debt markets were falling out, it didn't matter to him because he had a very good bank relationship, and he wasn't trying to get max leverage. Those types of buyers are valuable even more so with what we're going through right now as the market's shifting.

Darin: You alluded to this, the market's shifting. Is it due to rising interest rates or is it due to inflation? Are people just getting scared? Is the stock market going down? What's causing it?

Nick: A few things. One, I would say for the first maybe 13, 14 years that I was doing this, if you were buying a deal and you could get a 10-year Fannie Mae loan or Freddie Mac loan on the deal, then that's just what you did. You put the 10-year agency loan on it. Over the last four or five years, people realize, they're like, "I shattered my performance projections. I think I'll sell this thing after three years, instead of five years."

A Bad Leverage Point

A Bad Leverage Point
Photographer: PiggyBank | Source: Unsplash

Nick: Then they're like, "I've got a loan that's now at a bad leverage point. I've run out of interest only." The debt basically didn't match the exit strategy. What we saw within the last few years was, people, say, "Maybe I should just put a bridge loan on this deal. I'm not likely to hold this deal for more than five years. Probably I'm going to get out if I can implement my business plan quickly, I'll probably get out in three."

They were putting these bridge loans, these debt fund deals on the deals they were buying. Of the deals we did last year, 90% or more were that type of financing and it's a floating rate interest rate. All of a sudden you buy a floating rate, interest rate, you buy a cap basically. Your interest rate's capped and those caps cost nothing. Pennies on the dollar relative to what they are today.

Darin: They didn't before because they didn't cost anything.

Nick: They cost nothing. That's what everybody was doing. They're like, "This is great. I have a low rate and I've managed my exposure and that's great." The lender would give you a 75, 80% loan to cost. So you're rolling in all your CapEx. Life is good. I'm going to implement my plan to sell this thing in three years without a prepayment penalty or without a big prepayment penalty and rinse and repeat.

That all worked great until interest rates popped here in the last 60 days basically. What's happened is, on a normal deal, an interest rate cap cost 30, 40, or 50,000 before and that same cap is five or 600,000 now. So that's number one.

When the Math Does Not Add Up

Nick: That cost has skyrocketed. Interest rates themselves have gone up. If you're buying a deal at a three and a half cap, but putting a four and a half to 5% interest rate loan on the deal, guess what? That math does not work. So that's a problem.

On top of that, when you have a higher interest rate, that means your loan amount's going to go down. It's a triple whammy. The cost of the interest rate cap has gone up, the actual interest rate itself has gone up and the loan proceeds have gone down. The only way to make sense of most of these deals right now is to pay less for them. There's just no fancy financial engineering you can do.

The only way that most of these deals work are to pay less for them or if you have the right equity. I fully believe these deals are going to go up in value with the migration patterns coming into Texas. The cost of homes and home values have been off the charts high here. Now, they're not only off the charts high, but the interest rates are up almost 200 basis points if you're trying to buy a home.

I don't even think a lot of people are going to be able to qualify for that anymore. It's just all these things are pushing people to apartments. All the fundamentals are going to be great. When we come out of this, however long it takes, people are going to be in the money. Right now, if you have investors saying, "I need cash flow."

When COVID Happened to Marcus Millichap

Nick: The only way to get cash flow immediately is to pay less. If you have investors that are like, "I don't care about cash flow, I want an equity multiple and an IRR." There are going to be some great deals to be had. That's what we're working through right now in the marketplace. I've been through COVID, and I went through the great recession, never have I seen it turn as quickly as it's turned in the last 30 days. It's been a dramatic change and it happened really quick.

Darin: Everyone says it's different this time. But when there is a change in the market, it can happen pretty darn quick.

Nick: What's interesting about it is that when COVID happened, you're like, "Are people going to pay? What's going to happen? I can't charge late fees. People don't have to pay. I'm waiting on the government. When the government sends this money, is it going to make it to me or are they just going to keep it?"

There were a lot of factors that made you worry about the actual performance of the deals. Right now, the performance of the deals was off the charts. For every set of financials we are getting, these deals are doing exceptionally well. That part is very encouraging, but taxes obviously are going way up this year, especially, since the assessments have been aggressive.

Insurance costs are through the roof right now and interest rates are really high. Those are major challenges unrelated to the fundamentals of actually operating the property. That's what we're continuing with. It's very different than COVID but very challenging in a different respect.

