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BUYING AND SELLING WITH AGENTS

Some of your best buys will be through licensed real estate agents. There is a misconception that agents buy all the good listings. It’s not true. In fact, any informed agent knows that it is a conflict of interest to buy his own listing. An agent does not represent his client’s best interest by buying that client’s property at a bargain price.

I use the term agent rather than Realtor here because the term Realtor is a registered trademark of the National Association of Realtors and refers only to its members. While only some agents are Realtors, all Realtors are agents.

ENTICING AGENTS TO CALL YOU WITH GOOD DEALS

How can you convince agents to call you when they find a good deal? Use the carrot-and-stick approach. The carrot: Tell the agent that if she brings you a listing that meets your criteria, you always will make an offer. Now, for that offer to be good for the agent, the buyer has to put enough down to pay the commission.

Carefully explain what you are looking for. Tell agents that you are looking for an empty house or a house owned by sellers who need to sell this week. Anyone who owns an empty house is getting no benefit from it and probably is worrying about it. These sellers are the most motivated to sell.

BUYING BIGGER EQUITIES

When I started my investment career, I would look for houses where the price listed was the loan balance plus the commission. My reasoning was that these sellers probably were having trouble making their payments, because they would get nothing from the sale but relief from the loan. When I made offers on these houses, there was never enough money to pay a full commission.

There are two weaknesses with this strategy. First, you rarely buy much below the market. Second, the agent doesn’t remember you fondly because it is unlikely that she was paid a full commission for the sale.

A better strategy is to tell agents that you are looking for houses with bigger equities. This will give you more room to negotiate a better price, and it increases the chance that the agent would get paid a full commission.

Stress that you have the ability to make a quick decision and could close the sale in a week or less. This will get you a lot of calls in the last days of the listing period (a great time to make an offer—both the seller and the agent are under pressure to make a deal).

The stick in the carrot-and-stick approach is this: Tell agents that when you find a desperate seller and the agent with the listing has not called you, then the offer may not include enough cash to pay the commission. This is subtle, but they get it.

WHO TO CALL WHEN YOU WANT TO BUY A LISTING

Most of us know a number of real estate brokers and salespeople. When you spot a house or an ad for a house that has potential, it is a mistake to call a friend. If they want to get paid, they should be looking for these deals and calling you.

When you find a potential bargain, call the listing agent. The agent will receive two shares of the commission if she sells her own listing. This extra incentive to put the deal together will have this agent working twice as hard to get it closed.

I made a $170,000 offer on a house listed for $225,000. I eventually raised my offer to $175,000, still short of what the seller needed to pay off the loan and pay closing costs. The listing agent agreed to pitch in part of her commission to make the deal work.

PAYING AGENTS WHEN THERE IS NO CASH FOR A COMMISSION

Sometimes there is not enough cash in the transaction to pay a commission. Most residential brokers are hoping for a check at the closing. When there is no money to pay them a cash commission, promise to pay them later, perhaps when you resell the property. You can back your promise to pay with a promissory note secured by either the property you are buying or another property that you already own.

The top agents in any town make a lot of money. They avoid investing because it is too much trouble. If you make investing easy for them, you may be able to turn things around and collect a check from them at the closing rather than write them one. Look at your agent as a possible investor. Even if they don’t have the money today, you flatter them by asking them.

Keep in mind that in a normal market, 60 to 70 percent of listings expire before they sell. If the agent is convinced that this one will not sell, he will be eager to make some deal to get paid something for his efforts, advertising, and so on.

One thing Warren Harding taught me was to follow the cash in a transaction. Agents often buy a gift for the new buyer and stay in touch with him. Wrong strategy. The buyer is broke. He just spent it all on the house. Stay in touch with the seller or the agent. They have cash in their pocket and may be potential investors, and the agent may bring you a deal.

BUYING ON LEASE OPTIONS THROUGH AGENTS

Often the best offer to make on a house is to lease it with an option to buy. How do you pay the broker when you are making a low down payment such as an option payment? Offer to pay the agent part of the fee when the lease/option agreement is signed and the balance at the actual closing.

You can go a step further and say to the agent and the seller that if you do not close on the purchase, the seller would agree to relist the property with the same agent when the option expires. In this way, the agent gets part of a commission now and will get another full commission when he sells it again.

Suppose that a house is listed for $140,000, and you offer to lease it for four years, paying $5,000 down as option consideration today. A 7 percent commission is $9,800. If the agent received 25 percent of that commission, or $2,450 today, with the balance paid when you exercise the option, this is still far better than not selling the house at all. If the seller is more anxious than the agent, then the agent may negotiate for more of the option payment.

USING THE DIFFERENT TYPES OF LISTINGS

The two commonly used types of listings are an open listing and an exclusive right of sale. An open listing is typically unwritten. With an open listing, the owner agrees to pay the broker only if she produces a sale, while the owner reserves the right to sell it herself without paying a commission. If another agent sells it, only that agent is entitled to a commission.

