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Tuesday, September 05, 2006

Real Estate Investing Survival Guide - Protect Yourself from Realtors, Agents, Investors and Sales people

This is a bit of a continuation from the prior post so be sure to read it if you haven't already. I was 
discussing the need to really and truly understand what you are getting into...but DON"T rely solely
upon the advice of someone who is trying to sell you something.

It's natural formany people to seek out expertise when making an important decision-- we go to a doctor when we need medical advice and we go to an attorney when we need legal advice,
so most people are under the impression that the real estate sales person they are working with is the expert. Let's consider a few things. The doctor requires years and years of college, studying and money
to complete graduate school...so does the attorney. So does your child's school teacher to a lesser degree,
your accountant...ditto.  But, it takes VERY little time and money to sell real estate. I took the class
myself but didn't become licensed...I just wanted to find out what it takes to become a real estate sales 
person. It took about $500 and two weeks in a very dull classroom. Then you take a very very easy examination. That' it! Chances are that your beautician or hair stylist was required to invest hundreds of more dollars and hundreds and hundred of more hours to cut your hair than your real estate salesperson is required in order to sell your house or help you buy your next investment property!

So-first lesson. Don't count on your salesperson to be an expert. They are simply a sales person and the only way they get paid is if you or someone else buys. Who do you think they will have the most interst in serving?

That leads to a few more items that any novice investor should be aware of. First, real estate sales make money when a property sells so you should always keep their primary motivation in mind...to make a profit. That's fine as long as it doesn't conflict with your needs or motivations.

Before we go further, let's look at how real estate sales people are paid. Typically, a house is listed and a commission is set...it used to be 6 or 7 percent but now there is a wide variety of fee's depending upon who you list with. Let's say you go with a traditional listing and a 6% fee. Just to keep the numbers easy, let's say you've seen houses going up up and up so you call a realtor who sends out a lot of postcards and he tells you he's listing homes in your area for 200,000. You sign the contract and agree to pay 6% if it sells.  Now, most listings go like this...the listing agent and his broker...the one you just signed an agreement with, will get all 6% if they list and sell the house. But, often someone else drives by or another realtor has a client 
searching for a home in that area and bring a buyer...if another agent brings a buyer then the listing agent/broker get 3% and the selling agent/broker get 3%....they split it.

Now, here is where some people get into trouble. Some agents do nothing more than try to get people to list their homes with them...the list as many as they can but then do nothing more to sell your home. They just hope and wait that someone else brings the buyer. It's strictly a numbers game for them...list as many as they can and then take their share when/if the home sell. Because they list so many, they can make a handsome profit...and they will often tell a prospective seller anthing they want to hear just to get the listing!  They figure the seller will eventually drop the price to snag a buyer and they get their commission without doing any addittional work.

Remember one thing--ASKING AINT GETTING. Don't believe everyone simply because they name a number that sounds good. Demand comparisons  of SOLD properties not just other listings.

Next - Demand copies of the agents track record...how many of their listings did THEY sell? Find an agent that will actually perform the duties which you are paying them for! Be cautious of agents who simply try to list any house and tell you any price...

Okay, closely related to this is the decision to use a full service [that usually means full fee] versus a discount agency where you might pay less than 6 r 7% commission. Since many fee's are actually split [and then they are often split again...the saleperson has to split their half with their broker in many cases] then a property with only a 4% commission structure might NOT be a good idea because the real estate salespeople might be less inclined to show your property since their commission is lower than someone elses full commission property. What might seem like a good idea can become costly if they pass your property by in favor of one with higher commission rates so be sure to consider the advantages and disadvantages carefully.

On the other hand, I've listed quite a few properties and had some agents do a good job...and many more do a terrible job. Often the only thing you need is access to the MLS and a sign....if that is your case then consider a low cost do it yourself discount agency. Just consider all options and pro's/cons.  It doesn't make much sense to pay someone thousands and thousands for putting up a sign, filling out a few forms and submitting to mls. That's all some are doing...if that's it then don't pay for more because you arent getting more.  Ask to see everything they will do to promote your house and get it in writing. Remember, you can also demand shorter contract lengths etc...I like to go with a 3 month rather than 6 months but that's my personal preference.

Now, about sales people versus expertise. Here is something that I have found very interesting...up until a few years ago very few of the real estate sales people I dealt with had any of their own investment properties. Over the past few years, more do but they are often as new and clueless as you are...they are riding the same boom and bubble but really have little more experience or expertise than yourself in many cases. The fact is, they are SALES people just like the guy at the car dealership. When you go buy a car you dont expect the salesman to fix your car....he's not a mechanic although some car salesman might also be good at car repair it's just like anyone else...some are and some arent'. It's the same with real estate, most are sales people and that is how they make their living. A few also invest but not as many as you may thing.