Getting Things Under Control Post COVID

Darin: As an operator, I remember when COVID hit, you could never have forecast that. There was no way to plan for that. There was a worry, are people going to pay? I was really surprised that every month we continued to be a positive cash flow. There were tenants that didn't pay or were slow in paying. But plenty of tenants were like, "I'm going to pay for food and I'm going to pay for where I live." There were still a lot of tenants that rent was one of the first things they were going to pay.

Nick: We came out of that much faster than I think anybody expected. I'm hopeful that that'll be the case here. Obviously, we have some very macroeconomic things we have to get under control. We've printed an absolute insane amount of money that's been injected into the economy. We have seen it, the inflation is just absolutely off the charts right now. But again, real estate is a great spot to be when that happens.

Darin: Real estate has always been told that it's a great inflation hedge, and I think about these multifamily deals. If you have wage inflation, people are making more money, then it should translate to being able to pay more for rent. So, if your rent is going up and say that's based on inflation, inflation right now is 8%. Even if it's not at that level, your rent is going up and that's the top line. If you fixed your debt service, that's the ideal.

Increased Profitability

Darin: But even if you didn't fix your debt service and it's floating, that expense is still less than half of your expenses compared to your rent. Over time, you should have that increased profitability. That's where I see real estate being a good inflation hedge.

The big question mark is, if interest rates keep going up, will cap rates end up going up? If cap rates go up and the exit cap rate on these deals is higher, which one is going to have the bigger impact? The inflationary increase in profitability or the negative impact of maybe having higher cap rates at some point?

Nick: Most of these deals, if you implement the right business plan, even if cap rates rose, you're still going to be in the money. There's enough ability to influence NOI. I saw something today and I can't recall the exact source, but basically, our rents were still projected to increase 35% over the next five years and that's Dallas Fort Worth. So you're talking 7% rent increases a year. By the way, that's probably mostly organic. If you still have these deals that you can upgrade and get two or $300 pops, then you're talking about even more significant NOI and revenue growth than even what that number projects.

But yes, short-term cap rates are going to have to rise if interest rates stay high. What I find very hard to believe is that we won't figure out a way to get these interest rates down when things settle. I feel confident that's going to be the case. But, if you look and just do the math, let me ask you.

The Price of an Average Home

Nick: I'm putting myself on the spot here depending on what you say, but what would you say an average home in DFW price-wise would be right now? If you were just throwing a number out there, if somebody was like, "I want to go buy just a nice home, but nothing crazy over the top."

Darin: I live in Prosper, which is north of Frisco, the last stop on the tollway. I'd say the average homes here are probably four to 500,000.

Nick: That's what I would say, four to $500,000. It'd be hard to find much. If you're putting 10% down, it's a lot of money.

Darin: Most loans are 20% so you'd be putting down 80 to 100 grand to get into a home.

Nick: If you've got even 10% for the sake of this, which I don't think most people have, 40 to 50 to a 100 thousand dollars laying around. But let's assume you saved, and you had that. Right now, your interest rate, if you have perfect credit which most people don't, is probably five and a half percent. If you don't, it's probably north of 6%. When you start doing the math, your principal interest, taxes, and insurance are north of three grand a month.

If that's option one and option two is to live in an apartment, you've got a lot of runway in apartment rents before you're anywhere close to that. Plus, you don't have the responsibilities of lawn care and repairs and maintenance, et cetera. There’s a massive delta between those two numbers. I find it hard to believe that we aren't going to figure out a way to get rates down.

A Massive Shift for Marcus Millichap

A Massive Shift for Marcus Millichap
Photographer: Syed Ali | Source: Unsplash

Nick: There's no obvious easy solution in the near term, other than slowing down some of this inflation. Historically speaking, when I first started in the business, we used to underwrite six and a half percent interest rates. If I go back and look at the very first deals that I was underwriting, I'm like, "This is crazy." As time went by and they kept going down, I remember when somebody got their first 3% interest rate that I'd ever heard of. I was like, "Oh my goodness." It's just over the years. Now, I was expecting it to be in the threes. This is just a massive shift in the other direction.

Nobody has a crystal ball right now, for sure. Obviously, other world events that are occurring and conflicts around the world and just different crises, even here and along the border. There are just so many things that are having an impact on what's happening in the US and in the debt markets that it's hard to say that's going to slow it down. But I find it hard to believe that we won't get these interest rates under control and get them back down, but there's going to be some pain in the short term.

