Real Estate Is Not A Passive Investment

About ten years ago, a friend of mine told me that his wife had just inherited a lot of money and they had decided to invest in real estate.  Their plan was to buy ten or twelve properties and retire.  I told him that I thought that was a great retirement plan, but that it is a job as well.

But then he knowingly assured me that real estate is a passive investment.

He did not speak from experience.  Rather he spoke from what I have found to be common knowledge.  Everyone knows that one sure way to get rich in America is through real estate.  And further, landlords don't really have to do anything except cash the checks.

I think this attitude comes from popular culture and perhaps our experience when we are young rent payers.  Young people pay their rent to the landlord and don't really put all the pieces together.  There is also a class of so-called investment gurus who talk about real estate as a panacea.  Anyway the point is, many people seem to share my friend's beliefs about investing in real estate.

Let's get something out of the way:  What exactly is a passive investment?  Well, if you buy shares in IBM, guess what happens.  They send you four dividend checks a year.  You do nothing except cash them.  That is passive.  Same with bonds.  If you truly believe that real estate is the path to riches AND you want a passive income, I would suggest you have a look at REITs.

Now, perhaps you are wealthy and can afford a large-scale real estate portfolio.  You can hire property managers.  You can purchase multi-tenant properties with triple-net leases.  Your real estate income may come close to passive.  But of course, you have a whole new set of problems.  What's that you say?  Oh, you found out your property manager was taking kickbacks?  Who could have imagined?

Of course, you do not have to be wealthy.  If you own just one rental unit, you can hire a property manager.  For what, eight to ten percent?  Plus the cost of tenant acquisition.  Do the math, there goes your return.  This is why most small investors do not go this route.  Two other points:  One, unless you give the property manager a blank check, you still have to be involved.  And two, do you really think that your property manager won't hire his idiot brother-in-law to service your HVAC system at triple rates?

And to state the obvious:  People who truly believe that real estate is a passive investment are the least likely to hire a property manager.  They don't see the need; so of course, they don't see the value.

So here's how it works for most small investors.  Yes, you are the landlord.  But you are also a service provider.  And yes, you have tenants.  But another word for tenant is customer.  And when your customer calls you at midnight because his heat is not working, it is your job to get it working.  Like any other business, you must serve your customers.

Further, as a small investor, you are probably not buying new, Class A units.  You are buying older, less expensive properties.  Which require more maintenance.  My friend above assured me, that because they were only going to purchase commercial spaces, that midnight calls were not going to be an issue.  But while your CPA tenant may not call you at midnight, that does not mean that there are no maintenance issues.  Anyway they went ahead and purchased ten or so commercial rental units.

Five years later, he shared with me that he gets anxious when his cell phone rings.  Because it is often one of his tenants.  Calling with a problem.  Otherwise, why would a tenant call?

I did not have the heart to tell him:  I told you so.

Finally I should note one other issue that many small investors do not take into account, vacancy.  If you have ten or more units, you can easily plan for and manage vacancy.  If you have a handful of units, or just one or two, the risk of vacancy is high and the expense of vacancy is high.  It is not unmanageable.  But many small investors overlook the issue entirely.

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Think for Yourself: Photos on Business Cards

 

Think for Yourself 

First in an occasional series

A couple of weeks ago I linked to a Jennifer Allan-Hagedorn video on scripts.  And I absolutely loved what she had to say.  Above is a video with her comments on real estate brokers using their photos on their business cards.

First let me say, at least for residential real estate agents, this debate is over.  I bet you can count on one hand the number of agents you know who do not use their photo.  Get a hundred cards, and what, maybe one or two don't have photos.  So while it is no longer required, Jennifer does as well as anyone justifying the practice.

But I don't like it.

She refers to the familiar But doctors and lawyers don't put photos on their cards argument that we sometimes used to hear.  But I don't like that either.  Brokers are not doctors and lawyers.

