I put a premium on making things happen and getting things done. If I compare a bunch of B+ deal that I can actually get done vs. an A+ deal that doesn’t close guess which one I prefer?

This is a philosophy that I’ve learned over time, and one that doesn’t really jive too well with my background as an Army officer and my academic training as an engineer – two disciplines where finding the right solution is pretty darn important. So this is something that I have to work at.

This extends to the way that I deal with people. Real estate is a people business. Yeah there’s financing, and strategies and technical know-how, but at the end of the day it’s all about you and the person sitting across the table from you – whether she’s a contractor, a Realtor, or a buyer.

So I’m rarely thinking about cutting the best deal I can. I focus on cutting a good deal; one that I’m satisfied with, which gives me a good return and one which builds the relationship. A good relationship today will yield more good deals tomorrow.

Loyalty is important to me, and that is a value I try to communicate through my actions. Case in point - when I have a maintenance issue that I have to deal with here’s what I like to do: I call the contractor and tell him to head over to 123 Elm Street and take care of it, then send me the bill. No bid. Just fix it.

Now I certainly can’t always do this because many contractors are evil and dishonest (sorry if I offend anyone, but this is a statement of fact.) But I can do this with one particular contractor that I work with on a regular basis. I trust him, he trusts me, and we have a symbiotic relationship – this is a relationship that I value like gold. I know he’s not going to rip me off because he knows I’ll be coming back – he values the repeat business. And he knows I will treat him fairly, because he knows that our arrangement helps me manage my life – I value the ease and convenience. We both value the relationship and we both take care of it. Honesty. Trust. Case closed.

Reciprocal, symbiotic relationships don’t grow on trees and they don’t happen overnight. I always think of those hippos on the Discover Channel with the little birds perched in their wide open mouths. A real win-win deal: the hippo gets clean gums and the little bird gets an easy, risk-free meal of leeches and whatever else hippos end up getting stuck between their teeth. Kind of a disgusting analogy, when you really think about it.  Anyway, what you don’t want is to realize that you’re more like one of those whale sharks that has a bunch of blood sucking remoras attached to his underside; the remoras get a free meal and free transportation to boot, but the whale shark gets jack.

So relationships are something you have to keep reevaluating; make sure you're getting what you think you're getting. 

A few days ago I wrote a post about inefficiencies in the real estate industry, and how most investors who sell a home using a Realtor will end up overpaying if they pay a five or six percent commission.

I wrote a similar post over at ActiveRain, a real estate network populated primarily by Realtors. A fairly interesting dialogue ensued, but overall I felt about as welcome as Don Imus at a rap concert.

But no surprise there; ours isn’t an industry that embraces change. But some of the comments did illustrate the fact that working with Realtors is an important topic for real estate investors, and it’s one that’s worth spending a few minutes considering.

Just to set the record straight: I’m a fan of Realtors. The good ones are part financial analyst, part industry specialist, with a healthy dollop of psychologist in the mix. There are a couple of Realtors out there in blogland who write particularly good copy for real estate investors – particularly Jeff Brown and Chris Lengquist (Jeff might be a little in-your-face for sensitive readers; make sure you bring your sense of humor).

But, ironically, having these guys around can be a little dangerous – especially for new investors. Is it because they give bad advice. No – they give great advice – and that’s just the point. It’s a fair bet that the Realtor that gave you that magnet advertisement that’s stuck to your refrigerator right now is billing himself as an investment specialist too; but the chances are slim to none that he has the experience or background that Jeff and Chris have. Don’t be fooled; your chances of finding a Jeff or a Chris in the real world: slim to none.

So: what’s an investor to do? Well you gotta know what to expect, so here’s four things that I think you should keep in mind…