Darin: One of the things that I don't think people talked about a lot is, "If we go into recession, everybody just thinks it's going to be horrible." But if we go into a downturn, if I'm living in California and I lose my job, I'm thinking, "Where can I live that's better cost of living?" I may move to Texas or Arizona, or the Carolinas, or one of these growth markets.

Migration Flux

Darin: Even in a recession, it's possible that Texas and these other growth markets may continue to see that migration flux. That's something that I've definitely considered.

Nick: The numbers bear that out. Texas, look how much we're growing and how much we're projected to keep growing in the coming decade. Millions of people are flocking to Texas. Fundamentally, you have to feel good about where we're at. Unfortunately, it's a variable, but it's the largest part of your capital stack that's the greatest variable right now. Anytime the place that's providing you with 75% of your money is gotten a lot more expensive, it's going to have a major impact. We're going to have to ride it out.

Darin: We'll see how it plays out.

Nick: What we'll always see is, if you go back to the last recession, some of the biggest owners, if you were just to start naming names of who are the biggest owners in the market right now, they were all pretty active during the last recession. Or they held on and trod water to get through the last recession and ended up looking really good on the other side of it.

I don't know if it'll be the great reset that everybody's been waiting for, all these years. When we got through COVID, not just unscathed, but those values shot up quickly on the backside of that. I thought, "If COVID didn't slow us down, a global pandemic, I'm not sure anything could slow us down. Obviously, this has had a major impact, but I do think in the grand scheme of things, it will not be a long-term reset.

Reaching Out to the Brokers of Marcus Millichap

Nick: But in the short term for opportunistic buyers, there could be some opportunities out there.

Darin: Talk about people who are afraid when they first get involved in the multifamily world. When they’re calling people like you, calling brokers, and are intimidated by it, how do they build credibility quickly? How do they get the broker to believe in them that they could actually close and all those things? What's your take on talking to new people in the industry and advice to them?

Nick: One of the reasons I love doing brokerage is I love people and I enjoy talking to people. I enjoy hearing people's stories. If this was just about transactions, you can certainly do business that way. But to me, that takes the fun and joy out of this. I would certainly tell anybody, don't be intimidated to call. I've done this for a long time, and I've sold a lot of people their first deal, so I don't have any problems with that. Now, of course, you do want to be credible, and you only get one chance to make a first impression. That's something to be mindful of.

Some people are really hungry and aggressive, and it's easy to get out over your skis a little bit. I would say don't bite off more than you can chew. Slow down, and make sure you're doing business the way that you want to be known because word travels fast.

I had a guy call me today that we'd just sold a deal to. He said, "I've already been called by a couple of brokers because they saw that I bought this deal."

How Fast Words Travel

Nick: He’s like, "I can't believe how fast word travels." I'm like, "There you go." Your reputation travels even faster, especially if it's a bad one. As brokers, we all know each other, and we definitely look out for each other on that front. Nobody wants to waste a bunch of time or put a buyer in who's going to jerk the seller around. So reputation travels.

One of the things that we've done over the years that I've really enjoyed, and I don't take as big of a role in it anymore but I still am involved in it to varying degrees depending on the deal, is our 75 unit and under team. That's always a great spot to start off because you have a deal that's not as large. Again, you're not biting off more than you can chew. It's a reasonable size deal.

More than anything else, even if your aspiration is to own something larger and hopefully sooner rather than later, it's a great way to get your foot in the door. Those deals are not as competitive as the bigger deals and they're a less sophisticated buyer group. One of our largest clients, we probably did double-digit 75 unit and under deals with, he's now doing 100 plus. I say 100 plus, really 200 plus unit deals. We have a fantastic relationship with him, and we know what he’s capable of doing. We've closed a bunch of deals.

That all started with smaller stuff and has grown into larger stuff as our confidence in one another has grown. So I would say that's always a great spot to start. Good opportunities, good deals, good buyer pool.

Winning the Trust of Marcus Millichap

Nick: But even if you come well-capitalized and ready to bite off on something a little larger, I'd say just be coachable.

Be open to using vendors here that we know and trust. Because if you're somebody that we like, but we're not confident you can get the deal done, but you're using a lender who we know, or you're using a management company we know, or you're using an attorney we know, those are all things that make a significant difference. If those people all have confidence in you as a buyer or as a client, then that'd certainly increase our level of confidence as well.