So-First, don't assume the sales person knows more than you. They are simply trying to make a sale and get paid.

TWO-IF they are investors then be sure to ask yourself why they haven't taken the deal if it's such a good one! After all, they could potentially get a reduction from their own commission so it would cost even less for them than you.

So - If they are NOT investors then do NOT rely upon what they tell you a house "could" rent for...yeah, anything COULD happen but what is the most likely to happen? If they ARE investors then why aren't they buying?

Okay, next and this is simple but people overlook it all the time. Let's say you are looking at a house that's listed for $175k. You like it but you know it's priced to high [probably by some listing agent who told the seller he can get any price he wants]. You want to offer 150k. Now, the sales agent wants to make a sale but since they are paid on commission, they want to keep that sales price as high as possible...BUT, it's also a numbers game with sales so they don't want to hassle or spend a lot of time on one deal when they could be out making more deals. This works against the buyer and seller...a seller might feel pressured to make a sharp reduction to sell a house or property that could result in thousands or even tens of thousands less profit [but not that much less commission for the sales agent....consider this, at 6% commission split in two...for every $10,000 dollar reduction the seller looses the agent only looses $300 to $600. Likewise, for every $10,000 more a buyer pays, they only make $300 to $600 more in commission]. Most sales agents simply want the deal to close in as little time as possible. Do NOT assume or feel pressured either way...it's worth YOUR TIME in buying or selling to negotiate as much as possible but it's NOT worth most agents time. They just want to move on to the next deal and get you or the other party to 'give in' as soon as possible.

The above example is bad enough if you are a seller but remember, if you are a buyer then that $10,000 extra will usually equal even more--often double to $20,000 depending upon financing and interest rates.


Okay, that's it for today, sign in tomorrow for more updates. Lots of good stuff to come including making sense of mortgages, special programs for investors that you DON"T hear much about, how I bought properety for penny's on the dollar [literally...and I'll show you how to look it up to verify it AND how to do it yourself. No gimmicks!], some interesting facts about the so-called "investors" that are really pushy sales-people...and how YOU can look up what they really bought, paid and sold for property [like the guys pushing big preconstruction deals who don't own any for themselves!]....all kinds of good stuff! Be sure to check back or sign up for the feed!




 

Real Estate Investing Survival Guide

Congratulations! Chances are if you are reading this then you understand the potential of Real Estate to
enhance your wealth...and it's true, millions of people have used real estate investing to supplement
their income, create passive streams of income, retire early or even become very wealthy. On the other hand,
real estate is often a confusing and potentially high risk endeavor IF you don't understand what you
are really doing...or worse, if you happen to fall prey to the many scams, frauds, con artists and
others that take advantage of guillable newbies.  If you have already invested in real estate or are thinking of investing, take some time to read this article first. If you enjoy it, pass it along.

A little about me. I'm probably a lot like you. I became interested in real estate several years ago and have bought/sold homes and vacant land. I am NOT a realtor or broker but I have worked in the marketing area for realtors and brokers and know a few of their less than impressive tactics...tactics that disgusted me to the point that I quickly broke off that relationship. I've also been "taken" once or twice by less than ethical brokers and have known others who were as well. All in all, I've made a nice profit despite the learning curve and dealing with a few shysters.  I've also met some incredible people in the real estate field and several who helped me along. I believe in passing it along soooooo - for those of you who are really interested in delving into this, feel free to keep reading!

First - I'm NOT SELLING ANYTHING. I won't be selling anything at the end of the article either. 
I don't have anything to sell so that keeps it simple.

Second- Use common sense. What worked or didn't work for me may or may not work for you. Every situation is different, every town and location is different.

Third - Trust YOUR Instincts but educate yourself. Do NOT leave anything to 'chance' or rely upon others to have your best interest at heart. Unfortunately, there is a lot of money to be made and where there is money, there are copy-cats, shyster, crooks and just plain ignorant people. You will probably encounter most of them at one time or another but when dealing with a large dollar purchase, you don't want to make a mistake that could cost you your financial future.

