You purchased and sold your first investment property for a tidy profit. You celebrate and then you start thinking about the next one. You go through the finances, finding all the little details of which you hadn’t thought, and wondering how you might do even better on the next deal. You invariably will come to the question about how much money you gave up in agency fees.
In my area, the custom is that these fees amount to a massive 6% of the sale price! If you sold your property for $100,000 you would take home $94,000. Next, you start to think about what your agent actually did to warrant that kind of money. After all, you are the investor, you did most of the work in evaluating and finding the deal. The buyer needed a house anyway, why should you be paying his agent to work for him?
All of these are great questions and I’m not here to give you all the answers. The reality is that the system is set up to be the most service to the layman, who cares nothing for the business of real estate, who gets emotional about faucets and cracks, who wants the sale to go through tomorrow, who doesn’t give a rip about inspections, open houses, advertising, and negotiating. A good residential agent navigates the client through all of these issues, educates, councils, negotiates with the other agents, and helps you get the best price. Agents are great for the person who buys or sells once or twice in a lifetime or the person who does more but doesn’t want any of the hassle that comes with the deal.
For the rest of us, the residential agent serves as a bit of a middle-man. You will do the work finding the deals, or at least generating a set of criteria for your agent. The computer will print out a list of possible houses, and you will evaluate them. Any negotiating will go through the agent and you might begin to get frustrated that you can’t just have a conversation with the seller, or at the very least, her agent. You might feel like you did all the work, but the commission was the same: 6%.
And now you come to a choice: find the right agent, or become the right agent.
Finding the Right Agent
These people are out there. They usually have investing experience of their own. They can do all the annoying things about the deal that you cannot do (because you aren’t licensed) or that you don’t want to do. This type of agent can be found and is worth every penny of that commission. I’ve written about this before, so go back to Your Team…The Real Estate Agent for a review if you want to know more.
Becoming the Right Agent
This is what I chose to do. I don’t think either way is better than the other. Having a license and being a member of the local real estate association gives me a lot of benefits that I wouldn’t have otherwise. I can be nimbler in finding and making deals.
The Multiple Listing Service is a great tool to help you find deals. It is very easy to set up your own algorithm to find deals that meet your criteria. While the deals on the MLS are usually retail price this doesn’t limit you from finding deals by other means. It just opens one more door for you.
MLS also gives you the powerful ability to generate your own comparative sales (comps). This is arguably the most important benefit of MLS. In a few minutes I can get comps for a subject property and the search function is so granular that the comps are very precise in most cases.
If your area’s custom is that the seller pays 6% of the sale price, then the seller will pay 6% to the seller’s broker at commission. The seller’s broker will divide that in half and give what is now 3% of the sale price to the buyer’s broker. The broker is like the boss of the firm. The broker has negotiated beforehand with his agents (called Broker’s Associates, which is my state’s term for a real estate agent) a spit of the commission. This split will depend on how much work the broker does to help the agent make the deal (for instance, advertising, web site maintenance). Let’s say it is 25% to the broker and 75% to the associate. The broker then pays 75% of the 3% to the agent as commission. On a $100,000 deal this calculation is
6% / 2 = 3% Commission to Broker
3% * 75% = 2.25% Commission to Broker’s Associate
$100,000 * 0.0225 = $2,250 Commission to Broker’s Associate
It decreases pretty fast and everybody gets his cut, which makes it seem slightly slimy. Keep in mind, however, this has been set up for the retail deals and you may be able to negotiate with your broker for a better deal. You also don’t have to stick with the 6% commission, but if you offer less when you are selling your house, agents might not show your house because they will get less commission. While that would be ethically questionable at best, it probably will happen. Much larger deals usually have a lower commission rate.
Negotiation is quicker and easier. You no longer have an agent representing you and you can go directly to the other party’s agent with requests.
You will have access to meetups of other real estate agents and will gain contacts that can help you in your investment career.
I’m not an accountant, but if you spend most of your professional time in real estate there are some amazing tax benefits you can take. For instance, you can apply real estate losses to offset your ordinary income. This won’t work for everybody. I don’t get these because I’m still working my full-time medical job.
Getting your license is hard work. It’ll take 120 or more classroom hours and a big test at the end, depending on your state’s license requirements. You will need to find a Broker to work with and just like all the other team members you will have, it is important to find the right one
There will be fees, and they will keep coming. You need to be a member of your local Real Estate Association to get MLS access. You don’t have to do this if you have a license, but I would argue that without MLS access, you won’t be doing many typical deals, and it will be tough to demand a commission. You will need to pay the state licensing fees. If you live near a state boundary, you may have more than one state and association to keep current. You will also need to pay Errors and Omissions insurance fees.
Your state will likely demand you participate in continuing education. You can find great educational sources out there and this is a benefit. If you are like me, you might forget about these and then you are taking a bunch of courses at the last minute to meet the requirements. This costs time and money.
You are Held to a Higher Standard
This will take some getting used to. Your state will have requirements that you disclose to people that you have your license. The theory is that you might be able to get a better deal because you have extra inside knowledge that the other party doesn’t have and so they better be aware of that. In every bit of advertising for my property I need to disclose that I have a license. That statement might make people turn away because they think I might try to swindle them, or it might have no effect, I’m not sure. You will also need to be aware of fair housing laws (but you should do that anyway). If you make a mistake on your contracts it will be difficult to claim that you didn’t know any better because “you have been trained”.
There are many more pros and cons but these are some of the more important ones. Sadly, I won’t tell you whether you should get your license or not, but if you don’t mind the continuing requirements, I do think that the benefits are valuable. Do one deal a year and it will likely pay for all your fees. Do two deals and you make a profit. Do more deals and you can become wealthy.
Of course, you already knew that. That is why you are here.