Darin: That's great advice, and that's the advice that I went with. When I was going after my first syndication deal, I was focused on 60 to 100 units for a lot of the same reasons you just said. The senior syndicators that you're competing with are going after 100 unit plus, 200 unit plus deals. So, it knocks them out. They're not even looking at those deals. It brings the competition down so you can get your first deal. The other thing that you didn't necessarily mention, which I think is very important, is partnering with somebody that has experience.

I think that if you do that and you tell the broker that you're going to be partnering, even if you don't name them yet, you're going to be partnering with somebody from a multifamily mentorship group or somebody that's bought five deals in the DFW metroplex. Now it's another team member that is adding credibility to you.

A Great Strategy

Nick: 100%. That's a great addition to what I said for sure. There's not that much to gain most of the time for that partner. If they were to help bring along somebody else and that's their primary goal while making a little bit of money, that's great. But they also realize if the deal goes bad, it's also their reputation. Having somebody that's already in the market that cares about their reputation as a sidekick, that's a great strategy to just help you get your foot in the door.

Darin: Talk about, I don't know if you have these numbers in your head or not, but the types of buyers over the last year. Maybe characterize between syndicators, out of state buyers, 1031 buyers, and first-timers, however, you would classify. But maybe, you're seeing this over the last year, the buyers have shifted from X to Y.

Nick: Hasn't been a crazy shift at least last year. We did 70 some deals last year. I don't remember the exact count, but I think because Dallas has a couple of very large apartment mentorship groups. Here, we certainly have a ton of local buyers, and local syndicators, which is great. There are folks that we see often and know well, even before we've had a chance to do a deal with them a lot of times.

I will say this one trend and maybe this is what you're alluding to. Certainly, post-COVID, the lockdowns in certain states and some of the political stuff in some of these states have caused some people, on the west coast and in New York and Chicago, to reevaluate, "Do I want my money parked here? Should I go to a more landlord-friendly state?"

Syndication Partnerships

Syndication Partnerships
Photographer: Vardan Papikyan | Source: Unsplash

Nick: We would say we've seen more of those folks come into the market than we had in the previous couple of years. It used to be that it was very heavy California buyers. In the early part of my career, it was not unusual. We'd have guys that would flock to Dallas from the west coast than more 1031 guys probably back then. Then as more syndicators have started buying deals and putting these partnerships together, there are less than 1031 out of syndications obviously because that's just a hard thing to do.

We have had some 1031 guys in the last 12 months come in more than probably the 24 to 36 months prior. But I would say in general, our number one buyer is still probably a Texas-based syndicator. That's probably who our most likely buyer is on any given deal. Though the deal that I closed today, the low leverage buyer, was from California. He’s not in 1031, but just looking to move his money to Texas with a partnership.

The one I alluded to earlier that the agent in our west coast office, his client that he introduced me to, that we plugged into a deal, was a one-off California-based owner, not a syndicator. Those guys do come in and buy deals from time to time. In general, if it's a fully marketed deal, it's probably a local syndicator who's putting together a group, then they want to do something. Or it could be somebody who, if they're out of state, probably already owns here and is trying to add to their portfolio.

Marcus Millichap Values Perseverance and Determination

Darin: That's helpful. Talk about perseverance and determination. Getting into this space, what I've seen for myself and for other new people breaking in, it can take a year or a year and a half to get your first deal. There are a lot of deals that you're involved with that you're spending a lot of time on. You're putting in offers, and as a broker, you see those people. You see them, "Oh man, they came in second or third again."

I would imagine, as a broker, you like some of them and want some of them to win at some point. Talk about that perseverance and determination because without it, there are some people that come in and they go after a few deals, and then they don't win, and they peter out.

Nick: I won't name names, but there are definitely some groups that made runs at our deals for what feels like multiple years and were close, but just not the ultimate buyer for a while.

Finally, they broke through on one, and then as generally is the case that ends up leading to other transactions. Number one, I think buyers and investors, in general, underestimate just how we as brokers probably feel about people constantly not winning deals. It's not something that anybody enjoys.

Darin: Not fun.

Nick: No, I don't like delivering bad news to people over and over again. That's my least favorite part of the business. No question about it.

We're rooting for the people that are continuing to pursue our deals and we'd love to help them. Honestly, if they just persevere and are diligent and professional about it, it's like anything.