Four- Understand what you are buying AND why. This sounds simple enough but a closer look will usually demonstrate that many people don't understand what they are buying or why. Do you want to hold the property for the long term? Do you want to flip it? If you flip it are you calculating all fee's including transaction costs, realtor, vacancy, repairs, income taxed at normal rate [remember, if you hold less than a year then you do NOT qualify for capital gains tax...and it very well might bump you into a higher tax bracket!].  If you intend to hold it for more than a year, what is the rental market like in your area?

Here is a "caution" area...often potential investors rely upon realtors or others who will usually say something like "This house could/should rent for xxx per month" which sounds great...ASSUMING you can rent it at all, and assuming you do not have long vacancies, assuming you don't have any repairs due to tenant neglect or malfeasance, assuming you do all the work yourself and don't hire a property manager, assuming your taxes and insurance don't increase etc...

So, by this point you are probably wondering about numbers.  Here are a few quick examples.

Let's say you are thinking about buying a small single family home to use as an investment property. I'll use my own properties as an example so you have a "real life" situation. I'm in Florida which has been a VERY high growth area but I purchased right before the current boom.  My properties are all fairly similar so I'm just going to use one as an example. It's a 3/2 in a rapidly growing area. Built in the late 90's, about 1200 sq ft living area, on 1/4 acre subdivision very conveniently located. It's in excellent condition and new homes are still being built in the immediate area.

The PITI [principle, interest, taxes and insurance] were originally about $650 per month and I originally was able to rent it for $750 per month. The first tenants were military and broke the lease, left a few repairs but nothig major [they had a cat
which was NOT supposed to be allowed]. Meanwhile taxes and insurance went up so PITI went to about $700 per month. Vacancies in the local area began getting a bit longer so between a few minor repairs, gasoline, re-advertising etc, I was basically breaking even when I re-rented it.

Next lease was also broken and then we experienced a longer than average vacancy to find a qualified tenant. Making a couple mortgage payments resulted in a loff for the entire year but no big deal. Eventually, to fill the vacancy we had to lower the rent to $650 per month...meanwhile taxes and insurance increased to about $800 per month total.

Meanwhile, the boom has taken place and the exact same home is being built and sold for over 200% more than the price of this house....many by investors who were under the impression that the house "should" rent for $1200 a month or more. Since their base PITI is a minimum of 1k per month...they NEED it to rent for that to break even [with a property manager etc]. Unfortunately, most people who could buy--did. So there is a glut of vacancies and a glut of unqualified tenants...putting one in your home is a HIGH risk proposition. Just ask me, I did and they did over 8k in damages...lesson learned!


Now, if you had bought with the thought of renting then chances were, you were going to eventually loose some money in the short term so then you begin to consider selling. Unfortunately, if you purchased the rental for the new going rate, you would have to sell for a MINIMUM of about 10% OVER your purchase price just to get near even...realtor fee's and closing costs. That wouldn't count mortgage payments you made, down payment to take out the mortgage etc...much less any repairs or fee's.  IF you have any profit left over, then it will be taxed at ordinary income rate AND might put you into an even higher tax bracket overall. Even people who think they are making a profit are surprised to learn how little it was after everything was taken out!!

Okay, but let's say instead you decide to hold, you would be competing with people who are able to offer a lower rent cost....again, most people buy when they can so you must know what working class who rent can afford...and today, renting is VERY affordable because the market is literally flooded with "investors" who are desperate to rent out their homes to offset costs.

Here are a few facts from the US government... nearly 40 percent of homes were either 2nd /vacation homes OR investment purchases. Now, that doesn't sound to bad until you realize that over 65% of people now own their own home...it's the highest in history. So, if 2 out of ever 3 people already own their own home, and then a LOT of those people own more than one [and many own a LOT MORE THAN ONE home!!!], then it stands to reason there are a LOT of homes to choose from.  Statistics demonstrate this as according to government data, vacancies are VERY HIGH!


So, what about the so called housing shortage you hear about? Well, listen closely because it's always said very specifically...it's a lack of AFFORDABLE HOUSING!!! And what qualifies as affordable housing? By government standards its low--very low. To low for me to break even on the house in the example above and definetely far to low for the new buyer to get anywhere near breaking even.


Okay, that's it for today, sign in tomorrow for more updates. Lots of good stuff to come including making sense of mortgages, special programs for investors that you DON"T hear much about, how I bought properety for penny's on the dollar [literally...and I'll show you how to look it up to verify it AND how to do it yourself. No gimmicks!], some interesting facts about the so-called "investors" that are really pushy sales-people...and how YOU can look up what they really bought, paid and sold for property [like the guys pushing big preconstruction deals who don't own any for themselves!]....all kinds of good stuff! Be sure to check back or sign up for the feed!