As a real estate investor, I know I’m a little weird.
I know I look at houses different than most people. I know I expect a lot out of real estate agents and have a special way of doing things. I know I’ve probably irritated my fair share of agents over the years – especially in the early years.
I also know that a lot of agents simply are not equipped to deal with my “weirdness” and quirks as an investor – and I don’t blame them. Most agents deal primarily with non-investors, are trained by non-investors, and work in brokerages managed by non-investors.
However, I believe working with investors can be one of the best career decisions an agent can make, which is why I wanted to write this guide – to give real estate agents an inside look into the way my mind, as an investor, works so it can help those agents become better at their careers, make more income, and help more people.
If you are an agent, I encourage you to read this whole post (I know, it’s long!) and ask questions at the end in the comments section. My goal is to better equip you to deal with investors so you can take your business to a new level. In this guide, we’ll cover: (click to jump to that section)
- Using a “100 Year Old Rule” to Maximize Your Income
- Do You Hate Working with Investors?
- The Benefits of Working with Investors
- Free Real Estate Investing Education – for Your Clients and You
- What YOU Need to Know About Real Estate Investing.
- How to Really Calculate Cash Flow
- How to Interview a Potential Investor Client: Ten Questions to Ask
- Helping Your Client with Financing
- Making Offers for Investors
- Selling for an Investor
- How to Attract Investor Clients
- What about CCIM?
Using a “100 Year Old Rule” to Maximize Your Income
As an agent, a good portion of your time is spent generating leads. Whether it’s a photo on the side of a bus, a paid profile on Zillow, or simply handing out business cards at a networking event: leads are the lifeblood to a real estate business (Tweet This!) However, all leads are not created equal.
In his book, “The Four Hour Workweek” (ignore the sensationalist title) author Tim Ferriss talks about harnessing the power of the “80/20 Rule” to increase productivity and output. Essentially, the 80/20 Rule states that for for many events, roughly 80% of the effects come from 20% of the causes. For example, 20% of your neighbors cause 80% of the noise, 20% of my bean plants produce 80% of my beans, 80% of the wealth is controlled by 20% of the people (though, I think it’s even greater than that!)
I believe this same 80/20 principle can also be applied to business, and specifically for real estate agents.
- What if 20% (or less) of your clients produced 80% (or more) of your income?
- What if you didn’t have to spend any money on getting new leads – because you didn’t need any more leads?
- What if all that money you are paying Zillow can go toward your kid’s college education?
This is not only possible – it’s happening every day all across the world. As I’m sure you can guess – this is made possible by working with real estate investors. This guide is going to show you how.
Do You Hate Working with Investors?
Perhaps you’ve worked with investors before, maybe assisted a young couple in buying a rental house. Maybe you’ve never worked with an investor but are interested in adding “investor friendly” to your list of qualifications. Or maybe you’ve worked with investors before and … perhaps you hate working with us. We can be a difficult bunch to work with, I’ll be the first to admit it.
How many times have you talked with a “wanna be” investor, spending hours trying to help them find a deal, only to have them give up and waste your time? Or have you had a deal just inches away from closing, only to find out at the last second that they had no money to buy the investment property? This happens far too often and for that – I’m sorry.
However, there are ways to avoid these problems, to maximize your income without sacrificing your time working with unqualified investors, and to implement the 80/20 rule into your business.
This guide is going to teach you how to do that, by helping you get inside the mind of an investor.
You see – investors do not think like everyone else, which is where the disconnect often happens. Many real estate agents are so accustomed to first-time homebuyers or other shoppers that they misunderstand what an investor really wants. For example, an agent may tell an investor:
- “This house is located in a really great neighborhood”
- “This property is perfect for a large family”
- “Aren’t these countertops just gorgeous?”
While yes, these are important topics for conversation – most investors would rather hear:
- This house could produce $250 per month in passive cash flow
- The seller is very motivated – the house has been listed over 6 months!
- You’ll definitely want to check out this house – it has a terrible smell, which is scaring off the competition!
On the other hand, many investors don’t understand the benefits of working with a qualified agent, nor the work and red tape agents need to navigate around the buying and selling process. Some investors want their agent to work 100% for them, putting a ridiculous amount of offers out there that will never be accepted, for low pay. Many investors even wonder “why should I work with an agent anyways? All they do is put my listing on the MLS and sit back to take a cut.” (I’m not suggesting this – just saying what I’ve heard!)
I want this guide to help show agents how to best use their skills to assist an investor in running their business, and vice versa. I believe a strong real estate agent is one of the most important members of an investor’s team – and a strong investor should be one of the most important members of an agent’s team. Together, the synergy created by such an alliance can transform both parties and do tremendous things, make a lot of money, and lead to a long and prosperous relationship.
