The first realtor I worked with latched onto me like a leech. I was twenty-six, inexperienced and looking at buying my first rental property: a triplex. The man was from a firm that (I later discovered) was known for fake leases, cash in suitcases and fraudulent financing. After I called to visit a property he had listed, he basically attached himself to me. He kept calling and calling, pressuring me to see buildings and to work with him. I didn’t know how to get rid of him!
After two weeks of searching, he pressured me into making my first offer. I wasn’t sold on the deal, but I was also insecure and after he kept the pressure up, he “closed” me and I signed on the dotted line.
The property ended up being profitable and relatively trouble-free. I still own it today. But our relationship was very unpleasant. I can still remember the stained wall-to-wall carpet and fluorescent lighting in his office and the way he pressured me to make a decision I wasn’t ready for.
When it came time for my next purchase, I vowed to do things differently.
Do Realtors Add Value?
While Real Estate agents have a reputation for being sharks, I do believe they add value.
When I buy and sell properties today, I work with a broker, even though I am a licensed realtor and have enough experience to manage my transactions personally. A second opinion—a professional one—and the second pair of eyes is worth the commission cheque.
If you’re starting out, the value-add of a realtor—the right realtor—is even greater. Here’s why.
Realtors negotiate for a living. Negotiating is both an art and a science. Getting the best deal depends on knowledge of the market. Realtors see a lot and therefore know a lot. It’s their job to keep their nose in the marketplace. They’ll have access to comparable sales. They’ll know the reputations of other realtors—which ones are crooked, which ones ethical. Their knowledge is a value-add.
Realtors also have a professional network behind them, including inspectors, contractors, lawyers, architects, etc. This team of professionals will advise both you and the realtor if there is any uncertainty. For example, when I have doubts about a transaction, I call the director of the brokerage firm I’m affiliated with. When I’m unsure how to structure a complex offer or build protection into a deal, I, unlike my clients, have someone more knowledgeable to speak to. All of this is part of the value-added by working with a competent realtor.
And why not? For the buyer, it’s essentially a free service.
The Real Estate Board
In terms of due diligence, the real estate board heavily penalizes realtors if they don’t follow prescribed processes. Your agent will need to check the tax bills, any liens, the leases, the certificate of location, and so on. They will also be better at doing due diligence than you are. This is how they obtained their Real Estate license.
Realtors have professional errors and omissions insurance. If they overlook anything, are negligent, or jeopardize the transaction, there’s insurance coverage for you, their client. Working with a realtor offers you a certain level of security that private sales don’t.
Don’t Trust the Listing Agent
If you visit properties on your own and end up dealing with just the listing agent, don’t think you’ll end up in a better bargaining position. Many people think that the realtor will cut his or her commission to give them, the buyer, a good price. Don’t be fooled. The listing agent wants to do a deal and their first allegiance will be to the seller. This won’t put you in a position of strength in the transaction. You’ll also end up paying commission anyway (indirectly as part of the sale price).
Get a broker in your corner. Being represented by your own realtor will likely add no cost to you. If you work with someone competent, it will almost certainly save you money through the negotiation process. There’s basically no downside to being represented by a realtor when you shop for a property.
Show Me The Money
One caveat: Real Estate agents make money at closing. From a business standpoint, their motivation is to make the sale. Your realtor wants you to buy a building. Preferably without too much lollygagging. You, on the other hand, want to purchase the right building. Notice the difference in motivation?
Finding a property that meets your needs can take time. No matter how ethical, realtors want you to choose any building in the least time possible. Their commission will be the same whether you visit one property or twenty. Consider the pressure this puts on them. When realtors push people to make a purchase, it can be because they’re simply motivated to close the deal.
Then, factor in that not all sellers pay the same amount of commission. Realtors make between 2.0% and 3.5% on a sale. Do the math. On a property worth $450,000, that’s a difference of $6,750! This places realtors in an ethically difficult position. They’re expected to present properties neutrally despite vastly differing commission amounts. As a realtor, it’s difficult to avoid encouraging your clients to buy a building where the seller offers more commission, whether consciously or unconsciously.
Realtor or Investor?
Conflicted motivations aren’t the only thing to be aware of. How much do you know about the qualification process for becoming a realtor? It has nothing to do with investing. Many agents are great at making deals but they may not know whether a property is a good investment. While they can negotiate and fill out contracts competently, most residential realtors don’t know much about cash flow statements, leases, or tenant issues.
When selecting an agent. You’re going to need to pick someone who knows rental property. Learn how to select an agent.