The underlying premise for that argument seems to have been:  It's just not professional.  But if essentially all other brokers are doing it, well it has become the standard.  And many people will accept the standard as professional.  This is certainly true for brokers.

It should not be.

There are some other standard practices in the real estate business that I do not like.  Dual agency, coming soon, scripts, coaches, teams, underpricing, high fees based on illusory service, open houses, overpriced commodity marketing, an under-appreciation for negotiation skills, etc.  Just to name some off the top of my head.  All standard or near-standard practices.

So I am unwilling to accept the arguments of standard or professional to come to a personal decision on how to conduct myself in this business.

Let me give you another example of a recently-evolved standard practice:  Trust Accounts.  In my market, many firms have done away with their trust (escrow) accounts.  They will all make arguments based on liability and risk management.  But I will tell you what no one else will:  They got rid of their trust accounts because they are lazy and don't really care about serving their clients.  I could and should write a whole post on this topic.  But for here, I use it as an example of a standard practice, supposedly professional, and yet disreputable at the same time.  And brokers get away with it because, when searching for an agent, no one asks:  Do you maintain a trust account?  So this unworthy practice has become accepted as professional.

So what is a broker to do?  I mean regarding photos on business cards, or maintaining a trust account, or any other standard or non-standard practice found in this business.

Here's my advice:  Think for yourself.

Let me give you an example:

Jennifer says:  People remember faces more easily than names.  Therefore, put your photo on your card.  I say:  You know, if I am depending on someone remembering my face, I am in serious trouble.

So what might someone remember about me?  Well, maybe something insightful I said.  And I think this is the real reason some agents put their photos on their cards.  They don't have anything insightful to offer.  Many cannot even engage in a genuine conversation.  But...they have a pretty (or handsome) face.  Go with what you got, right?

As for the remaining agents?  Well I can assure you of this:  Not all of them want to put their photo on their business card.  Yet they do.  Why?  Well their real estate coach told them it was a good idea.  Or their mentor.  Or maybe their managing broker.  For many, they are simply doing what everyone else is doing.  Mindlessly imitating the behavior of their peers, no matter how foolish it may be to do so.  Warren Buffett labels this the institutional imperative.  But I think we can simply call it broker foolishness.

One final note:  The point of this article, and really of this entire website, is not to tell you what to do or not to do.  Sure, I'll typically give you my opinion.  But more than anything else, these posts are meant to be thought pieces.  So again, think for yourself.  And based on your own thought process, do what makes sense for you.

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A Disciple of the Written Word

A friend emails:  You should start a YouTube channel.  A colleague on an email forum that I started says:  You should move this forum to Facebook.  A relative asks:  Are you on Instagram?  A client asks:  Will you come on my podcast?  And why don't you start your own?

The truth is I am an unapologetic disciple of the written word.  I am comfortable here, with this medium and on this platform and in this format.  I belong here.  I am happy to leave all the modern alternatives to others.  I like writing and then reading what I have written.  And thinking about it.  Revising it.  Correcting it (although I can be a terrible editor).  Sometimes I even print it out...on paper.  Or, in a book.

Look, we are not talking about a Gutenberg press here.  When I publish to this blog, anyone in the world can read it, instantly.  Or not.

But will I miss out on some potential audience?  Without doubt.

I often write to help me determine how I should think about things.  Even sometimes, if I should think about things at all.  It really is a journal.  So if others read along, great.  It is a bonus.  But the writing you find here is primarily for myself.  If you are reading along, I hope it makes you think as it does for me.  Surely that is a worthy goal for all of us.

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How Many Brokers Can One Person Manage?

In North Carolina, real estate firms are supposedly supervised by a Broker-in-Charge.  Each office of every firm is supposed to have a BIC who is responsible for ensuring the office meets NCREC requirements.  The NCREC requires BICs to supervise Provisional Brokers much more closely than Full Brokers, but that is to be expected.

