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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