Good Things Will Come

Nick: Good things are going to come to the person that's doing the right thing in the space. Eventually, somebody's going to call you. You're going to win that deal or we're going to call you and you're going to win that deal. Because we knew, "Man, you just missed out on this deal. But hey, I know about this one over here. It's very similar. Why don't you guys try to make a run at this? We want to give you the first shot at it." That happens all the time.

I had that conversation today with somebody who missed out on a couple of deals we sold recently. They were pretty similar to another deal that we are getting ready to list. Because of the capital markets right now, the owner is willing to sell it preemptively as most transactions are right at the moment. I just said, "This one's going to be coming out soon, but you might want to take a look at it now. A, the owner would entertain an offer. B, it's very similar to those other deals you offered on that you didn't get." That particular investor was excited about that opportunity. So that happens.

There are very few people that have looked at our deals over the years. They offered multiple times on our deals over the years but that didn't eventually work out in their favor. Just stick with it. Everybody has to go through that.

I fully understand and appreciate how hard it is even just to get to the best and final, how much work it takes to get to the best and final. You're filling out questionnaires and you've toured the site.

Best and Final Calls

Nic: You've met with contractors, and you've gotten your debt quotes, and you've gotten a debt quote scrubbed multiple times. You got your insurance lined up and it is a lot of work if you're doing those 100 times a year and you go 0 for a 100.

Darin: That's tough.

Nick: It happens and so we get it. We always say on our best and final calls, like, "Independent of the final outcome, thank you for being here and thank you for getting to this point. We don't take it lightly because we know how much work it is."

Darin: A syndicator probably doesn't hear anything after. It's not you. You keep on saying stuff and they don't even hear it.

Nick: That is probably the case. I could give you a lot of success stories where eventually the perseverance paid off. I probably couldn't give you many where the perseverance didn't pay off. There are very few that have said, "I'm just not even going to look at your next deal because I never win it." Most of the time, they may not feel optimistic, but they keep looking, and eventually it works out in their favor.

Darin: I know some syndicators that I felt like we're on the cusp of throwing this out, just getting really frustrated. Then they broke through and got their first deal. Maybe they partnered with somebody that had experience and they took a smaller piece of the deal to get in. All of a sudden, the floodgates opened up and boom, they hit two, three, four. I think back to people like that.

Off to the Races

Darin: I'm like, they may have left and not continued. Once they hit that first one, they just were off to the races.

Nick: If you find yourself in a spot where you've made several offers and you haven't won anything, at some point you probably have to look in the mirror. Say, "Am I doing something wrong? Mr. Broker, why didn't I win? Was it just because of the price?" A lot of times it's because of the price, but sometimes it's because of earnest money or timing. At some point, you got to say, "Why am I missing out?"

If you're constantly too low on price, then you might say, "Yes, maybe I'm a little uncomfortable. But I'm going to have to get a little bit more aggressive on this underwriting. I'm tired of watching people sell these deals five years later. They've got a two X, three X deal on their hands that I passed on for two or 300K because I didn't have aggressive enough assumptions or whatever."

Sometimes, people are not great on the seller-buyer interview calls. Their enthusiasm for the deal doesn't come through or vice versa. Sometimes, people are fantastic on those calls, and the seller's like, "I think all of them will perform, but I liked Darin. Darin was a great guy. I want to work with Darin." That happens too.

At the end of the day, it's never our decision. We're trying to present the seller with outcomes. We can give them our background, our history, and our recommendation, but ultimately the seller's going to make the decision. But we want to do the best we can to help position people as best we can.

What Marcus Millichap Says to People Who Are Not Winning

What Marcus Millichap Says to People Who Are Not Winning
Photographer: Liam Nguyen | Source: Unsplash

Nick: If you're constantly not winning, then I'd say circle up with the people you know in the business. Say, "What do I get to do to get over the hump here? Brokers, what do I have to do to get over the hump here? Joe blow partner who owns five deals, you figured it out. What do I have to do to own five deals?"

Be honest with yourself and be coachable and receptive to doing some things differently.

Darin: Listeners, you heard it, ask. Ask what you could do differently. The other thing is, to look at the people that are winning the deals. So, you lost a deal. Maybe you know the people that won the deal. Go back to them, and ask them, “Can I see your underwriting?" Maybe they'll share it with you. You can look at the differences and learn from them the next time. Participate in people's webinars.

