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Lesson
2
Using
A Estate Broker
Why Use An Agent
 To use or not to use an agent, that is the question.
While buyers and sellers alike often resent paying real estate agents, a real
estate investor should think twice and carefully consider any decision to buy or
sell investment property
without competent agent representation.
As will be explained below, there is
often no benefit to a buyer to not use an agent and is almost always necessary for larger
properties.
We are primarily concerned in this course with the purchase or sale
of commercial and multi-family residential properties. However, some of the following information
will also apply to single-family homes. The
average person can usually, with proper education, buy or sell small
residential rental properties of one to several units on their own. The
marketing of duplexes, for example, is quite similar to that of single-family
homes where inventory is relatively available to the general public
and analysis is similar to that for a rental house. However, it is our best
advice is to always work with
professional agents the first time around. In almost every real estate
investment, even a simple mistake can be very costly.
Buying and
selling commercial (includes industrial for purposes of this discussion)
and multi-family residential properties is more
complex and sometimes has pitfalls for even the sophisticated investor. As
a consequence, most buyers and sellers of commercial and multi-family
properties, even a very experienced one, are usually represented by a fulltime,
professional real estate agent.
First: most commercial or multi-family
residential properties that are for sale will be listed
with a broker. That means that a real estate sales commission will be paid in the transaction
whether or not the buyer is also represented by an agent. Furthermore, the full
commission will usually be paid, so the decision of a buyer to avoid an agent of his own
will usually mean that the seller's broker will simply not share the commission with a
buyer's broker.
There is no benefit to you to go into the
investment decision naked since a broker's commission is likely to be paid
either way.
Second:
commercial and multi-family are not usually marketed in the same manner as are
single-family homes. For Sale Signs are not typically placed on
commercial properties or
multi-family
residential properties. Furthermore, many real estate investment
opportunities
are not advertised in local newspapers. Marketing is often done
between real estate agents
who know the "wants and haves" of the area through networking groups,
with the agents utilizing their own private client lists.
Accordingly, it is unlikely that the lay person buyer will have
knowledge of, or access to, more than a small part of the ever-changing
available inventory. Likewise,
the lay person seller may be unable to properly expose his property to
serious
potential buyers.
Third:
a buyer who chooses not to use an agent may have difficulty in
determining the real value of an investment property and end up paying too much for the
property. A seller without an agent might either price his property too
high and not receive offers or price it too low and sell for less than market
value. It is usually relatively easy for the lay person to get
necessary information about single-family rental properties because the most
import data are (1) the square footage and/or number of bedrooms and baths and
(2) the
sale prices of comparable properties, which are usually available from the tax
assessor's office, and (3) the market rent for similar properties is readily
available by calling on "for rent" signs and reading classified ads
about similar properties for that are for rent in similar neighborhoods.
 It is much more difficult to obtain the necessary information regarding commercial
and multi-family residential properties. Even when one can obtain the
sales price of similar properties, one cannot easily obtain important
details. The types of units; condition of interiors; operating expenses; and terms of existing
leases are all very important in determining value.
The
market rent for commercial space is highly variable and dependent upon a number
of factors. They include, but are not limited to: build-out costs,
signage,
property taxes, insurance, glass replacement, building and parking lot
maintenance, even light bulb and filter replacement, but there is much, much
more. The information necessary for proper analysis is
often difficult, if not impossible, for the lay person to obtain, but is
usually available to real estate professionals. Furthermore, even when the
information is in hand, its analysis and its application to a specific property of
interest is often difficult for the non-professional.
How To Select An Agent
For the purchase or sale of commercial properties or multi-family
 residential
properties, it is important to use an
agent with significant commercial or multi-family experience. An agent may be very
experienced and very successful at buying and selling single-family homes, but
it is likely that they know little about the intricacies of
more complex properties. For commercial and investment properties you should, if
possible, even select an agent who
has experience in the particular category of property in which you are
interested. There are important differences among multi-family, retail, office, and
industrial properties.
The best way to select a real estate agent is the
same as the best way to select a dentist, lawyer, or veterinarian; by having
personal knowledge of the individual and of their abilities and experience. The next best way is to get a referral from a trusted acquaintance who has the
personal knowledge.
If neither is
possible, for example because you are new to the area, the alternative is to do
some research on your own. Determine who is successfully listing and
selling the type of property of interest in your area. There are a number
of ways to do this including advertising, newspaper stories and talking with
real estate professionals like property managers, lawyers and CPAs.
