Chapter 6

Building Your Team

In This Chapter

Assembling your team first

Hiring tax and financial advisors

Seeking lending professionals

Finding top real estate agents and brokers

Adding appraisers and attorneys

There are some investments — called passive investments — where you can simply turn your money over to professional money managers or financial advisors who then act on your behalf and make the day-to-day investment decisions, buying and selling investment assets within the portfolio. Mutual funds are an example of this type of passive investment. You send your money to your favorite mutual fund firm and periodically evaluate how your fund’s managers are doing.

Investments in real estate that you’re directly involved in managing are the norm, because passive investments in real estate aren’t readily available (except for REITs and TICs, which we discuss in Chapter 4). And for most real estate investors, real estate investing is hands-on and complicated enough to require the services and knowledge of a team of professionals. Although you may be skilled in your chosen field, it’s unlikely that you possess all of the varied and detailed skills and knowledge necessary to initiate and close a good real estate transaction.

Evaluate proposed real estate investments carefully and methodically before you make the ultimate purchase decision. The uniqueness of each potential real estate opportunity requires the investor to patiently critique the pending investment. You should understand the economic climate and potential for growth, the current physical condition of the property, the tenants, and the value of the property in the marketplace. Then you should ensure that you’ve got a solid negotiating strategy to orchestrate a deal, that the financing comes through, and that the transfer of real estate is handled properly. This requires a team approach.

In this chapter, we discuss the different real estate professionals and service providers that you should consider teaming up with as you search for real estate investment opportunities and proceed with the purchase of property.

Knowing When to Establish Your Team

Some real estate investors make the mistake of looking for a property to buy without spending enough time upfront thinking about and identifying the pros whose help should be retained. We recommend that you have your team in place before you begin your serious property searching, for two reasons:

• You can move quickly. The speed at which you can close a transaction is an advantage in any type of market. In a soft or buyer’s market, some sellers are desperate for cash and need to close quickly. In a rising or seller’s market, sellers typically don’t tolerate having their property tied up for a long time until closing with a buyer who doesn’t understand the current market conditions or how to properly evaluate the property. Sellers may be missing out on a better deal with a buyer willing to close quicker and/or pay more. In a buyer’s market, although less property may be selling overall, there is always demand for the most appealing properties that are priced right and well located. These properties often attract multiple offers, so being organized and efficient can make the difference between securing and losing a desirable property.
• You can effectively research the property before making an offer. Prudent investors conduct research and gather information before they even make an offer, so they know which property or properties are worth seriously pursuing. Typically, the real estate industry describes due diligence as the period of time after you place a property under contract (see Chapter 14). But you really need to perform due diligence even before making an offer. You don’t want to waste time or money on a property that can’t meet your goals.

  Some real estate investors like to make an offer and get a property under contract before they begin due diligence. We believe that this is a mistake and can lead to a reputation with sellers (and agents) that you’re not a serious buyer (see the “Working with Brokers and Agents” section later in the chapter). We recommend only making offers when you have done enough due diligence to feel comfortable that your further, thorough review of the property interiors and books probably won’t reveal any surprises that will lead to canceling the purchase.

  The most effective research is done with the assistance of real estate professionals to give you the advice and information you need to make an intelligent decision. This pre-offer period is critical; it’s the one real opportunity for a prospective buyer to investigate a property while retaining the ability to terminate the transaction without a significant monetary loss. You may invest time and several hundred to several thousand dollars to perform the necessary due diligence, but this is a small amount compared to the potential losses from the purchase of a bad property. (We cover this prepurchase research in Chapters 10 through 12.)

Adding a Tax Advisor

A tax advisor may not be the first person that you think to consult before making a real estate transaction. However, our experience is that a good tax advisor can highlight potential benefits and pitfalls of different real estate investment strategies. Of course, make sure that your tax person has experience with real estate investing and understands your needs and specific goals in regard to your property investments. (We cover the ins and outs of real estate accounting and taxation in Chapters 17 and 18.)

Although you may pick up a lot of information about real estate and discover some of the advantages of property investing speaking with some tax people, don’t rely on generic information (“investing in real estate offers a terrific tax shelter,” for example). You need specific feedback and ideas from a tax expert regarding your unique financial situation and which types of real estate investments work best for you.

