When I first started in the business I loved doing fixes and flips, but wasn’t so keen on selling houses to strangers. I sold enough houses to get by and focused on the flips since those were much more fun. I always thought it would be smart to buy rental properties, but I was young and not very good at saving money.
Then in 2008, I started selling REOs and completing broker price opinions for banks. I loved the REO side of selling houses and I have become very successful at it in the last few years. I am a HUD listing broker as well and love HUD, I can’t buy HUD homes myself, but I have a great article on how investors can great deals on HUD homes here.
I think the reason I love REO is that I can communicate through email and I am a natural introvert (another popular forum discussion). With REO came more money, more savings, and a desire to grow that money into something more. I did a lot of research on franchises, businesses, the stock market, and bonds and decided rental properties were the best investment out there.
When I was doing fixes and flips with my father, we bought most of our properties at the public trustee auction and it did not matter if we had our real estate license or not. When we sold our homes, we saved 3% on each transaction, because we did not have to pay a listing agent a commission. When I started buying rental properties for myself in 2010, I bought everything off MLS and saved a commission on each purchase. We are buying more flips of the MLS now as well, we are now saving a commission on the buy side and the sell side.
Even though we save a ton of money on commissions by being agents that is not the biggest advantage of having a real estate license. The biggest advantage is having a huge advantage in buying properties over those that do not have a license.
Saving Money on Commissions
I will take you through an example of how much we save on a typical flip. The savings are similar on a long-term rental purchase, except there won’t be any commission on the sale since we are holding the property. Let’s assume we purchased a flip on an REO property for $100,000, fixed it up, and then sold it for $170,000.
The bank offered a 3% commission to the real estate agent that represented the buyer on this property. Sometimes banks do not like it when the buyer is also the real estate agent and they may have stipulations they won’t pay a commission in these instances. We use an LLC to purchase our flips and my dad will usually sign for the LLC and I will be the agent on the deal. That way the agent is different than the end purchaser and the bank will pay a commission.
On the purchase end, we can structure the deal so we get paid $3,000 for our commission or we will waive our commission and pay $3,000 less for the property. The benefit to getting the $3,000 is the extra cash in our pockets for repairs or other investments. The benefit to reducing the price is, we won’t have to count the commission as income and pay taxes on it. It saves money, in the long run, to reduce the price if that is an option.
However, many brokers will only allow agents to take no commissions on one or two deals a year. We can do it as much as we want since we are on a 100% split and the monthly fee brokerages may allow you to make as many no-commission deals as you want as well.
On the sell side, we save 3% as well since we are the listing agents and do not have to pay someone else to sell the property for us. Again, commissions are negotiable and you may be charged more or less for an agent to sell your home. Three percent of $180k is $5,400 that we save by not hiring another agent. We structure this as a no-commission deal since we will not have to pay taxes on the income again. Total savings is $8,400 on this one deal alone. We flip about ten homes a year, and it is easy to see we save a lot of money by being agents.
The biggest reason I would suggest every real estate investor get their license is because of the advantage it provides when finding deals. I still buy most of my long-term rentals off of MLS and we buy flips on MLS as well. We purchase short sales, a few REOs, and even a few fair market sales off the MLS system. As an agent, I have access to MLS and an investor without their license does not. Most properties listed in MLS are listed on other sites like Zillow, Realtor.com, and others, but the information is not as accurate or updated as quickly.
Real Estate Agent
If I were not an agent, my time frame for making an offer would be much longer. I would have to do more work to find new listings on Zillow or another website. Once I found a great deal, I would have to contact my agent. I would have to wait for them to find time to set up the showing and show me the property. Then I would have to wait for them to write the contract and I would have to come in and sign the contract before it was submitted.
I have to hope they understand the importance of time and getting that offer in ASAP. Even if they are a super fast, great agent, it may take them half a day or an entire day to get all that done. Someone else could have already submitted an offer and had it accepted before my offer was submitted.
Knowledge of the Market
As a real estate agent, MLS also provides me with a wealth of sold information. I can look up sales from 10 years ago if I want to, as long as the sale was completed through MLS. MLS is a great tool for me to determine value quickly, and easily. I am also constantly around houses as a Realtor, I am constantly determining values for my sellers and buyers and I almost always know the market without having to pull up-sold info. Knowing values is the most important thing for a real estate investor to know and being a real estate agent gives me a huge advantage.
Connections in the Business
As a real estate agent, I am constantly talking to lenders, other agents, title companies, buyers, and sellers. I found my portfolio lender because other agents referred me to them. My portfolio lender is awesome and will give me as many loans as I want as long as I qualify. That may change at some point, but without them, I would be struggling to finance properties, especially now that I have 10 mortgages.
Other agents have referred me to sellers looking to get out of their homes because they know we buy flips. I know the best title companies, the best lenders, and the best Realtors. I also know which companies and Realtors to steer clear of, because they may kill a deal with their incompetence.
Disadvantages of Being an Agent
There are some disadvantages to having a real estate license and being an investor. The biggest one for me, is I am limited to what houses I can purchase, but this won’t apply to 99% of agents. Since I am a HUD broker I cannot buy any HUD homes no matter who has them listed. None of my immediate family or any agents and their immediate family can buy a HUD home either.
Bank of America will not allow me to buy any of their listings or even short sales because I list REO for them. There are a few other companies I work with that have the same policies and I can never buy an REO that I have listed. It is a clear conflict of interest for me to purchase I home I listed that I determined value on for the banks.
- I have to disclose I am Realtor when I market to sellers. I don’t think this is a big disadvantage, but some people on the forums think they get a better response if they are not an agent.
- Some people feel a code of ethics is too restricting for real estate investing, I do not feel this way. If you are a real estate agent, it is easier for buyers or sellers to file a complaint against you with the real estate commission or whatever body governs real estate in your area.
- The biggest reason most do not get their license is the cost and time it takes. Getting a license is not easy in most states, it takes hours and hours of classes and tests and the tests are not easy. Once an agent has their license, they have to take continuing education, keep insurance, pay for MLS, pay board dues, pay to hang their license, or split their commission.
It can cost thousands of dollars a year to be a licensed real estate agent, but one or two deals a year will easily make up for that money. Not only are you saving commissions, but the biggest advantage is the deal you get because you were faster than everyone else. To a flipper, one deal can mean $20k, $30k, $40k, or more in profits. To an investor buying long-term rentals, one deal can mean thousands of dollars a year in cash flow.