• Realtors help you get deals done. The vast majority of investors – yours truly included – are part time investors. You invest in real estate to diversify your investments, earn a superior rate of return, and secure your future – but you have a day job too. There will be times that if you try to do everything yourself you either won’t get the deal done, or you won’t run all of the traps and end up making a mistake. Here’s my analogy: I can put a tile floor in myself – but this is work that I tend to outsource. Getting help will assist you in making things happen. Hire one when you need to.
• Realtors won’t bring you deals. In my experience you’ll never get a Realtor to bring you a good deal. That’s just not the way it works. A Realtor with the ability to spot a good deal will take it for herself when one comes along. So by definition if a Realtor hands you an opportunity it means either a) she doesn’t know a good deal when she sees one or b) she does know a good deal when she sees one and this one ain’t. But hey, in her view a commission is a commission. Word to the wise: expect to find your own deals.
• A Realtor is unlikely to be able to give you good investing advice. But you should expect him to give you competent advice on buying and selling a house. I use a Realtor at times, and she doesn’t really know much about investing. And that’s ok with me; I’m not paying her to give me investing advice. I read some writers insist that investors should only work with Realtors who own real estate investments themselves, but that advice strikes me as a bit wrongheaded; you shouldn’t be depending on the person who’s going to bag a commission from your purchase/sale to give you advice on whether or not said purchase/sale is a good investment.
• Loyalty, loyalty, loyalty. Ours is a business of relationships, and creating a symbiotic, mutually beneficial relationship is one of the best investments that you can make. Your average homebuyer buys a home and sticks around a while. Your average investor buys a home, then buys another one, then buys another one. Create a relationship with your Realtor and show him that you value his services and it won’t take him long to figure out that you’ll be coming back – and there’s no way to get a service provider’s undivided attention than being a repeat customer.

The four points above apply to everyone. Here’s another couple for those of you with a few deals under your belt.

• Take charge of the negotiation. You should be in the driver’s seat, not your Realtor. Call your own shots, drive the negotiation tactics, set your own pricing strategy. Your Realtor should be there to advise and execute, not to decide.
• Cut costs when you sell. That means FSBO, flat fee, or deep discount. In the past I’ve argued that the buyer bears part of the sales commission via an increased sales price, but when you’re the seller there’s no doubt that this hits you in the pocketbook. Once you’re confident about handling the deal yourself an extra 6% in your pocket at closing is no small deal.

There’s no getting around it: there’s simply too many real estate agents out there.

I wrote in a recent post that real estate investors who work with a Realtor will generally end up overpaying for their services; if you pay a $12,000 commission check it’s highly unlikely that you’ve actually gotten $12,000 worth of time or effort out of the Realtor that supported you. And note that a healthy portion of that fee will be passed directly to the buyer – the idea that “the buyer doesn’t pay a commission” is a myth.

This isn’t to suggest, however, that agents are greedy or that they’re raking in the big bucks. Average Realtor income, according to the National Association of Realtors, is under $50,000. This is more than the average elementary school teacher but less than a financial service representative or an engineer.

Buyers and sellers pay too much in commission but many agents still struggle. What gives? The answer is simple too many real estate agents.  

But there is an odd phenomenon at work here. Usually when there is a glut of supply for services the price for those services drops accordingly. Supply and demand reset that price accordingly, delivering better value for the consumer at the new equilibrium point. However, in this case the National Association of Realtors has done everything in its power to resist the market’s natural ability to find equilibrium: everything from attempting to monopolize MLS data to doggedly defending the current commission structure to fighting to keep the banks out of the game.

I lived in Bogotá Colombia for three years. Bogotá is a beautiful city with great people and I enjoyed my time there. But the traffic is awful – mainly because there are too many taxi cabs on the roads. And the taxi drivers have to work morning, noon and night just to scrape by because there is so much competition – and that just keeps everyone on the road more hours (using more gasoline) which in turn creates more completion...and so on and so on.

The same thing is happening here in our real estate industry. As the market booms more and more agents are pulled into the industry chasing the same number of 6% commissions. And the industry’s leadership clings to the status quo instead of encouraging new business models that will evolve with the consumer’s needs.

:: So what does this mean for investors?

First of all a new business model is coming. Will it be Redfin? This question makes me think of a now forgotten company who’s stock I bought back during the dot com boom. This particular company was working on a groundbreaking new music format called MP3. I saw that this technology was going to be big, but unfortunately I bet on the wrong horse. Apple won and the stock I bought tanked.

So...has Redfin picked the right model? I think so. But will they win the race? Who knows – but the odds are against them. If I were a betting man I’d put my money on someone coming out of left field. Citibank? Google?

But for now: no investor should be paying 6% to sell a house. New options are already popping up – I'll talk about this in a future post.

Update - 11 July:  I posted this topic over on Active Rain, a blogging network populated primarily by Realtors.  I got a pretty lively reaction...

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 stand