Based on your age, income, and other important factors, the benefits you seek from real estate may be entirely different from other investors. Many real estate investors are looking for immediate cash flow from their properties. But others have sufficient income currently from other sources and prefer to look at real estate as a wealth builder for their retirement years. And almost all real estate investors are looking for tax benefits.

The role of your accountant is to evaluate and recommend investments and tax strategies that maximize your financial position. Remember the old adage that says, “It’s not what you make that matters but what you keep.”

A good tax advisor with property investment experience can tell you whether your best real estate investment is the direct ownership of properties or perhaps owning triple net leased properties with lower returns but fewer management headaches. An accountant can inform his clients as to whether they can (or how to) meet the active participation required for certain tax benefits while hiring a property management company to handle the bulk of the day-to-day tenant/landlord issues.

You may also want to find out whether you qualify for the added tax benefits that are available for some investors who qualify as real estate professionals. Achieving such qualification isn’t easy, and the IRS may someday audit you, so be sure to implement a reliable method to document to ensure that you meet the requirements. Meet with your tax advisor and get to know the benefits and pitfalls of your proposed real estate investments before you start making offers.

Finding a Financial Advisor

Over the years, Eric has written extensively about the financial planning profession and how individuals can best navigate important personal financial decisions with and without the help of planners. In theory, everyone entering into major investments like real estate should seek holistic financial advice from a financial advisor who charges an hourly fee.

In reality, many financial consultants sell investment and insurance products that provide them with commissions or manage money for an ongoing percentage in stocks, bonds, mutual, and exchange-traded funds, and the like. Such salespeople and money managers can’t provide objective, holistic advice, especially on real estate transactions. When you buy property, you spend money these people want to manage. Check out the “Avoiding financial conflicts of interest” sidebar in this chapter for more information.

If you’ve worked with or can locate a financial advisor who sells her time and nothing else, just as a good tax advisor does, consider hiring her. A true financial advisor can help you understand how real estate investment property purchases fit with your overall financial situation and goals. (Chapter 1 discusses all the variables that affect the way your investments mesh with your situation and goals.)

Avoiding financial conflicts of interest

Here are a couple of stories that highlight the conflicts of interest you may be subjected to when working with a financial advisor.

• While serving as an expert real estate witness, Robert had a case where a retired couple was given some self-serving advice by their financial planner. This couple owned their principal residence plus three other rental homes valued at $1 million. All of their real estate was owned free and clear, and the rentals were in great condition with good long-term tenants. The properties provided a nice monthly income stream that was mostly tax-free due to their depreciation deduction (see Chapter 18). Although the real estate was clearly their largest asset and completely debt-free, they also had nearly $500,000 in liquid assets such as stocks, bonds, and IRAs and seemed to be fairly set. That was, until their new financial advisor told them that their retirement was at risk because they had too much invested in real estate. The planner’s recommendation was to keep their own home as their real estate investment, but sell the three highly appreciated rental properties and invest the proceeds in mutual funds and other financial products from companies affiliated with the planner.

  The planner failed to disclose his relationship with the sponsors of the new investments and also failed to warn them about the significant capital gains taxes that would be due upon sale. By the time they met with their accountant, it was too late — two of the three rental properties had been sold and more than $200,000 in taxes was due. The accountant advised the couple to contact an attorney and file a lawsuit against the financial advisor. Although the couple prevailed, they recovered only a small portion of what they paid in taxes. Even worse — they lost the benefits of cash flow and appreciation on their real estate while now owning fully taxable investments.

• In Eric’s previous work as an hourly-based financial advisor, he often had clients come to him who were disappointed with the biased and confusing advice they got from various so-called financial planners. In one typical case, a widow had been told by an advisor to sell her two investment properties because he believed that the stock market would produce better returns. She set the wheels in motion to unload the properties but put the brakes on at the last minute after deciding she needed a second opinion. She met with Eric. The first thing that she noticed working with him was that he was far more thorough in examining her overall financial situation, including all of her investments, insurance, and resources for retirement. She also realized that she was happy with her real estate holdings and really didn’t have any motivation to sell them. Furthermore, she found out from Eric that over the long-term, the returns from stocks and real estate were quite comparable. She thus decided to keep her life simple and stable and hold onto her nicely performing rental properties.

Don’t get us wrong, selling real estate can make sense at times. However, you must ask a lot of questions and run any proposed investment strategies by good independent advisors before you make the decision to liquidate your real estate and shift your investments to other opportunities.