They won the deal and you're on their investor database. You get the invite. Maybe you're not looking to passively invest in that deal but get on the webinar. See how they're pitching the deal, see how they underwrote the deal, and then you learn from that for the next one.

Nick: I would just say that when we get to that point in these deals, what the seller's really looking for is if I pick you Mr. Buyer, this deal's done. I can go to sleep at night, and I don't have to worry about it. You're going to close.

A Smooth Closing for Marcus Millichap

Nick: If your LOI doesn't convey that and your interaction with the seller doesn't convey that if you get a chance to talk to the seller, and at the end of that call, they aren't like, "Man, this guy really wants this deal." And if they don't even hear you say, "I know you want a smooth closing and we're going to be your guys. But I promise you, we're going to be great buyers for you." If they don't feel that way, then you're probably not going to win the deal. I would just say that's the biggest intangible.

If you're a million less on price, it probably doesn't matter how excited you are about the deal. But assuming you're to the point where there's a seller interview call, it's neck and neck. Just make sure that all your homework is reflected, in the amount of effort, and energy. That they know, "This deal's important to me and if you select me, I'll see you at the closing table in 60 days, and it's going to be a really smooth process."

Darin: I tell people this, and I've never asked a broker if this actually happens. I tell people, "When you start the process, think of that last meeting between the broker and the seller." Maybe there were 15, 20 offers, maybe there were six or seven in best and final. Now there are three that are on the table. I'm like, "Think of the seller asking the broker, who should I go with? Why is the broker going to sell you over the other two?" I don't know if that happens or not. I assume there's something like that happens.

Your Chance to Shine

Nick: It does happen. Again, what we're doing at that moment is saying, "Here's what I know about each of the three. So and so has been incredibly thorough. They've asked lots of questions, they're using vendors that we know, and they're putting X amount down. They're syndicating out of this group that we've done lots of deals with. This other buyer. We don't know them at all. Hopefully, they can get the deal done." Those are the things the sellers want to know.

Again, I know those questionnaires that buyers fill out can be a little bit tedious and time-consuming. But I look at that as that's your chance to shine. If you've done all the homework and you've got a detailed budget, CapEx budget, and renovation budget, and you know you've budgeted for surprises, make sure that shines through. That's what the seller really cares about. As a broker, I don't have an egg on my face if I tell you, "I really feel strongly about this buyer," and they don't perform, I don't look good.

Darin: You don't look good, and you don't get your commission.

Nick: We have to start all over with the next buyer and that next buyer may have moved on. Or they may want to lower their price because the deals coming back around, and they feel like they've got the leverage. Sometimes, for the inexperienced guy. That's maybe a strike against you. You're a riskier choice for the broker to recommend or for the seller to choose. The seller has his own partners to answer to so he doesn't want to look bad either. So you've got to convey.

Marcus Millichap Is a Higher-Powered Partner

Darin: But that's the point. It's like thinking about early on how you can overcome the fact, that you know that you're a first-time buyer. So somehow you have to overcome that.

Nick: To your point earlier, you bring in a higher-powered partner with a better resume. You do this deal and yeah, maybe you don't make as much because you have a partner in, but guess what? Now, the next time you go buy your next deal, you're an experienced owner. I own this deal and the person doesn't care that you own that deal with a partner. All they know is you own that deal. I think to play the long game. We're not trying to do one transaction. We play the long game as brokers all the time.

On our team, if you're working with us, we're not treating you like a transaction. We're treating you like a friend that we want to be successful, and we want to do lots of business with, in the next 5, 10, 15, and 20 years. I've been at this now for 18 plus years, I've got a lot of clients that I've done a lot of deals with and that's why.

Darin: I could attest to that, that's the way I was treated. So I really appreciate that. You guys have accomplished so much, what's your next big stretch goal after this? Where do you go from here?

Nick: First of all, the way I approach anything that I ever do is, that I'm not watching the highlight film. I'm watching the tackles that I missed. How can I do better than what I'm doing right now in addition to growing the team and all that, that's great.

The Best Version

Nick: But let's be the best version of ourselves that we can be first and foremost. We all have areas that we're not as strong in that we can get better in. I think that's the first step for us. As long as I've been doing this, I'm still figuring out things that, "I did this a certain way for 15 years, but this new way is working much better."

