John Schaub's Strategies and Solutions -
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#9803 March/April

WORKING SUCCESSFULLY WITH REALTORS

The best buys I have ever made have been through Realtors. There is a misconception that Realtors buy all the good listings. Not true. In fact, any informed Realtor knows that it is a conflict of interest to buy his own listing. An agent does not represent his client's best interest by stealing that client's property. 

One of the country's leading Realtors was Warren Harding. Warren taught thousands of people tax free exchanging and estate building. He left this world for a better place early this year. Warren was a friend and mentor to me, and to many, who today teach others. He was a master of the real estate business and the best salesman and negotiator I have ever known.

Warren had great confidence in his own abilities, and was able to instill that confidence in others. He started Exchangor organizations in more than 16 states and in hundreds of towns. He was the founder of the Academy Of Real Estate, a nationwide exchanging network. This issue is dedicated to Warren, whose legacy is his many successful students who are now helping others.

TRAINING REALTORS TO CALL YOU WITH GOOD DEALS

How can you convince Realtors to call you when they find a good deal? I suggest the carrot and the stick approach. The carrot: I tell Realtors that if they bring me a listing that meets my criteria, I will always make them an offer. Now, for that offer to be good for the Realtor, the buyer has to pay enough down to pay the commission.

I carefully explain my criteria. Warren Harding taught me that the people in the transaction were as important as the property. I tell agents that I am looking for an empty house, or a house owned by sellers who need to sell this week. I know that anyone who owns an empty house is getting no benefit from it and is probably worrying about it. These sellers are the most motivated to sell.

I define the size and price range house I favor, but tell them, "If the seller is anxious enough, I will look at anything." I buy and sell several houses a year that I would never buy as an investment. These houses are available at far-below-market prices or on terms that guarantee me a profit.
BUYING BIGGER EQUITIES

When I started my investment career, I would look for houses listed just a commission above the loan balance. My reasoning was that these sellers were probably 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. 

I did buy a few this way, and identified other houses that I would buy for the loan balance after the listing expired. There are two weaknesses with this strategy. First, you rarely buy far below the market. Secondly, the Realtor doesn't remember you fondly, as it is unlikely that he was paid a full commission.

As I grew wiser, I told Realtors that I was looking for houses with bigger equities. This gave me more room to negotiate a better price, and it increased the chance that the Realtor would get paid a full commission. I stressed that I had the ability to make a quick decision and could close the sale in a week or less. This got me a lot of calls in the last days of the listing period (a great time to make an offer - both the seller and broker are under pressure to make a deal.) However, I explained that I had to buy below the market or on terms that would allow me to make a profit.

The stick in my carrot-and-stick approach is this. I tell Realtors that if I find a desperate seller, and the broker with the listing has not called me, then my offer may not include enough cash to pay their 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 brokers and salespeople. When you spot a house or ad 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. This agent will receive two shares of the commission if she sells her own listing. This extra incentive to put the deal together will have them working twice as hard to get it closed.

I made a $170,000 offer on a house listed for $225,000. We eventually raised our 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 their commission to make the deal work. 

PAYING AGENTS WHEN THERE IS NO CASH FOR A COMMISSION

When exchanging properties, there is often little cash in the transaction. Exchange brokers learned to be creative in collecting their commissions. Some would go on title for part interest in the property. Others would agree to carry back a note for the commission. Others would accept other property, or even an option to buy another property, for their commission.

Most residential brokers are not this creative. They are hoping for a check at the closing. When there is no money to pay them a cash commission, offer a note. The note can be secured by either the property you are buying, or it may be another note that you already own. 

Some brokers 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. 

Suppose you buy a listed house, offering to take over the loan balance, but have no cash to pay the commission. However, you own a $10,000 note that was created when you sold anther property. You owe the agent a $6,000 commission. Instead of cash. you offer the agent your note at a discounted price of $8,000. He agrees to accept the note, but is being overpaid. You ask for and receive his $2,000 check to close the deal. 

From your perspective, you have just bought a new house with your note, and received $2,000 cash back. From the agent's perspective, he has just collected a $8,000 commission (the $10,000 note less the $2,000 cash he contributed) on a hard to sell house. 

Keep in mind that in a normal market, 70% 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, etc.

Of course, you could offer the same agent an empty lot or a car or a boat that you own, but no longer want. If the agent would make a good long term investor, ask them to put up the money for the down payment on this house or another one. 

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

BUYING ON LEASE OPTIONS THROUGH REALTORS

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 like an option payment? I try to get the agent part of their fee at the closing and the balance when I buy the house. I even go a step further and say to the agent and the seller that, if I do not close on the purchase, that the seller would agree to relist the property with the same agent when my option expires. That way the agent gets part of a commission now, and will get another full commission when he sells it again.

Suppose 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% commission is $9,800. If the agent received 25% of that commission, or $2450 today, with the balance paid when I exercise my option, that 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.

DIFFERENT TYPES OF LISTINGS - WHICH YOU SHOULD USE

There are two commonly used types of listings, open and exclusive right of sale. The open listing is typically unwritten. With an open listing the owner agrees to pay the broker only if he produces a sale. 

The exclusive listing guarantees the exclusive agent a commission if the property sells during the term of the listing, regardless of who buys. Exclusive listings are required by 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 ever 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 them 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 as commonly used because MLS will generally 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 six and seven percent is not as important as selling the house quickly.

Insist on a short term agreement. A 90 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 buyer obtaining financing or selling another house before they close on yours. These offers take your house off of 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 you receive another offer acceptable to you, they will have the right to waive their contingency and close within 30 days, or void the contract.

2. Ask for a non-refundable deposit of $1000 which they forfeit if they failed to close. This money will compensate you for taking the property off the market for a month. If they need longer, ask for more money.

BROKERS CAN BE GOOD CUSTOMERS

Not all agents are rolling in dough. In fact, only a few 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 Realtors. 

Many agents have trouble qualifying for a loan because their income is from commissions and 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 broker 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 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 his 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 REALTORS WHO BUY PROPERTY

Don't buy your own listings. 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. They 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.

TO HAVE OR NOT TO HAVE A REAL ESTATE LICENSE

I obtained my real estate license while still in college. I was one of the youngest real estate brokers in our state at one time. I kept my license, took advantage of many of the courses offered to Realtors, and even taught a few. The experience of working with other brokers and agents was eye opening. I was amazed by the fact that most did not invest in their own product.

When I took Warren's class in 1973, he opened my eyes to investing for my own account, and I never looked back. I collected my last commission in 1976, and put my license inactive. A couple of years later, I tore it up. I have never regretted that decision.

If all you do is buy for your own account, the license is not necessary or even an advantage. An agent must disclose that they are licensed when making offers. I never found this to be a problem, though 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 Realtors 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 now have a license and it does not negatively impact your investing, keep it until it does. Most buyers in a hurry would rather do business with someone in 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.

HARDING'S PLEDGE

At every Academy meeting Warren Harding would lead us in the following affirmation. I swear that I will not downgrade myself or anyone else, and furthermore that I will not complain to anyone who cannot do something about it. This is my solemn obligation to myself and to the people with whom I do business. Warren lived his life by that pledge and has left this world a better place.

Note: The information offered in this letter is part of an ongoing series. This issue builds on the information given in previous issues. The author and publisher are not engaged in offering tax or legal advice. Laws are constantly changing and advice of a competent accountant and attorney should be obtained before implementing strategies suggested in this letter. 

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