Lining Up a Lender or Mortgage Broker

Before looking at specific real estate opportunities, you need a budget. And because your budget for real estate purchases is largely a function of how much you can borrow (in addition to your cash available for a down payment), you need to determine the limits on your borrowing power. If you can’t afford a property, it doesn’t matter what a great deal it is.

Postpone making an appointment to look at investment properties until after you examine the loans available. You have two resources to consult:

• Lender is a generic term for any firm, public or private, that directly loans you the cash you need to purchase your property. This type of lender is often referred to as a direct lender. Most often, your list of possible lenders includes banks, credit unions, and private lenders (including property sellers). Lenders tend to specialize in certain types of loans.
• A mortgage broker is a service provider that presents your request for a loan to a variety of different lenders in order to find the best financing for your particular needs. Just like real estate or insurance brokers, a good mortgage broker can be a real asset to your team (we cover mortgages in detail in Chapter 8, along with the advantages and disadvantages to working with mortgage brokers versus direct lenders in Chapter 9).

Understanding lending nuances

Lenders and mortgage brokers are in the business of making loans. That’s how they make money. Their product is cash, and they make money by renting it to people and businesses that pay them the money back plus interest, which is the cost of renting the money. Money is a commodity just like anything else and its availability and pricing are subject to an assortment of variables.

Lenders and mortgage brokers want to find you money for your next real estate purchase, but they’re not objective advisors to provide counsel for how much you should borrow. They’re trained to calculate the maximum that you may borrow. Don’t confuse this figure with the amount that you can truly afford or that fits best with your overall financial and personal situation. Because they only are paid when they make loans, many borrowers have learned the hard lesson that some lenders and mortgage brokers are willing to make any loan.

So why is getting a loan so difficult at times? Because lenders want to make loans to those investors who are a good credit risk and who they think have a high probability of repaying the loan in full plus the interest. This concern became more pronounced in the late 2000s as real estate prices fell and defaults and foreclosures escalated. The lender has costs of doing business and needs to make a profit. Because the money they lend often belongs to their depositors, lenders need to be careful and selective about the loans they make. (See Chapter 9 for more information on the necessity of a good credit rating when investing in real estate.)

On the upside, we’ve found that lenders can also serve a valuable role by preventing you from making serious mistakes. Particularly in overheated seller’s markets where prices are irrationally climbing with little fundamental economic support, your lender and the required appraisal from a competent professional appraiser can keep you from getting caught up in a buy-at-any-price frenzy. (Of course, this isn’t always the case; look no further than the subprime loan debacle that came to light in the late 2000s.) In these markets, lenders tend to be a little more conservative, limiting loan amounts and requiring larger down payments. These factors provide the lender with additional protection should market prices fall, but they’re also a signal that the lender feels the loan exceeds the intrinsic value of the property that they’ll be stuck with if you default. Smaller loan offers with higher down payments are a clue that you may be paying more than a property is worth or buying at the market’s peak.

The lender requires collateral to protect them if the borrower doesn’t make the debt service payments as required. Collateral is the real or personal property that’s pledged to secure a loan or mortgage. If the debt isn’t paid as agreed, the lender has the right to force the sale of the collateral to recover the outstanding principal and interest on the loan. Typically, the property being purchased is the pledged collateral for real estate loans or mortgages.

Building relationships with lenders

Relationships with lenders can take time to build, so begin looking for lenders that specialize in the types of properties within the geographic area that you have targeted. They can help you understand your financial qualifications or how much you can borrow before you begin your search for an investment property. Although lenders only make money by making loans and some lenders seem to be willing to lend money on any property at any price, the type of lender you should associate with is one who understands real estate cycles and your local real estate market. Not all lenders and mortgage brokers were hit by the subprime lending mess, and it does matter that you develop a relationship with a lender that’s likely to be there when you want to acquire additional properties.

When you get together with your lender or mortgage broker, provide them with your latest personal financial statement, which includes your income and expenses as well as your assets and liabilities and net worth. The days of “no documentation” or “stated income” loans are hopefully over.

Always be truthful with your lender. One way to sabotage a relationship with a lender is to exaggerate or stretch the truth about your current financial situation or about the potential for your proposed property acquisition. Most lenders require supporting documents for your income and assets and will obtain a current credit report. When you don’t oversell yourself or your proposed property, lenders are often more willing to work with you and even offer better terms.