But here is a question:  How many brokers can one BIC supervise effectively and responsibly?  I truly do not know the answer to that question.  But here is a Broker-in-Charge with 900 licensees under her supervision.  No, that is not a typo, and if you click the link, give it a minute because it takes the database a few seconds to bring up the whole list.  That is more than six percent of the entire count of MLS-subscribed brokers in our market.  Imagine that.

She must be some sort of management wizard!

Or...Could it be that she has absolutely no idea what all 900 of her brokers are up to?  Maybe it does not matter?

Really, I am just wondering....

Look, I know there is some structure there.  I see names on her list who are also BICs.  So I suppose those brokers are running their own teams, out of their own offices.  Nevertheless it does seem odd that someone would assume that level of responsibility and liability, and the firm would assume such a shaky risk management structure.
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Lazy Brokers and eSignatures

We all love eSignatures.  But lazy brokers love them the most!

Our firm uses DocuSign, and we have since it first appeared.  And regardless of what eSignature system you are using, I think we can all agree these systems have made our professional life easier and more productive.  I mean think about all the driving around, for signatures, that we are no longer doing.

But there is, still, one fly in the ointment:  Checks.

Fully executed contracts appear right in my email inbox.  But any monies required by said contracts, well, that's a different story.  In North Carolina, our contract calls for two different checks, an Earnest Money check and a Due Diligence check.  Now the contract does allow the Earnest Money check to be mailed and received within five days (if both parties agree).  But the Due Diligence check is to be delivered to the seller on the day of contract execution.  And because of this, we never allow the buyer to mail the Earnest Money check.

That means that while the buyer's agent need not get in his car for contract signatures, he does need to pickup and deliver the checks.  And while this may not seem like a big deal to you or to me, this has become a huge problem when we represent the seller.

Why?  Because buyer's agents just can't be bothered to do their job.

So, instead of a buyer's agent sending us a fully negotiated and buyer-signed offer, and we as seller's agents, sending this to the seller for signature, we have to halt the process.  We say to the buyer's agent:  Okay, we have received your signed offer, now bring us the checks.  And of course, the buyer's agent always says:  No, no, get your seller to sign, and then I will bring you the checks.

The problem with that is, after the seller signs and this is communicated to the buyer, then, checks or no checks, we have a fully executed contract in place, which must be delivered to the buyer.  So fully executed contract and no checks!  That is no way to serve our client, the seller.

And see, the problem is that it is a bit of a gamble.  Sure, we want a fully executed contract in place.  But I sure don't want to have to worry about getting those checks afterwards.  Yes, there is a procedure to force delivery (or risk seller termination) after the fact.  But who wants the trouble?  And in the meantime, we may lose a perfectly good alternate buyer to some other house.

This would not be a problem if we could simply count on agents to do their job!

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Real Estate Brokers LOVE Scripts

The other day, I referenced this Jennifer Allan-Hagedorn video in the comments of another post.  But I think it deserves its own post.  Jennifer's take on real estate brokers using scripts is very similar to my own.  She is not a fan.

But I have to point out what I posted as a comment to her video:  The fact is, many brokers use scripts because they work.  This is a reality in our business.  Most consumers only enter the real estate market a handful of times in the course of their lifetime.  So they are quite susceptible to this nonsense.  And brokers take advantage of this.

I have said this before, but it is worth repeating:  If you cannot trust someone to have a sincere and genuine conversation with you, how on earth can you trust them with something as important as a real estate transaction?

If you are reading this blog, this probably does not apply to you (whether you are a broker or consumer).  But scripts do seem to work for many.  Not sure what to do about the practice other than shine a light on it.  Sadly, I don't see a way to drive the script-readers out of the temple.

We'll come back to this topic.

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The Wholesaling Scam

A Note on Real Estate Wholesaling

Here is the wholesaling business model as I understand it:  

The wholesaler identifies a property that might be purchased for less than market value.

The wholesaler approaches the owner to discern interest level in a sale.

The wholesaler's goal is to find a property that he can purchase under market value from a less than savvy seller.

The wholesaler and the seller reach a deal for the property at a less than market value price and place the property under contract.

