Real Estate Agents

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If classified advertisements and real estate magazines give you a huge pool of properties to consider and the occasional phenomenal bargain from publicly available sources, then real estate agents offer you an ongoing stream of good recommendations that are not always out in the open yet. A real estate agent worth his salt will know what you are looking for, and not waste your time with properties that you would turn down in a hurry.

That brings us to the question of how you should go about choosing a real estate agent.

One: Never stick to just one agent. Why would you? One lone agent does not have access to every property on the market, and he or she does not get to hear on the grapevine about every deal that is coming up.

Two: Work with agents who are themselves investors. I know that sounds counterproductive, on the basis that if the agent were to stumble across a bargain, he or she is hardly likely to offer it to you. On the face of it that is true, but there is a limit to how many properties agents will buy (they have this constant dilemma between selling properties to earn a commission and buying them for the long haul). Most important, real estate agents who are themselves investors know what it is that you are after in a property. They will not waste your time telling you how gorgeous the view of the garden is from the living room, or how cozy it seems at night, or how the deli up the road has great liverwurst on Sunday mornings. They will provide you with the things you want to know—growth in population in that area, growth in rentals, vacancy rates, property taxes, and other such factors.

So how do you find a good real estate agent? The simple answer is to interview them. You may receive a recommendation from someone, but if not, you can always try some at random. Just as looking at properties is a numbers game, so is finding a good real estate agent that you are happy to work with. You might interview fifty to find four or five that you can work with regularly for a long time.

One exercise I get the mentoring students to do is go to a real estate office where they have never been before (any office picked at random in an area where they have determined they want to invest), and ask: "Who would be the best agent to deal with concerning investment properties?" If there is a lot of foot-shuffling and blank stares, go to another office. But if someone volunteers or is volunteered, ask him or her the simple question: "What is the best investment property that you have on your books at present?"

If he identifies one, then you are 10 percent on your way to finding a good agent. I say only 10 percent, because you still have to ask the following qualifying question: "Why?" In other words, why does he think that the property he has just pointed out is the best investment property on his books.

If he says: "Because the decor is so tastefully done" or "The neighborhoods are so lovely," then you have to move on. But if he says: "Well, this property sold five years ago for $328,000 or about the same as similar properties at the time. Today it is on the market at $415,000, but other comparable properties have been selling for over $500,000. What is more, the owners have received approval to pop the top and add another story, and rentals in the area have been strong. Vacancy rates are uniformly low." Then, whether or not the property is a good deal for you, you know you are dealing with an agent who can speak your investor language. This will make life a lot easier for you.

Those real estate agents who do not speak your language can make life very frustrating for you, and can seem to inhibit your ability to invest. Take heart! They also make it frustrating for your competition!

This was brought home to me in the early 1990s. I had spotted a newspaper advertisement for a block of three shops in a popular seaside community. The quoted yield seemed high, so I asked the agent to confirm that a local tax had not inadvertently been included in the quoted rentals. She replied (erroneously) that the tax did not apply to commercial property, and suggested I visit the butcher in the end shop, as he was the owner and seller.

I duly visited him in his shop. There were no customers. To start off with, I asked him why he was selling the building, and he replied that he was far too busy to talk and referred me back to his real estate agent. So much for making it easy for me to buy, especially when you consider that his business was in trouble (it went into liquidation soon after I bought the building).

I went back to the agent, and said that I had done my own research, and that I was ready to put in an offer. Could I submit it that afternoon?

This was the middle of December, and her answer stunned me. "No," she said, "I cannot do that, as I am packing to go away on vacation."

"Wow!" I said, "must be some vacation. Where are you going? To Europe for six months?" She replied that she was only going down the road for a few days, but was adamant that she was too busy.

"Great!" I thought. She is going away, and will not come back until just before Christmas when everything is shutting down. Furthermore, the owner is hardly likely to sell the building without her, given his attitude during my brief visit to his shop. Therefore, their perception of the pool of buyers will be artificially low, and their expectation of price will be diminished accordingly.

She did not submit my offer until January 11, by which time I had dropped it another couple of tens of thousands. It was the only offer they had received. I fully expected them to counter, but it was accepted as is.

Sometimes, when the other side seems slow, not focused, or not motivated, it can really work in your favor.

"Well, what about the butcher who went under just after you bought the building?" I can hear you ask. Good question. Before I heard that he had closed his doors for the last time, I got an inquiry from a woman to say that the shop seemed empty, and that it would make a great delicatessen. Could she take on a lease? At first I thought she must have been talking about another building, but it soon became apparent that she wasn't: The butcher shop was indeed empty. She signed up for a 12-year lease, and spent more than $30,000 renovating the premises. It is still a delicatessen/coffee shop to this day, and yes, as with the other properties discussed earlier, I still own it. Why wouldn't I? It still generates passive income, its income and capital value continue to go up, I have refinanced it to pull out some money, and by not selling, I have no depreciation recapture tax issues or capital gains tax issues to worry about.