Working with Brokers and Agents

Your investment team should include a sharp and energetic real estate broker or agent. All real estate brokers and agents are licensed by the state in which they perform their services. A real estate broker is the highest level of licensed real estate professional, and a licensed real estate sales agent is qualified to handle real estate listings and transactions under the supervision of a broker. The vast majority of real estate licensees are sales agents. Throughout this chapter, we refer to both real estate brokers and agents simply as agents.

A real estate agent must have his license placed under a supervising broker who’s ultimately responsible for the actions of their sales agents. Real estate brokers often begin their careers as real estate agents, but it’s possible to meet the more stringent qualifications and immediately qualify as a broker. Brokers and agents can perform the same functions; many real estate agents actually have more practical experience and hands-on market knowledge than the brokers they work for. Brokers that have many agents reporting to them often spend most of their time educating, supervising, and reviewing the transactions presented by their agents. So, if you have a problem with an agent, contact the broker — the buck stops with her!

Generally, you deal with real estate agents, but the added experience and dedication of a broker can be beneficial to you if you’re involved in larger and/or more complicated transactions. Real estate agents are fine to handle the majority of real estate transactions, including the typical purchase or sale of an owner-occupied single-family home or condo. However, many owners of investment real estate don’t want the disruption that can occur with openly listing the property. The management company and employees begin to worry about their jobs, and tenants become concerned that rents will be raised. These problems can be avoided by quietly talking to one or two top brokers in an area with the understanding that the potential transaction is to be kept confidential. This leads to some great opportunities for the top brokers and their clients.

Whether you use a broker or an agent, make sure that this person has a solid track record with investment property transactions in your area. And although having a real estate agent on your team is an excellent strategy that gives you a competitive edge, don’t completely ignore the Multiple Listing Service or in-house listings of brokers. Such sources often include properties that other investors overlooked because they didn’t have the vision or the right team members to see a potential opportunity.

Seeing the value of working with an agent

In many metropolitan areas, looking at the properties on a Multiple Listing Service (MLS) or in the newspaper or online listings isn’t enough. The best deals are often the ones that don’t make it into these sources. This is where the “insider information” from real estate sales agents can make you the bride and not the bridesmaid. (Of course, many brokers are themselves interested in investing in income producing properties, and they have the first chance at the best deals.)

You want to be the first one contacted about the best properties coming on the market rather than one of many when everyone knows about the property from the MLS. The MLS is a service created and maintained by real estate professionals per guidelines established by the National Association of Realtors (NAR). This service gathers all of the local property listings into a single place so that purchasers may review all available properties from one source. The MLS also deals with commission splitting and other relations between agents.

For many years the MLS dominated the markets, but the Department of Justice filed an antitrust lawsuit that was settled with NAR in 2008, agreeing that other listing services would be given access to the same listings. Now there are several investment real estate listing services that are gaining market share and offering instant access to an incredible database of information on all types of properties from single-family homes and condos to large commercial, industrial, and retail properties. Two of the most popular listing services for investment properties are Loopnet (www.loopnet.com) and CoStar (www.costar.com).

Grasping the implications of agency: Who the agent is working for

When you deal with a real estate agent, you need to know who she represents. Real estate investors need to understand the concepts of dual agency and single agency and the implications of each:

• Single agency: This is when an agent only represents the buyer or the seller. The other party either represents herself or is represented by an agent who doesn’t work for the same broker as the other agent. For example, a buyer’s agent only has a fiduciary relationship with the buyer. The buyer’s agent has a duty to promote the interests of the buyer and keep all information confidential unless legally required to disclose. The buyer’s interest should be first and foremost, and no information is passed to the seller without your knowledge other than that information that directly affects your ability to perform on the contract as written.

  We strongly recommend that you work with an agent who operates as a single agency representative. A lot of money is involved in income property transactions, and you want to have someone looking out for your interests whether you’re buying or selling an investment property.

• Dual agency: A situation in which the same individual agent represents both the seller and the buyer or when two different agents representing the seller and buyer are from the same firm (with the same broker). With any transaction, each agent involved owes a fiduciary duty of loyalty to each client he represents, but this is nearly impossible for one agent who is representing both the buyer and seller in the same transaction (and difficult as well if two agents work for the same broker).