The wholesaler then approaches buyers (often investor types) who may purchase the property at or near fair market value.  Or at least closer to market value.

The wholesaler and the buyer go under contract at or near fair market value often using a buyer corporate entity (LLC, corporation, etc).

There may be a double closing, but it is certainly not necessary.

At closing, the buyer is introduced as a partner or associate of the wholesaler.  The buyer's entity acquires the property at market value, the seller gets the originally agreed less than market value price, and the wholesaler keeps the difference.

What actually takes place is the buyer acquires the property at the originally agreed less than market value price, and pays the difference to the wholesaler as an assignment fee.

Of course, there are variations of this.  But in any case, it's all pretty nifty, but for one little problem:  Transparency.  Three questions:  Does the seller go into this transaction fully understanding what the wholesaler wants to do?  Does the seller understand what is happening along the way?  And finally, at closing, does the seller understand how the deal is structured?

Another question:  If the answer to these three questions is yes, why would any seller agree to it?

Also:  Does the seller understand that the wholesaler has no intention of purchasing the property himself?  And can terminate the contract if he fails to find a buyer?  And here's a question that I really do not know the answer to:  If the wholesaler truly has no intention of purchasing the property and this is not made clear to the seller, is the wholesaler not in breach of his contractual duty to act in good faith?  Yes, there is such a thing:  There is a covenant of good faith and fair dealing implied in every contract.  Imagine that.

Look, I am not terribly interested in foolish sellers.  My heart does not really bleed for sellers who fall for this nonsense.  Although maybe it should.  No, rather, I am concerned with the wholesalers and their business model.  It is a business model designed to take advantage of the ignorant and perhaps the unfortunate.  It is a model of bad faith.

It's really theft.  The wholesalers are stealing equity from unknowledgeable and unsuspecting sellers.  This is who wholesalers are and this is what they are doing.  I am not calling for more laws or regulation, but I do think we should shine a light on the practice.

Real Estate Wholesalers:  Modern day, small time con men.

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Is there a Market for Competence & Integrity?

Click to find The Competent
Broker at Amazon.com

Over the weekend, I received a lovely note from a Florida broker who had found and purchased my book, The Competent Broker.  She wrote:  I found your book by Googling "broker with integrity."  So just for kicks and grins, I decided to Google:  "real estate broker integrity book."

Finally, I made it to the top of a Google search.  First listing on the first page.  Oh, there were some other books listed, but mine is, apparently, the only one on integrity in the whole real estate universe.

I did the same search on Amazon, and again, it is the first non-sponsored book listed.  Followed by books on real estate investing and flipping houses.

This was not complete news to me. When writing and later pricing the book, I was advised to look up other books similar to mine.  Book comps, so to speak.  Well let me tell you, there are loads of real estate books.  But I found exactly zero on competence and/or integrity.  Sure, there are some textbooks which cover agency and ethics for aspiring brokers.  But in terms of a book for competent, high integrity practitioners and how to identify them, I am not aware of any others.

Why?

Well I think it speaks volumes about our business.  Brokers want books on sales and prospecting and scripts.  Oh, and how to get rich selling real estate.  Consumers want books on investing and flipping houses and the latest HGTV offerings.

So, is there a market for my subject matter?  I have heard from a number of like-minded brokers such as my new Florida friend.  So I know there is at least a small market.  The real questions are:  How do we reach it?  And can we expand it?  At this point, these are open questions.

I like to think that there is in fact an audience for this type of work which has been ignored by writers and publishers searching for easy sales.

Help me find it....

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There is Only One Buyer Pool

Some people have a misconception about buyers.

They seem to believe that each real estate broker has a distinct set of buyers and those buyers are dependent on their particular broker.  So people think, let's deal with this broker or that broker because he or she has a certain set of buyers.  And further, perhaps if we change brokers, the new broker will have access to a new set of buyers.

