This is a hotly-debated topic among investors: Should investors obtain a real estate license (become real estate agents) for the benefits offered by the license? Although there are some obvious benefits—and other not-so-obvious benefits—the answer is usually “no.”
And I say that as an investor who does have a real estate license.
Let’s consider the benefits:
Ability to do your own comps
One barrier many investors run into is the inability to quickly and accurately determine the ARV—after-repair value—of a property. For an investor, the key number is the ARV: What the property will be worth after it’s fixed up. Everything else is based on that. The classic formula for determining what a wholesaler (or rehabber) should contract for/pay for a property is: MAO (Maximum Allowable Offer) = ARV*0.7 minus repair costs. That is: Take 70% of the ARV and subtract repair costs. That should be the maximum a rehabber should pay. A wholesaler should subtract his/her desired profit from the figure to determine what the cost to the rehabber should be.
A property’s ARV is $200,000. The cost to rehab the property is $40,000. The rehabber should pay no more than $100,000. If a wholesaler wants to assign the contract for $10,000, then the property should be put under contract for no more than $90,000.
So, if ARV is key, then that’s the critical number for the wholesaler to know. And, yes, access to the MLS in order to “pull comps” is the best way of determining that.
Note from Zilculator:
Our real estate software also provides a possibility for our customers to pull comps from both public records and MLS. Try our Premium features today.
Problem #1: The difficulty is that performing a comp analysis and determining the ARV is both an art and a science. For example, most sales in the MLS don’t represent the ARV of a property. Typically, sold houses are in fair-to-good condition. They’re generally not in a true ARV condition. The MLS may have three good comps for a property—let’s say $200,000, $210,000, and $220,000. So we might assume that the ARV is about $210,000. But were those properties truly “after repair”? Not likely. In this case, a true ARV might be higher. It’s often possible to determine a property’s actual condition . . . but that involves a close inspection of the property description and, sometimes, contacting the listing agent.
There are also price trends and cycles not reflected in the MLS. For example, property values in many areas will rise in the early spring, peak around June or July, and then trend lower in the fall and winter. A property that sold for $300,000 in June might only sell for $270,000 in December.
Problem #2: Comps based on MLS figures are likely 3-4 months out of date. A house that sells in July probably was placed under contract about 60 days earlier—in May. Depending on how long it was on the market, it may actually have been listed in April. If a wholesaler or rehabber obtains a property in August, he/she will be more than satisfied with July comps. And yet those July comps represent houses put on the market in April. Meanwhile, if the rehab will take, say, 3 months, the rehabber will put the property on the market in October or November. That’s a long way from the past April.
That’s why determining ARV is an art as well as a science. It involves more than just “crunching numbers.” It requires an understanding of the sales process and the cyclical pricing of real estate. Simply buying access to the MLS (becoming an agent and then, separately, joining the regional multiple listing service) isn’t enough. And I haven’t seen many investors willing to put in the time and effort to factor in those elements.
Problem #3: Many investor/wholesale purchases aren’t on the MLS. The sales generally are (we’ll get to that in a moment), but not the purchases. While it’s true that the sold price (ARV) is the key figure, the purchase price provides a double-check. For example, although a sales price of $200,000 is the primary number, it’s helpful to confirm the other numbers—the purchase price and the repair costs. It’s difficult to confirm exact repair costs but, as in our example above, it would be helpful to know that wholesalers and rehabbers were paying around $100,000 for those properties. But those properties won’t be in the MLS; it’s likely that they were not listed properties that were sold by agents. The properties I’ve put under contract—and most properties put under contract by wholesalers I know—weren’t listed in the MLS. They were found using direct mail, bandit signs, or with some of the other techniques used by investors. Yes, those purchases will show up in tax records, and most MLS systems offer a quick, efficient way to search tax records. But tax records are public; it’s not necessary to join an MLS to access tax records.