Another example of how a "slow" real estate agent can work in your favor concerns a funeral parlor I came across in a country town. While I had been out of the country, this particular property got passed in at an auction at $195,000. It was a custom-built funeral parlor, which meant it had a waiting room, a chapel, a slumber room, a viewing room, a mortuary, and a chilling room (no marks for guessing what they kept cool in there). However, the operators had left the industry, and the building was empty. What else can you do with a funeral parlor? There are not many alternative uses that I could think of. A theme restaurant (vegetarian, of course) would seem very distasteful.

So I had someone call every funeral operator in the country, to ask them if they wanted to expand into this town. Most said no, some laughed out loud, and one said: "Yes! I've always wanted to operate in that town."

I signed the funeral operator up on an agreement such that if I should become the owner of the building, he would then become the tenant. Already, the building was worth more to me (with a committed tenant) than it was to the seller (who had only an empty building).

Anyway, I went to see the real estate agent involved. It was a cold winter afternoon when I drove into town, and when I got to his office, his receptionist told me that he was busy, and would be for at least another half-hour. I told her I would be back, and spent the next half-hour walking in the rain. When I got back, I was told that he was still on the phone, and was likely to be so for some time more. I replied that that was fine, and that I would simply wait in the reception area.

Eventually he came out, and asked me gruffly what it was I wanted. I replied that I wanted to look at the funeral parlor premises. We arranged to meet there in yet another hour. More time in the rain.

Sometime during this tour, I think the agent realized that I was serious after all about the building. He asked me if I wanted to go through it again, perhaps with him, or perhaps on my own. I replied that I had seen it, and that we should get back to his office to write up a contract.

"You can't do that!" he exclaimed.

"Because the seller wants to lease a small portion of another building on the property, and you would have to figure out a rental value for that portion."

I told him that I already had a figure in mind, and that we would just include it in the wording of the offer. I asked him to start writing up the offer. He hesitated, and seemed unable to fathom my speed or direction. So I offered to write it up myself. He agreed, and his relief was obvious.

It seemed to me that the agent was just not ready for a sale. Who on earth would want an empty funeral parlor?

Of course, for me it wasn't empty. I acquired the entire property for a net figure of $170,000. I told the bank that that's what I had paid for it, but that I now had two tenants. One, the funeral parlor operator, was signed up on a 10 + 10 year lease (ten years with a right of renewal for another ten years), and the other, the seller, was signed up on a 6 + 6 year lease, for a total rental of $30,500 per annum. Therefore, so I told the bank, it might be worth more than what I paid. The bank sent in their own appraiser, valued it at $240,000, and gave me a 66 percent mortgage of $160,000. So in this case, I had only $10,000 of my own capital tied up in the property, while I was receiving $30,500 in rent, less $15,500 in mortgage interest, for a net $15,000. While the net yield on the purchase price was a "modest" 17.94 percent ($30,500/$170,000), my cash-on-cash return was in fact 150 percent ($15,000/$10,000). Once again I was pulling more out of this property every year than I had put in as a one-off at the beginning.

Apart from showing that even an empty funeral parlor can offer some attractive passive income streams, the point here is that the attitude of the real estate agent did not help to make a sale, which of course worked in my favor. It's a bit like when there is a lot of red tape to deal with: It makes it difficult to do business, but it also makes it difficult on your competition. So long as you have some degree of perseverance, you can easily leave competitors way behind.

When the people I deal with are fast, knowledgeable, and efficient, I am grateful for the ease with which the work at hand can get done. And when the people I deal with are, to put it politely, in the wrong profession, then I am grateful that most of my potential competition packs up and goes away. You win either way. This is a much healthier way of looking at it than saying that astute agents will never sell you a bargain (as they would buy it themselves) and that slow people will never offer you a bargain (as they couldn't find one if they wanted). Once again, whatever you believe is what will manifest itself for you.

To finish off our discussion on real estate agents, bear in mind that just as you want to deal with an astute agent, a good agent will like to have an astute investor to work with. People who buy homes to live in tend to buy on average only once every five years (and most of them own only one home to live in at a time). But an investor may buy one a month, or three in a good week. That is more interesting (financially!) for a real estate agent. Once you have found a cluster of astute, like-minded real estate agents, you will find that you tend to stick with each other for a long time.

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