I am not sure it ever worked that way, but today it surely does not.  Buyers, in the aggregate, are all looking at the same data.  Even if everything trickles through their broker (and today it often does not), the broker is sending them the same data that every other broker is sending to their own buyer clients.

What does this mean?  Well, in terms of searching for listed property, it means it does not really matter who you hire as a buyer's broker.  Assuming they are competent.  You get the same list of available properties as every other buyer.  For sellers, it means essentially, there is one large buyer pool.  Not many small pools.

If you are a seller, there may be many different reasons to change brokers.  But don't make the mistake of thinking:  A new broker will give us access to a new set of buyers.  Why?  Because, I assure you, if the new broker had a buyer for your property, he or she would have already brought them to you.  Brokers cannot hoard their buyers.

Okay, but what about unlisted properties?  Here, sure, there may be some broker who is aware of a buying opportunity that other brokers are not.  And hiring that broker as your buyer's agent will perhaps give you a leg up on the property.  But here's a question for you:  Do you want to hire a broker who will fail to serve his seller's best interest in order to serve his own?  Oh yes, you may get access to an unlisted property, but is that the type of broker you want to deal with?  If they will cheat their sellers, they will cheat their buyers.

Okay, okay, but what about unlisted properties where the seller has asked that the sale be kept quiet?  Yes, it does happen.  But it is rare enough that this factor should probably not be used in picking a competent, high integrity broker.

Which brings us to the final question:  If what you say is true, what difference does it make which buyer's agent we hire?  Well in terms of knowledge of and access to available properties that meet the buyer's criteria, none.  It is only after the buyer identifies a potential property that the buyer's agent earns their worth.

Choose wisely.

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Definition: realtory

realtory (adjective and adverb) 

A person, thing, or action that exhibits traits typical of a Realtor®.

Yesterday, I was describing a colleague, and I said:  "She is very realtory."  What I meant was that she acts like, and carries herself, much like the stereotype of a typical real estate broker (most of whom are indeed Realtors®).  I would like to say that I did not mean it in a negative way.  But the truth is, I did.

Note, this has less to do with the Realtor® organizations, and more to do with the way brokers act.  I guess I could have said brokery, but it was realtory that came to mind.  I think it fits.

Example:

She keeps sending me realtory emails announcing her latest price reductions.

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Broker Emails

Today I received yet another email from broker Kathryn.  Here's a screen shot:

Very professional looking.  But I think it is worth pointing out, that I never subscribed to her email service.  Nevertheless, I seem to have found my way onto the list.  Hint:  She (or her firm) added my email to her mailing list without my request, much less my permission.

So I hit reply, and sent her the following:

Right?  I mean, why not?

And Kathryn?  Well she got right back to me:

Thank you Kathryn Washburn; I could not make this up.
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The Competent Broker has been published

Click to find The Competent
Broker at Amazon.com

The Competent Broker:  Seeking Competence and Integrity in the Real Estate Business

The Competent Broker has just been published on Amazon, in both paperback and Kindle eBook formats.

The Competent Broker  Competence is a choice.  In the business of real estate brokerage, this is an absolute.  Brokers have a duty to their clients to be competent.  A duty of competence.  So competence is a character trait and a function of integrity.  It is not that brokers choose to be incompetent.  But they do choose to focus their attention elsewhere.  Competence simply falls by the wayside.  Unnoticed and unattended.

The purpose of this book is to help readers find and identify competence and integrity in an often murky and counterintuitive business.  We start with Competence is a Choice and a Code of Competent Conduct, which we expand into sections on Brokers, Buyers & Sellers, Fees & Business Models, Marketing, and Negotiation.

   

There are a few different and sometimes overlapping potential audiences:  People thinking about entering the real estate market either as new buyers or sellers, or perhaps those with a less than ideal experience in the past.  People thinking about getting a real estate license or newly-minted brokers just finding your way.  And finally, disaffected brokers seeking a better way.

Visit our Competent Broker page for a chapter-by-chapter summary.

I look forward to your comments and questions.

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