I’ve often mentioned that real estate investing is all about people. Here are three ways in which this general principle manifests itself.

Information wants to be free: Real estate investing certainly has an element of secrecy, as does any business endeavor that involves negotiations. For example, when you’re on the buy leg of a 1031 exchange you don’t want the seller and you’re running short on time you don’t want the seller to know that you’re under pressure to make a deal work. And when you’re selling a property that you just bought FSBO you don’t want the buyer to know that you purchased it for a song.

But that said, there is a great amount of general information that you can be generous with. This isn’t altruism; information truly wants to be free, and professionals who are open with sharing their expertise will in the end benefit in many ways.

This is a principle that I try to demonstrate myself – in this blog, for example. Everything here is free. And I frequently receive emails from readers who compare the things they read here (and on other free resources) with the stuff that they pay thousands of dollars for. The internet is a sleazy place when it comes to real estate. Want to find out “…closely guarded secrets for real estate investing” or ways to get “a whole new level of jaw-dropping wealth and financial independence” then all you have to do is whip out our credit card. (note: these are actual quotes from various websites). If you’re paying for a secret you’re getting scammed; there are no secrets out there.

But this “free information” principle applies directly to all of us as investors. I deal with a relatively small number of real estate professionals: contractors, real estate agents, lenders. And I share with them what I’m doing – how I make deals work, what’s been successful and what’s failed, and what my strategies are. And they reciprocate – which means I learn a lot more about, say, peer-and-beam foundation leveling and realtor commissions than I otherwise would. Information wants to be free, but it’s also very valuable. Give a little and you’ll get a lot.

I want the people around me to make money: I’m not a big fan of paying a 6% commission to sell a property. But that doesn’t mean that I mind when the people around me profit when I do a deal. Most successful corporations don’t get that way be paying their employees the bare minimum; this rarely is a sustainable strategy. Likewise, most successful investors don’t get that way by squeezing every cent out of every deal at the expense of the people who support them. When I call my contractor or my real estate agent I want them to be happy to see my name on their caller ID. I want to be known as a repeat customer who closes deals. I expect to be charged a repeat-customer rate, but they know they won’t have to twist my arm to get paid fairly.

Relationships aren’t just about dollars and cents: This is an area that I have to be vigilant about reminding myself. I generally show appreciation through repeat business – and since I’m generally a dollars-and-cents type I might tend to think this is enough. But it isn’t. Independent professionals get a great deal of satisfaction from the appreciation that their clients show them. Good businesspeople aren’t in it just for the money, and they won’t know you appreciate their expertise and hard work unless you tell them. Write a note. Post a recommendation on Angie’s List. Remember them at Christmas.

Three academics from Northwestern University have just published a study comparing for-sale-by-owner sellers with sellers who used a Realtor. The researchers started with the hypothesis that a good Realtor might make up some of the commission that he or she is paid by helping the seller to get a better outcome – either in terms of higher price or a quicker sale.

They tested this by evaluating sales in Madison Wisconsin from 1998 to 2004. The dominance of a single local FSBO website makes Madison an ideal location to compare results – working with the local MLS and www.fsbomadison.com the authors of the study were able to access nearly every sale that occurred during the period.

The results are surprising: the average sale price of FSBO homes is higher than the average price of homes sold by a Realtor.

This directly contradicts a claim made by the National Association of Realtors that using a Realtor results in a 16 percent increase in average sales price. The NAR does not detail their methodology or the assumptions that they used to reach this number.

The Northwestern University study, however, is meticulous and transparent. The authors discuss the consistency of their data sets, study methodology, and their approach to resolving biases in the data sets.

But…the gig isn’t up for Realtors…yet.

1. The study was conducted in a relatively special place – Madison, Wisconsin – a region which has, for reasons not discussed in the study, developed a special culture in which FSBO sales have captured a significant percentage of the market. This fact, in itself, might skew the results. FSBO penetration hasn’t reached these levels in most other markets, and an FSBO seller is more likely to be viewed as an oddball, and that matters.

2. There’s a self-selecting factor which the study doesn’t adequately address. Negotiating a sale isn’t for everyone. Logic dictates that a) sellers who are good negotiators are more likely to get a higher price whether or not they use a Realtor and, b) sellers who are good negotiations are more likely, on average, to sell FSBO. The study addresses this, but not to my satisfaction (if anyone cares about this you can ask in the comments…)

FSBO conditions haven’t spread nationwide, and FSBO isn’t for everyone. The later condition won’t change, but the first one will.

So…who cares? What does this mean to me?

You’re an investor and this trend will impact you. Thoughtful studies like this one will continue to demonstrate that paying a Realtor $18,000 to sell your $300,000 house isn’t good value. FSBO listings will proliferate, and that’s a good thing for the investor market. A commission is a classic transaction cost, and transaction costs decrease liquidity and pull profit out of every trade, both for the buyer and the seller.

Realtors, however, will continue to be an important part of your business as a real estate investor. To respond to market pressures the real estate industry will have to start offering a suite of products that meet your needs and price them accordingly. As an investor you don’t need help finding your dream home, you don’t need a negotiator, and you don’t need to have your hand held through the transaction. What you do need is a competent business partner to supervise the paperwork drill and help make sure the deal closes efficiently.