  Avoid the inherent conflict of interest found with dual agency and establish a relationship with a single agency agent who represents only your interests. Dual agency makes it extremely challenging for one agent, or two agents working for the same broker, to be loyal to clients with opposing interests. For example, an agent may hear confidential information from sellers about what their minimum acceptable price is, and the same agent or another agent from the same firm hears from buyers that they’re willing to pay more than what they first offered.

Agents, and especially their brokers, prefer dual agency — they generate more commissions by representing both sides of the transaction. That’s why many agents start out showing their clients only properties that are listed by their firms. However, this desire to capture a bigger share of the real estate commission has led to some serious conflicts of interest. Now most states either prohibit dual agency or at least require the agent to disclose the exact nature of the agency relationship prior to commencing the representation of a client by taking a listing, showing a property, or making an offer.

Getting a feel for compensation

Real estate agents are generally motivated to see the transaction go through because they’re compensated when a sale is made. Compensation for agents is typically calculated as a percentage of the sales price paid for a property. So the agents actually have an interest in the property going for a higher price. Commissions vary based on the property and the size of the transaction:

• Individual residential properties, such as single-family homes and condos, have commissions of 5 to 6 percent of the sales price.
• Small multifamily and commercial properties are often in the 3 to 5 percent range.
• Larger investment properties have commissions of 1 to 3 percent.
• Raw land (in its natural state with no grading, construction, or improvements) is usually at 10 percent, unless the acreage is large. Subdivided or finished developable lots in suburban areas typically draw a lower commission.

These commissions are typically split between the firm listing the property for sale and working with the seller and the agent representing the buyer. The actual proportion of the split varies, with the listing agent sometimes taking a smaller percentage than the buyer’s agent if the commissions aren’t evenly split. The commission actually is paid to the broker, and the agent receives his share based on his employment or commission agreement, which also often calls for the agent to cover some of his own expenses and overhead.

Real estate commissions can be a significant cost factor for real estate investors. Most listing agreements acknowledge that commissions aren’t fixed by law and are negotiable. Traditionally, the seller “pays” the commission to the real estate agents involved in the transaction, although because the buyer is the one paying for the property, we say that both the buyer and seller ultimately pay for the agent’s commissions.

Real estate agents do add to the cost of purchasing property, but a good agent, like a good property manager, can justify the cost of her services by introducing you to properties that you would not otherwise have an opportunity to purchase. A good agent earns her commissions other ways as well — as a good negotiator and through her other marketplace knowledge.

Some real estate investors get a real estate license so that they can eliminate paying at least one-half of the real estate commission to agents. Be sure to disclose immediately to all parties prior to entering into any transaction that you’re a licensed real estate agent. And at times you’ll be able to use your sale’s or broker’s license to effectively reduce your transaction expenses and investment requirement by representing yourself in a transaction. This is particularly helpful when you’re looking to sell a property in a strong seller’s market.

But as a licensee you need to be very careful to follow all real estate disclosure laws about your licensing status to all parties in the transaction. Generally, a real estate agent is expected to have more knowledge in a real estate transaction than others without such credentials. Thus, you must be very careful when you act as an agent and a principal in a purchase or sale transaction.

Although you may often have superior knowledge of market values and opportunities in the marketplace, you need to make sure that you’re not self-dealing or taking advantage of insider information that would have a material impact on the value of the property. A real estate agent who buys properties for the long-term for his own account is not likely to be challenged, but such an individual that uses his knowledge to flip properties for a quick profit may be subject to claims by the seller that he withheld information. For example, you may find yourself named in a lawsuit if you bought a property at a low price when you knew that a new road was going to be built that would greatly enhance the property value in the next year or so.

Robert has seen many allegations against licensed real estate professionals who have been accused of self-dealing or failing to act properly in real estate transactions when they buy the property for an entity that they have a financial interest in or have a straw man or secret partner. This situation can happen even if you disclose your real estate license status and your financial interest in the buyer entity, but it is illegal and likely to be considered more egregious if you conceal this information from the seller. Agents have also been accused of illegal activity when they sell their own property (for example, as a tenants in common or triple net investment opportunity) at a much higher than market value.