Avoiding paying the commission when selling
Yes, this is a benefit. But it’s not as much as would be expected, and there’s an associated cost. Consider the $300,000 property. Although commissions are negotiable, let’s assume, hypothetically, a 6% commission. When a house is listed, especially if a full commission is to be paid, that commission is often split between the listing agent and the buyer’s agent. If the investor is an agent, lists the property, and shares the commission with the buyer’s agent, the investor saves 3% or $9,000. Depending on the arrangement the agent has with his/her broker, anywhere from perhaps $500 to $4,500 will go to the broker. That leaves $4,500-$8,500.
Agreed: That’s real money. Still, the investor will have to devote time, effort, and—yes—money to marketing the property. Open houses. Video tours. Staging. That’s time, effort, and money that can’t be devoted to the investor side of the business. Many investors decide that they just don’t want to have to spend that time, effort, and money marketing their latest rehab. It’s just not worth it. When I do see it happen, often the investor has a partner (married, long-term commitment) where one performs the investing functions and the other performs the real estate agent functions. That can work. But I seldom see a sole investor acting both as an investor and as a listing agent.
Understanding how the real estate process works from the agent’s perspective
This is a real benefit that’s seldom appreciated by the investor. The world of traditional real estate sales by real estate agents is totally different than the world inhabited by investors. And most investors—unless they’re also agents—don’t have a clue as to how agents work. What their priorities are. What their strategies are. What their mindset is. If an investor is going to be working regularly with agents, this is important knowledge to have. But is it worth the expense? Not usually for wholesalers who generally interact with sellers and rehabbers. It might be worth the expense for rehabbers who more frequently will interact with agents and, perhaps, with buyers.
Adherence to state laws and regulations required for an agent. If the investor chooses to join the National Association of Realtors, adherence to the NAR’s Code of Ethics
I’ve included this as a benefit although, frankly, many investors consider this a liability rather than a benefit. There’s an advantage to telling a seller that your actions are overseen by state regulations and that you adhere to the NAR Code of Ethics. This applies even when an investor is operating as an investor, not as an agent or Realtor. That behavior also can keep you out of trouble. I don’t tell sellers that I’ve been trying repeatedly to reach them. I don’t propose and promote deals that I know aren’t in the best interest of sellers. Yes, you can make low offers; the seller’s motivation may be to sell quickly or in “as is” condition. You just can’t materially misrepresent factors.
For many investors, particularly those starting out, cost is a significant disadvantage. It varies greatly by state, but it’s not unusual to spend $2,000 to become licensed, and another $300-$500 for membership in the regional MLS. Then there’s the cost of continuing education to retain a license, the $500-$700 to maintain your membership in the National Association of Realtors, and another $300-$500 for MLS membership.
Is agent licensing, NAR membership, and MLS membership just a series of “shiny objects”? Are these diversions from what you’re really interested in doing?
Compliance with state laws and regulations applicable to agents
We covered this above. While some view this as an advantage, many investors view this as a disadvantage. (I consider it an advantage.)
As the saying goes, don’t reinvent the wheel.
If the goal is get good comps, then the solution for most investors is to find an investor-friendly agent who will provide those comps. And investors have much to offer in return: Leads the investor generates where the would-be seller is unable to accept the low price offered by the investor. These are still good leads; they’re still people who are interested in selling their homes. They may not be good leads for the investor who is unable to make the deal work, but they may be ideal for a friendly Realtor. Offer to provide any leads you’re not able to handle, in return for comps and even leads on potential sellers who are unable to sell conventionally. (A house in poor condition, a house occupied by a hoarder, and so on.)
There are even paid services that provide comps. (Stay away from Zillow and similar, though.) If that’s all an investor needs, those may be more than sufficient, and they’ll be far more cost-effective than becoming an agent and joining an MLS.
And if the goal of a rehabber is to reduce commission expenses, remember that commissions are negotiable. If you can provide a listing agent with a stream of 2, 3, 4, or more properties a year, you should be able to negotiate a substantially lower commission.
For most rehabbers and wholesalers, it just doesn’t make sense to become an agent.