Or, "I see this other guy that's very successful over here. He's selling industrial buildings, but he does this." So, I think those are all things that we're constantly literally evaluating on a daily basis. The second part is we are trying to really put ourselves in the shoes of our clients. Again, your deal is an example. We want to be a part of that deal from the time we sell it to you and hopefully get to bring it full cycle for you on the back end and then keep that momentum going.

That's something that over the years we want to keep growing with our clients. What we see our clients telling us over and over right now is they want to buy bigger deals. They want to buy nicer deals. And so we're doing more and more of that. Moving forward, we want to keep doing what we've always done, which is workforce housing. That's our bread and butter.

We're also trying to find ways to get our clients into some of these nicer, newer assets. We've had some success with that on the periphery. We did a deal recently in Van Alstyne, we did a deal in Sanger, and we did a deal in Weatherford.

Deals on the Outskirts

Nick: So, we're doing deals on the outskirts of the metroplex. We've done some deals in secondary and tertiary markets that are nicer, newer deals. Our secondary and tertiary market team is growing very rapidly. So I think there's a tremendous opportunity there.

I bought a deal in Oklahoma after COVID that's gone really well. One of the things that I like about that particular area, it doesn't have the growth, it's not as sexy as DFW is. But your taxes, you don't have to cringe when you get the tax assessment in the mail. You're like, "I hope I don't get killed with taxes this year." And, "I'm about to start this long process." It's a disclosure state. They know what you paid for it and their tax rate is much cheaper. That's been a nice change of pace and a nice opportunity.

As much as we say it's not a big growth market like DFW is, we've taken revenue up on a 158-unit deal by over 50,000 a month in less than 24 months. We've had tremendous success really growing rents there and managing the deal much better than it was managed before. We have literally gone from 77,000 a month in collections to really north of 130. I think it will be a little north of 130 this month.

Darin: I've heard mixed reviews about people going into the different markets.

Nick: There are. You have to have the right team.

Darin: Some people have done very well. Some people have struggled because they looked at it like a DFW deal in a different market. That didn't work out that way.

Marcus Millichap Offers An Alternative to DFW

Marcus Millichap Offers An Alternative to DFW
Photographer: Scott Graham | Source: Unsplash

Nick: No, I think the team is super important. But you can find a lot more deals that are really mismanaged in some of those markets. You can find a lot of deals that haven't had much of an upgrade program done in those markets. The deals are much cheaper in those markets, the deals are less competitive in those markets and the debt is pretty similar.

Anyway, I just think as people are saying, "What's an alternative to DFW?" It's worth pursuing. I could tell you plenty of people that have had deals that didn't go as good as they wanted in DFW to. A lot of times it comes down to your team and your plan. If you have a bad plan and a bad team and a great market, you could still have a bad deal. And if you have a bad team and a bad market, you can have a bad deal up there too. I just think that the taxes have been a really nice welcome relief up there. That's just been something interesting.

We've got a handful of deals up there right now that I think have got some eyeballs on them that are looking and seeing that same thing. I think our biggest goal is just continuing to grow with our clients and continue to do what we're doing but just do it better than we did it yesterday.

Darin: What do you like to do outside of work for fun? I've seen you on the slopes.

Time Flies

Nick: I definitely like to ski. You and I have played some golf together. My wife and I love to disciple and mentor young married couples. So that's something that's really fun that we get from our church. That's something that we really have enjoyed doing. Love to travel. The majority of our time is spent on weekends doing kid stuff. Baseball, tournaments, basketball tournaments, volleyball. You name it. So that's a blessing. It's a joy for us. Our kids are lots of fun. We love to just get to be mom and dad and enjoy all that that entails on the weekends. Being there every night of the week as well, it's keeping us busy, but it flies by too.

Darin: I've got two college-age kids. So I can attest to the fact that it does fly by.

Nick: I know one other area that you and I can relate to is I love Texas A&M.

Darin: Yes, my son goes there.

Nick: I'm very into Aggie sports. Aggie football, Aggie baseball, Aggie basketball.

Darin: They're doing good in baseball right now.

Darin: It's a weird place. People go down there and drink the Kool-Aid. I appreciate you coming on. Listeners, if you're looking in DFW, you're listening to one of the top brokers in DFW. Call him, call his team. I've been very happy with not only the professionalism and helping me win the first deal and also exiting a deal. You could tell that they care about people and that makes a big difference. It's a relationship business. This is a good relationship to have. I appreciate you coming on. Listeners, I hope that you enjoyed that one. Until next week, signing off.

How to Reach Nick Fluellen

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