I’m sure every agent can remember the first few calls they got from investors. Someone wanting to buy multiple properties a month? Paying cash for all purchases? Easy commissions, right? I’ll be rich in no time! Goodbye Toyota, hello Mercedes.
In most cases, that is not how it plays out. These self-claimed cash investors don’t buy many (or any) houses after hours of work on your end.
They suck up more time than they are worth, and much like a hard night of drinking, you swear never to do it again. Been there before?
As a licensed investor, I want to help you figure out how to get the most (or at least something) out of your investor clients.
Below are five tips that will help you actually make money when working with this clientele.
Think like an investor
I’ve had agents send me “deals” on homes that were $5,000 below market value and still needing repairs. This is not a deal. It might be a deal for an owner occupant, but not for an investor. If you want to help investors, you have to think like they do, which is different from your typical buyer.
One quick and easy way to think like an investor is to use the 75 percent rule. It’s a simple formula to tell if you are looking at a possible deal or not. It goes like this:
(75% of ARV) – Repair costs = Investor purchase price
ARV is the “after repair value” or top market value of the home if it were all remodeled and repaired to top condition.
You take 75 percent off this maximum value because that 25 percent accounts for the investor’s profit, closing costs both ways, holding costs (loan payments, utilities, taxes, insurance) and Realtor commissions when selling.
Repair costs are all the costs it takes to get a house into top condition. If you plug those numbers into the formula, you get a price an investor would likely pay for the property as-is.
This is just a general rule of thumb, and it’s always best to ask investors how they evaluate a deal. More often than not, if you bring someone a property that fits this formula, you’ll have a buyer ready to go.
One of the largest areas of growth in the investor world has been in wholesaling. Wholesalers are individuals or companies that market directly to sellers with the intent of buying their property.
They negotiate a purchase price and get the property under contract to then sell their position in that contract (not the house) to another investor. Their profit is called an assignment fee as they will assign or transfer their rights to purchase the house at the negotiated price for a fee.
At closing, the investor to whom they assigned their rights in the contract brings the money to fund the sale, takes title to the property, and the title company cuts checks for the seller and wholesaler.
Typically, most wholesalers are not licensed agents because they aren’t selling homes or helping people buy homes, just selling paper or rights to a contract.
If it feels like a grey area — and that’s because it kind of is. Some states are cracking down on this and making wholesalers actually purchase and take the title to the house or have clear intent and ability to purchase a house before entering into contract.
Some wholesalers don’t have a dime to their name and have no intention of closing on a property they get under contract if they can’t find a buyer before their contract ends. This clearly creates issues with the seller and anyone involved especially if the house is listed on the MLS.
Some wholesalers are legit though and do help the real estate industry by cycling unwanted or dilapidated/distressed properties through the market to investors and eventually ending up in the hands of owner occupants via real estate agents.
Many of the homes wholesalers deal with are often not worth very much and are in terrible condition; many agents would not want to list them for a few hundred dollars worth of commission.
Why bring wholesalers up? If you don’t know who they are or how they work, you can’t create a win-win relationship with them.
How to create win-win relationships with investors
To create profitable relationships with investors, you have to figure out who you are working with and set expectations. Don’t be afraid to secure your place in the deal, be it commission or future listing agreement.
Investors are negotiators, remember that. Here are some ways to make money and help investors make money:
- Flippers: If you are working with a flipper, there are two times you can make money. The first is when they buy the property. If you put in the offer, you can get 3 percent to 6 percent commission or maybe a flat fee. The second time is when they list the property for sale. As an investor, I would gladly pay you 6 percent on the buy side and 3 percent when we list the property if you brought me a good deal. Remember, a piece of something is better than a piece of nothing. I know agents in my area that have developed tight relationships with some of the top flippers and list all their houses as well as bring them deals. In the end, investors want consistent results, deals on houses and useful, honest knowledge from agents.
- Wholesalers: If you have a client flipping homes and a wholesaler sends you a deal on a home, the logical step is to connect the two. Most wholesalers will easily pay you 3 percent on this transaction for finding them a buyer. When working with wholesalers, be prepared to have short or no inspection periods after making an offer, to deposit non-refundable earnest money and to close quickly.
- Bonus: Another way to work with wholesalers is to become their go-to agent referral. Wholesalers generally talk to a lot of motivated sellers. Only a small percentage of those sellers are motivated enough to take an offer that would make sense for an investor. So what do wholesalers do with the leads they can’t convert? Well, they could give them to an agent like you to work. Would you like free motivated seller leads?
- Landlords: Some investors prefer to hold onto their properties as rentals. Unless you run a property management company, your chance at making a profit here are reduced to just when the investor buys the home. Still, if you see a deal from a wholesaler and have an investor buyer that wants to collect rentals, why not send them the deal for an easy 3 percent? Also, don’t forget about the “turn-key rental” companies. If you can learn their buying criteria, you can be a good source of deals for them. They often pay cash and higher prices than most investors for rent-ready homes in good areas.
Where to find the good investors
Finding good investor clients isn’t as hard as you think. The key is to bring value to them, and they will reward you with value in return. The cost to acquire these clients is very low and only takes a little bit of time.
As you’ll see, by taking advantage of some of these strategies, you’ll not only learn more about investing but also meet clients at the same time.
Here are the main avenues to find the bulk of investors:
- BiggerPockets: This is a real estate investing site where a lot of investors congregate. It is very easy to search by area and connect with local investors. However, you tend to see that the investors who are active on this site are in the lower to mid-tiers. By that I mean, they aren’t the top investors in the area, but it’s still a good source of clients.
- Local REIA meetings: Almost every city has a local Real Estate Investors Association meeting. These are held once a month, typically cost $10-$20 to get in and always bring a crowd of local investors. It’s a great place to meet both new and experienced investors.
- Meetup.com: A lot of investors host various meetups each month or week via Meetup.com. This is a great way to learn about investing and connect with some active and high-profile clients.
- Facebook: In my area, we have a few Facebook groups with hundreds of investors where we all exchange deals or ask questions. It’s a great spot to be as a real estate agent as you can forge relationships and see deals that your buyers may be interested in. Search Facebook for “[city name] investor group” or “[city name] wholesale group.”
- MLS: If you see a nicely remodeled house hit the market, find out who the seller is. See what else he or she has done. Send them a personal letter saying you’d like to meet for coffee to discuss how you can help them find more deals. Don’t try to snake their listings for a commission discount though. Offer them value (more deals, better service) and most will gladly pay you 6 percent all day.
Become the go-to investor agent in your office
Most agents don’t want to or even try to mess with investors or the investment world.
If you know some investor buyers and can understand even a little about the investment basics, you can be the go-to agent in your office for either off-market or soon-to-be listings. Your investor clients love these types of deals and can also close quickly on them.
All you have to do is get one or two quality investor buyers, and then mention to your office-mates that if they come across any properties needing rehab or that are distressed, they should tell you first.
You offer the seller and listing agent a chance at a quick sale, your investor gets a look at a potential deal, and you can take home an easy 3 percent.
Think about it this way also: Have you ever heard an agent tell you about a listing appointment he or she went on but the house was so dirty he or she declined the listing?
Or heard of an agent refuse to list a house because the commission was so small? Or dread taking a listing that needs repairs an owner can’t or won’t make?
Those are the scenarios you want to be involved in. If you have the quality investor buyer, you can easily patch together a quick deal that works for everyone.
Hopefully, these tips will help you navigate the growing and evolving world of residential real estate investor clients.
If you have any good suggestions for topics to dive into relating to investors, please share in the comments below.