One example from Robert’s litigation consulting practice involved a real estate agent who advised an elderly owner to sell a residential rental fourplex where the apartments were contiguous but each rental unit was on a separate lot. The agent advised this unsophisticated owner to sell all four units as a single property to a business associate of the agent. Then the new owner turned around and within less than 12 months had sold each of the four individual properties separately at a gross profit of over $1 million. The agent clearly knew that real estate sold in smaller increments generates a higher overall value. The aggrieved elderly owner filed suit against the agent.

Finding a good broker or agent

The key to finding a good broker or agent to assist you in the purchase of investment real estate is to narrow the field down to those individuals who are the best. Look for folks with the following qualifications:

• Full-time professional: Because the commissions earned on the sale of a large income property can be so great, you’ll find that almost every broker or agent will claim that she can represent you. But you want to eliminate those brokers or agents who are greedy, incompetent, or simply mediocre. Although many part-time real estate professionals sell single-family homes and condos, you’ll quickly find that the most qualified real estate investment property agents are full-time.
• Expert in the geographic market and specific property type: Find someone who knows your market and the specific property type you’re seeking. This knowledge is especially important if you don’t live nearby. Avoid brokers who aren’t experts in your specific property type. For example, don’t use a broker who specializes in single-family homes and condominiums unless that’s your target market. Likewise, a commercial property broker is unlikely to have the best investment opportunities for your consideration with single-family investment property.

Some real estate investment books advise you to contact every broker or real estate agent who targets your preferred geographic area. Although casting a bigger net has some inherent attraction, our experience is that you should only work with one broker or agent at a time in a given market area.

Real estate agents can be a key source for new investment opportunities and general market information. This is where our advice about finding an experienced agent who specializes in the types of properties you’re looking for and knows the local market pays off. These agents know buyers and sellers and also possess contacts for other services and products that you need as your real estate investment portfolio expands.

After narrowing down the candidates, you can apply many standard screening techniques to pinpoint the top three that you should interview:

• Verify the professional’s license status: Nearly every state has an online broker and agent database, so this step is simple. Confirm that their real estate license is current with no citations or disciplinary action for past or pending violations. Note that not all states will post pending violations but only adjudicated or resolved matters, so ask your agent directly. If you’re using a real estate agent, check both the license status of the agent and her supervising broker. If the broker or agent has been disciplined by the state, inquire further to understand the relevance to your transaction. A suspension or temporary revocation of a license can be a serious issue — even if it was reinstated. The facts of the case may be material to your choice of a real estate professional.
• Check references: Get the names and numbers for at least three clients (in the geographical area where you’re seeking property) that the broker or agent has worked with in the past year. Investment real estate transactions tend to be fewer than owner-occupied property transactions, so speaking with three or more clients from the last year maximizes your chances of speaking with clients other than the agent’s all-time favorites.

  Don’t just ask for the references; call them. And don’t just ask generic questions about whether the client was happy with the broker or agent. Dig deeper — find an agent who you can work with on investments that are critical to your long-term wealth-building goals. Ask questions about the types of properties and the geographic locations involved. Ask questions like, “Did the broker or agent assertively represent you and take charge of the transaction or did you have to initiate conversations?”

Consider these traits when investigating potential brokers and agents as well:

• Willingness to communicate with you: The number one complaint about real estate professionals is that they don’t keep their clients informed during transactions. You’re looking for someone with experience who isn’t necessarily the top producer, because you want someone who can take the time to communicate regularly with you.
• Interpersonal skills: A broker or agent needs to get along with you and with a whole host of others involved in a typical real estate deal: other agents, property sellers, inspectors, lenders, and so on. An agent needs to know how to put your interests first without upsetting others.
• Negotiation skills: Putting a real estate deal together involves negotiation, so you want a broker or agent with negotiating skills and lots of experience in larger transactions. Is your agent going to exhaust all avenues to get you the best deal possible? Be sure to ask the agent’s former clients how the agent negotiated for them.
• Reputation for honesty, integrity, and patience: When it comes to the brokering of investment properties, the reputation of your representative can be critical. Brokers or agents with a track record of dealing fairly with their clients and their peers can greatly assist in gaining the cooperation of an adversarial seller. And gaining such cooperation is often needed to close a complicated transaction. Some strife is almost guaranteed when buying investment real estate — there are several opportunities where the transaction can unravel and only the trustworthiness, perseverance, and patience of the real estate professionals involved can keep the transaction on course.

