I moved to the U.S. back in 2012; you could classify me as an ‘international investor’ buying U.S. real estate, even though I reside here. Over this period I have dealt with a lot of brokers and agents. I have developed some very important questions that every investor (international or domestic) needs to ask their broker when buying U.S. real estate, particularly commercial real estate (my flavor is multi family).
The type of questions you ask is equally as important to judge the brokers/agents knowledge, experience and negotiation skills. If you get the right broker in your team they will be a fantastic source of high quality deal flow with better returns.
What I have learned
A few questions that an investor needs to ask a real estate agents or brokers, to gauge their ability and skills.
Q1. What do the laws in your state require you to do for me?
Takeaway: Treat each state within the US differently.
Real estate laws vary widely from state to state, for instance, many states do not hold a real estate agent and broker the same. To be a real estate broker in the state of California an agent needs a minimum of two years industry experience before sitting the brokerage exam.
Most states even require you to involve lawyers while inking a deal between you as the investor and the broker/agent.
It’s important as an investor to understand what your agent is expected to do as defined by state law.
Q2. Of all the escrows you opened for the buyer (clients) in the last 2 years, how many of them you successfully closed?
Takeaway: Measure the success rate of your broker precisely.
By asking ‘how many deals you closed last year’ isn’t an effective way to measure a broker’s ability to close deals. It keeps investors in the dark, since they answer as ‘X number of deals’ without letting investors know how many they tried to close.
For instance, a broker quoting ‘I have closed on 50 deals during the last year’ doesn’t tell an investor as much as ’I have opened 100 escrows but only 50 of them successfully closed’. Understanding this difference in those answers, as an investor, can measure the true success rate when buying properties from a broker.
Q3. On average, how much over or under asking price have your clients paid for properties you have helped them acquire?
Followed by,Q4. What was the market trend right now?
Takeaway: Know how good your broker is at negotiation
Let’s say, the broker responds to the above question, “our clients have paid an average of 6% over the asking price”. When people tend to pay 4% over asking price, the broker managed to get 6%, or if the broker got 2% below, when people tend to pay 2% over the asking price. That should give an absolutely clear view of your broker’s ability to negotiate.
The ability of your broker to negotiate a juicy deal directly affects the ROI on the investment; my motto is – You make money when you buy, not when you sell! The negotiation with the seller is key. Most of the time I will personally handle my own negotiations with a potential seller to get the maximum bang-for-my-buck, but also to set up a win/win for both the seller and myself.
Q5. Are you representing the seller in this transaction?
This is a situation whereby the broker is representing both you as the investor (the buyer) and the seller. If the answer to this question is “yes” keep in mind that the seller is likely paying the broker a commission. Your broker should be representing your interests, and your interest only in a transaction.
Q6. Do you work with investors?
Having a good broker apart of your A-team that understands the investing process is vital to your success as an investor. Even though the broker is incentivized by a sales commission negotiate the lowest price possible may not be the best purchasing scenario.
I am a huge fan of creative financing, in particular seller carry back financing. Working with a broker that understands creative financing is also a massive bonus. If the broker can negotiate a SCB financing on a deal I will always pay him/her based on the agreed sales price, this way they aren't as focused on the commission and more focused on negotiating the best possible deal. This question also ties in to how well do they negotiate?
Good Deal Flow = Getting your first deal done!
Good deal flow is key, and your broker holds the keys to all the deals on the market, or about to hit the market (off market and pocket listings), particularly when you start out buying multi family deals.
Developing a relation with a broker at the beginning, particularly when you have never done business, can be challenging. Good quality deal flow from a broker is directly proportional to how many deals you have closed on. Once I completed my first large multi family deal brokers started taking me more seriously, and the reason is that I have proved to them that I can close!
As investors we want to be working with the right type broker; knowledgeable, credible, and one that knows how investors think. Not only will they increase your deal flow but they will have a direct result on your ROI.
Until next week Happy Investing!