An exclusive listing guarantees the agent a commission if the property sells during the term of the listing regardless of who sells it. Exclusive listings are required by Multiple Listing Systems (MLS) and many of the big brokers. Many exclusive listings can obligate a seller to pay a commission to the agent if anyone they showed the house to (or even told about it) buys the house within a specified period after the listing expires. Read these listings carefully before you sign one or make an offer on a house bound by one.

A seller can exclude specific buyers, even from an exclusive listing. If you are interested in a house that a seller is going to list with an agent, have the seller exclude you from that listing. Then, if you buy, there will be no obligation to pay a commission.

Another type of listing, the exclusive agency listing, allows the owner to avoid paying a commission if he sells it himself but protects one agent in the event another agent sells it. It is not used as commonly because MLS generally will not accept properties listed this way.

If you ever list a property, use an exclusive listing to get the benefit of MLS exposure. You want every hotshot selling agent in town showing your house. Agree to pay the highest commission common in your area. The difference between 6 and 7 percent is not as important as selling the house quickly.

Insist on a short-term agreement. A ninety-day listing is as long as I would suggest. Read the fine print carefully, and remember to exclude any buyers with whom you are now negotiating. Be wary of accepting offers that are subject to the buyers obtaining financing or selling another house before they close on yours. These offers take your house off the market without compensation to you. If you do want to accept an offer subject to one of these contingencies, use one of these strategies:

1.   State that in the event that you receive another offer acceptable to you, the buyers will have the right to waive their contingency and close within thirty days or void the contract.

2.   Ask for a nonrefundable deposit of $1,000 that the buyers forfeit if they fail to close. This money will compensate you for taking the property off the market for a month. If the buyers need longer than thirty days, ask for more deposit money.

AGENTS CAN BE GOOD CUSTOMERS

Not all agents are rolling in dough. In fact, only the top producers make any serious money. Most are average consumers, struggling to pay their mortgage and car payments. I have both sold houses to and bought houses from such agents.

Many agents have trouble qualifying for a loan because their income is from commissions and is not predictable. In addition, some have credit problems. They are good candidates for a lease/option or owner-financing sale. Recently, I sold two houses that needed quite of bit of work to agents on lease/options. They can fix them up and then refinance them and pay me off.

I’ve bought many homes from agents. One agent has sold me his personal residence twice. When times are good, he buys a nice home, but he never gets emotionally attached to it. When cash gets tight, he knows that I will buy it and gives me a call. He knows that when he can’t borrow, he can sell.

As you develop trust with agents, they become repeat customers. They will bring you sellers or buyers and sometimes just refer business to you. An agent can’t make money from a buyer who has little money or credit. But that buyer may make a good tenant for you or even a lease/option buyer.

Likewise, an agent can’t collect a commission from a seller who is behind on her payments and has no equity. However, you may know how to buy that house, save the seller’s credit, and make a profit. I have had several calls referring these desperate sellers to me by agents.

ADVICE TO AGENTS WHO BUY PROPERTY

If you are an agent, don’t buy your own listings. You are the agent for the seller and cannot ethically make a good deal. Cancel any and all listings, whether written or implied, before making an offer. If you buy your own listing and either deduct your commission or receive it at the closing and later resell the property for a profit, you are likely to be sued by the seller. The seller will claim that all you are entitled to is a commission, but you made more. Therefore, the seller is entitled to the overage (plus attorney’s fees and costs).

Don’t pay taxes on your own money. When you make a down payment and then collect a commission at the closing, you are just getting part of your down payment back. Unfortunately, any commission you receive is taxable income to you.

Likewise, if you trade services for a down payment, the services you trade can be classified as taxable income. If you forgo a commission and take equity in the property, you have still earned that commission, and it is still taxable. When buying, do not participate in any commission.

SHOULD YOU HAVE A REAL ESTATE LICENSE?

If all you do is buy for your own investment, the license is not necessary or even an advantage. An agent must disclose that he is licensed when making offers. I never found this to be a problem, although others have. A typical disclosure may read: “John Smith is a registered real estate broker in the state of Florida and is purchasing this property for his own account with the intention of making a profit. Smith will not participate in any commissions paid in this transaction. Any listing, whether written, oral, or implied, between Smith and the seller is hereby voided. Sellers are advised to seek legal advice.”

The education available to agents is an advantage, although it is often designed to make you a better agent, not a better investor. If you do not have a license, don’t get one unless you want to work as an agent and collect commissions.

If you already have a license and it does not have a negative impact on your investing, keep it until it does. Most sellers in a hurry would rather do business with someone in the business—someone who knows how to fill out a contract, someone who does not have to go to a bank and beg for money, someone who will really buy their house. Having a license is not a hindrance when you are buying from someone who really needs to sell.

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