Making the most of your agent

To get the best deals, timing is critical. You want your broker or agent to think of you first. To do this, you need to build a solid rapport with your agent, which you can do by building a track record of not wasting the time of your professional team. Because agents only get paid for deals they close, they’re not interested in investing time and energy with numerous potential buyers. They want serious buyers who will close the deal. Plus, if you garner a reputation of tying up properties and then renegotiating the deal or canceling the escrow, you’ll find that your offers won’t be accepted in the future. Sellers and their brokers don’t want to waste time with phantom buyers.

If you’re not interested in or not able to purchase a property at the time, let your agent know at once and explain your situation and thank him for thinking of you. A handwritten thank-you note or simple gift also lets him know that you appreciate his efforts — and keeps you at the top of his lists for the next opportunity.

Considering an Appraiser

Many real estate investors know appraisers solely in the role of providing the property valuation report required by lenders. And it’s generally in this role that investors can find appraisers to be a source of aggravation rather than a potential resource. However, an appraiser can be an effective team member if your real estate investment strategy involves buying and selling properties with somewhat-hidden opportunities to add value. Appraisers see many properties over their career and thus often possess insight into real estate opportunities that others miss.

Appraisers can help you by telling you the current value of a property, but they bring real value as part of your real estate investment team by

• Providing insight into the factors that can lead to an increase in the market value of a property.
• Assisting you in maximizing the return on your investment by suggesting cost-effective and high demand upgrades to distressed or fixer-upper properties.
• Giving you useful information on the demographics of the area and helping to identify those properties that are distressed but have plenty of upside potential (properties requiring work in good neighborhoods).

One of Robert’s partners, a highly successful real estate investor in foreclosure properties, has even hired an appraiser as an in-house member of his real estate investment team. Virtually every property that appears on the weekly Notice of Default list from the title company is reviewed first by the appraiser, who looks for properties that are located in the path of progress and with some real upside potential if brought to marketable condition physically and aesthetically. (For more on Notice of Default, see Chapter 3; for information on getting in front of the path of progress, see Chapter 10.)

The appraiser is also able to assist in determining the as-is value and the cost of making the necessary repairs and upgrades to the property. This information helps the investor establish the maximum price she should pay for the property, based on comparable sales in the market.

As many have learned from the debacles of the real estate collapse in the early-1990s and the late-2000s subprime disaster, appraisals are often an art and can be very subjective. You need to make sure you find an appraiser that has a comprehensive education and training in proper appraisal techniques and complies with the Uniform Standards of Professional Appraisal Practice (USPAP) set out by the Appraisal Foundation. The appraiser you use should have extensive product knowledge of your target property type (residential, commercial, and so on.) along with significant experience and market knowledge in your area. Contact the local American Society of Appraisers and the Appraisal Institute for referrals. Like many of the top professionals you seek for your team, you should not simply look for the lowest price, because you may end up with an inferior appraisal.

Finding an Attorney

You may think that adding an attorney to your real estate investment team seems like an expensive luxury that you can’t afford. Indeed, you may be able to purchase properties when you’re just starting out as a real estate investor without consulting an attorney, because buying a small rental property is often not much different from purchasing your own home. The process is relatively simple with preprinted forms that seem so easy to complete. And you usually have an experienced real estate agent to guide you through the process. (See Chapter 13 for information on locating forms.)

For simple transactions, the retention of an attorney is strictly a function of whether attorneys are traditionally involved as the intermediary or closing agent. If you live in an area where attorneys aren’t usually involved in real estate transactions, an attorney may not be necessary. In some states, having an attorney is essential to handle the transaction and closing.

We strongly suggest that you consult with an experienced real estate attorney as your investments increase in size and complexity. With more complicated transactions, have the attorney review the documents — even in states where the title or escrow company handles the paperwork and serves as the independent intermediary or closing agent. A good real estate attorney can help you structure proposed transactions. Particularly if you’re looking into a large transaction where you assume loans or you’re attempting to secure special financing, a competent real estate attorney can be invaluable.

Robert’s late father, a real estate attorney, taught him early in his real estate investment career that the best time to consult with an attorney is before you finalize the proposed transaction. There is nothing your attorney can do to avoid legal snafus and expensive litigation if he isn’t hired to draft, review, and negotiate the terms of your proposed transaction in advance. Although such a review may cost you some money up front, it’s definitely much more economical than having to hire an attorney to get you out of a bind.