That’s not $18 thousand worth of service that you’re asking for. Realtors who understand this and tailor their offerings and pricing will have investors beating a path to their doors

Recently I was looking for a new tenant for a single family home that was going to be vacant in about a month’s time. The house is in the back of a quiet cul-de-sac, so I spoke to a neighbor a couple of houses over on a busy corner and paid her $20 bucks to put a “For Rent” sign with my phone number in her front yard.

It’s a popular area so I got lots of calls. Some of them, of course, were from Realtors who wanted to help me lease the house. I like developing relationships with Realtors (as I’ll explain below) so I agreed to meet one. She rolled up on Saturday afternoon in a massive shiny SUV with a magnetized sign featuring a large glossy portrait of her smiling face.

She took a look at the place, declared that she thought she could help me, and explained that the charge would be one month’s rent plus a $150 listing fee. And free of charge she offered me lots of advice, like check the applicant’s credit and make sure the property is clean before you show it and call the applicant’s references before signing a contract.

She called me the following Tuesday to see if I was ready to list the property with her, but by then I already had it leased out myself.  This particular unit rented for $1,250/month, so I saved myself a total of $1,400.  Well, $1,380, including the $20 bucks I gave the neighbor to allow me to put the sign up. 

Realtors can offer a lot of value to investors…

…it’s just that your needs are different than the needs of standard consumers.

Bottom line: your needs, as an investor, are different than Joe Homebuyer’s needs.

There are three ways that Realtors will tend to react to this:

• Offer the same package of “value” that they offer to the general consumer and insist that you pay what the general consumer pays. You’ll get the “my services are worth it” angle from these Realtors. But that’s like arguing that a circular saw is worth fifty bucks: it might be worth that and more, but if the job calls for a drill then you’re paying for the wrong tool. Verdict: wrong answer.
• Offer you the “investor services” that fit the value drivers on the right hand side of the table above, but insist that you pay the same rate that they charge for the suite of services on the left. This is an “entitlement” mentality; the agent feels that his fee isn’t for service rendered, it’s for having his expertise supporting your deal. If you’re an investor this isn’t reasoning that you should accept. You should pay for the time and effort that agent puts into the deal; if you’re doing much of the heavy lifting then you shouldn’t pay the same as the next guy who buys a property once every other decade and needs his hand held through the entire transaction. Verdict: wrong answer.

• Offer you the “investor services” that fit the value drivers on the right hand side of the table above, and charge you appropriately. This…by process of elimination…is the “right answer.”

So, what does “charge you appropriately” mean? You’re the negotiator and so is your Realtor – sit down and work it out!

• No comps: I’m buying an updated four-unit complex in the trendy Montrose section of Houston.  There basically are two types of properties that you find in the comps: teardowns and new construction.  The building that I’m buying was originally built in the ‘30s, but has been updated with new wood floors, central air conditioning, a raised outdoor deck, and a number of amenities that make it a rare building.  Which means: there’s nothing to compare it to. Which in turn means: you have to trust your numbers because there’s really not much of a “market”. 
• Time pressures: The sale side of the 1031 was triggered by my selling the property to the tenant who I was renting to.  This was fortuitous in that I avoided vacancy, sales commissions, and all of the other hassles and expenses that are associated w/ marketing a property, but it also happened a bit quicker than I had expected – which meant that  I needed to be expeditious in my search in order to identify a replacement property within the IRS mandated 45 day window. But nothing like a deadline to keep you from getting paralyzed by the analysis. 
• Challenging negotiation: The goal of a negotiation is to efficiently reach a wise agreement in an ethical way.  This is easies when there is some alignment of the goals of the two parties and they negotiate directly. Well in this case the “alignment” part was potentially there. But the other elements weren’t. First: both the sellers and I were using agents – that in itself injects two additional degrees of separation into the negotiation, which makes effective communication more difficult. Add to this the fact that the seller was not a single individual; the property was owned by a group of three physicians who had teamed up on the investment, and who, based on their disjointed and confusing responses, had conflicting agendas. Messy. Once I get this deal tied up I’ll write about how some of the Getting to Yes principles helped keep the deal from stalling. 

But...looks like we're close to the finish line on this deal.  And appropriately, the deal is set to close on Friday the 13^th.  Not that I'm superstitious or anything...

• What does this mean to me? Gibson was ham-fisted in his response to this crisis, but in the end he was negotiating from a position of power. If you put your foot in your mouth while you’re holding a good hand then it might pay to concentrate on landing your next success instead of dwelling on the mess you’re in. 

• What does this mean to me? I think I’m a smart enough guy, but when I can choose between relying on being smart and being prepared I’ll choose the latter any day of the week. Be ready to think on your feet if you need to, but in high stakes situations it pays to spend some time beforehand getting your strategy straight. In their negotiation masterwork Getting To Yes Fisher and Ury call this “generating creative options.” Think ‘em through beforehand and have them in your back pocket if you don’t want to look like Michael Richards stumbling through his ad-lib on Letterman. 

• What does this mean to me? Gibson followed up his disgraceful tirade with a box office smash and may be on his way to redemption. Richards, on the other hand, will probably never land another acting gig. Imus was smart enough to realize his situation was a bit closer to Richards than Gibson, and he acted accordingly – so this will likely be a temporary humiliation (a la Gibson) than a death sentence like Richards.  When you're in trouble, pretending like everything is ok doesn't work.  Act. 

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Follow-up ::   Hmmm....well in hindsight it looks like I got that little detail about Imus being on the road to redemption kinda wrong.  Guess my crystal ball wasn't working too well.  But you can't get 'em all right...