The worst way to choose an agent would be to
choose one at random from the yellow pages. It is relatively easy for
anyone to obtain a real estate license in even the most highly regulated
states. Real estate agents are turned out at even higher
rates than lawyers in this country. Additionally, most seasoned professionals
are not likely to get caught up in the "mine is bigger than yours"
yellow pages ad contest. The pros make their money by who and what they know,
not by an ostentatious show.
If nothing else, select two or three large
successful firms in the area, utilizing the size and appearance of their offices
as criteria. Interview each firm's designated broker, if he is taking new
clients, or his recommendation as to who is the most qualified. Make your selection of the candidates based on the interviews and the agreement they want you to sign.
Is the agent
(and his broker) properly licensed? Have any complaints been filed against
either? Check them out via a phone call to the state's real estate license
regulatory agency or on the agency's Web
site.
The
Broker agreement does not have to be some preprinted form that locks
a client into an exclusive agent relationship with one broker for an extended
period. Negotiate everything and make sure you have an easy way out of the
contract if the agent doesn't produce satisfactorily.
You Have An Agent, but Retain
Control
Now that you have your very own agent
(we assume you have a good one) you cannot sit back and wait for close of escrow.
Not on your pocketbook! Even when you have a real estate agent representing you as buyer
or as seller you should remain actively involved and remain in control.
Remember, the agent usually makes the same amount of money whether you make a
good decision or a bad decision, whereas a bad decision can not only mean
reduced profit, but can even cost you additionally beyond the loss of your
entire capital investment. You should consider the agent an assistant,
even a tool. You must do your own due-diligence. Never turn the
decision-making over to the agent.
And You're A Seller
If you are a seller, it is important that
your agent have all necessary information and documentation about your
property. This includes not only the positive value-adding things, but
also any material defects. Material facts that might
affect the decision of a buyer to purchase the property must be disclosed. To not do so can leave you open to litigation if it is shown that you had
knowledge of a defect discovered later.
When the offers come rolling in, do not depend
only on your agent's analysis of purchase contracts that are received.
- Read the document yourself and be actively involved in writing counter
offers.
- Be sure that you understand all
implications of every document that you sign.
- Be sure that the contingencies are
reasonable, have reasonable time periods, and are not such as to make
tying up your property a waste of time.
- Remember that your property is essentially
off the market once you accept an offer. It is not unusual that
contingency periods can mean that your property is off the market for 30
to 40 days with no certainty that you have a deal. Although it is
not uncommon that the seller may still be allowed to take backup offers,
in reality most buyers and their agents will not put the required significant energy
into making them unless the market is extremely tight and there are no
other properties on which they could make offers instead.
And You're A Buyer
Even though you have an expert as your
agent, you remain your own best attorney and
accountant. No one has more at stake than you. Using the resources on our site and other references, learn
the details of a purchase and apply them as you go.
- Be personally involved with your agent in writing the
purchase contract document.
- Be sure that you understand all
implications of every document before signing.
- Be sure that your offer to purchase has
adequate contingencies covering financing, leases and other documentation,
physical inspections (e.g., roofs,
heating/cooling systems, plumbing, electrical, etc.), leases, and other matters.
- Consider requiring a survey if there is not
documentation regarding a previous one and/or extended coverage title
insurance.
- If there is any suspicion regarding
potential environmental concerns, be sure to require a Phase 1 report, with
contingencies to cover any resulting problems.
- Consider hiring contractors to inspect
roofs, heating/cooling systems,
plumbing, electrical, etc. It could be a couple of hundred dollars
well spent.
- Read every lease and other document related
to the property.
- Be sure to use estoppel certificates that
accurately reflect the lease copies that you have been provided.
Bottom Line: ___________________
What
you don't know can hurt you. The potential problems and pitfalls inherent in any kind of investing
are certainly present in real estate. However, careful and professional
analyses before you buy or sell will usually make real estate the
safest place to keep and grow your money.
This is the age of specialization. No
one can know everything there is to know about anything, let alone about everything. As a real estate investor, you should select the type of property you
want to learn to live with, choose only investments that fit your criteria,
don't hurry, and select your broker that same way.
Above all else, completing this e-course will
provide information that will help you make the proper decisions as well as
retain control over the deal.
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