The Benefits of Working with An Investor
As I mentioned earlier, I believe an investor can easily become your number one source for income in your real estate career – for obvious reasons. Let me sum up a few of the important benefits for working with investors:
- Multiple Deals – Let’s start with the obvious ones – investors buy a lot of property. While some investors buy one or two properties per year, other investors buy dozens or hundreds of deals per year. Getting just a few investor clients in your rolodex can quickly earn you more income than all your other clients combined.
- There are a Lot of ‘em – According to a joint survey from BiggerPockets and Memphis Invest taken in 2012, there are over 28 million real estate investors in America, seven million which claim to be “active real estate investors” and plan to be “actively buying property in the next 12 months.” That’s a lot of investors, especially considering that the NAR lists only about a million real estate agents in the country.
- Investors Buy and Sell Often - When dealing with a homeowner – typically, the cycle between buying and selling can be years or even decades. Typically, a homeowner will be looking to either buy or sell – but not always both. Investors, on the other hand, are typically buying and selling all the time – so your ability as an agent to make money can potentially skyrocket when working with investors.
- Systematize Your Business – An investor typically has much less “emotional attachment” to the home, thus making the whole process much more “mechanical.” While that may not sound like a fun thing – it actually is great for your business because of your ability to create systems to handle much of your business.For example, when dealing with a first-time home buyer, emotional things like a cute color, a dog house, or a swing set can make or break a buyer’s interest. However, when dealing with investors, you can learn what appeals to that investor (specifics such as neighborhood, cap rate, price, income potential) and set up automatic emails for your agent.Another system you can set up is the offering process. With most investors – you won’t need to schedule a time to sit down with them to write up an offer, carefully explaining each word on the 1,000,000 MLS forms. Instead, you’ll be able to email over the same form, allow your investor client to sign it on their iPad, and submit the offer all during your lunch break.
- Investors Know the Process – Experienced investors understand the game. They won’t balk at the closing table when they realize that the agents are making 6% off the deal, they won’t freak out over some rot in the bathroom floor, and they will hopefully do their own homework on finding financing for their deals (though, you can assist with that, which we’ll touch on later.)
- Referrals – Investors are generally heavily involved in the community and, as a result, have a wide network of people who may be looking for a good agent. Investors also like to strengthen those connections by sending recommendations, so if you are a great real estate agent, expect your investor clients to brag about you and tell all their friends about your services.
- Free Investing Advice – Chances are, you don’t want to continue working until the day you die, so building up your own investment portfolio may be a goal for you in the near future. By working with investors, you have the ability to learn from real life investors, and get paid to do so. You get an inside look into how they negotiate, how they analyze property, what kind of financing they use, and more. Many individuals pay tens of thousands of dollars for programs to learn the stuff you will get an inside look at everyday.
Learning how an investor thinks, strategizes, and plans is essential if you want to pursue a career working with investors, and this guide will help you do just that. I would love to see more agents trained to effectively deal with the real estate investing world, and maybe even get involved with investing themselves. This guide is going to cover all that- and more.
Free Real Estate Investing Education – for Your Clients and You
It’s not your job to teach clients how to invest in real estate. However, in the position you hold, a lot of questions will probably be asked – especially by the newer investors. Many of these new investors may have come out of some cheesy guru retreat armed with motivation but little knowledge. Others may have simply heard about the wealth building power of real estate and want to start building their retirement with some rental property. Whatever the source for their entrance into real estate, the fact remains that they don’t know enough.
So the problem exists in the industry: agents are ill-equipped to teach about real estate investing, and clients don’t know enough.
Furthermore, for years the real estate investing industry was controlled by late-night Gurus who sold dreams and up-sold myths. I’m sure you’ve seen the infomercials, with the flashy cars and beachside mansions, promising easy millions with no money down pitches.
At BiggerPockets – we believe this kind of manipulation is wrong.
Real estate investing is not a secret to be learned only after paying tens of thousands of dollars in fees. It isn’t some sleazy, underworld of deception and trickery. Real estate investing is an art form of building wealth by solving problems. (Tweet This!) Yes, investors are looking to make a profit like any business- but education has been democratized and investors can learn how to ethically invest in real estate. This is the spirt of BiggerPockets.com. BiggerPockets exists as a platform for new and seasoned investors to discuss ideas, strategies, and tips – raising the bar for the real estate investing community.
With over 130,000 members and half a million monthly visitors, BiggerPockets is the web’s largest real estate investing community, with an active blog, forum, marketplace, file vault, and more. Every day, deals are being made, partnerships formed, problems solved, and new investors are learning how to get started. To learn more about BiggerPockets, including our 9 Core Beliefs – check out our Start Here page.
What YOU Need to Know About Real Estate Investing.
As an agent, you don’t need to be a pro investor. You don’t need to know everything – but if you want to become an “investor friendly agent,” it’s wise to learn some of the fundamentals. In a way, we’re back at the 80/20 Rule again. You don’t need to know 100% of what there is to know about investing to help your clients. Knowing just 20% can help you tackle 80% or more of the issues that will ever come up. So let’s look at that important 20%:
At it’s core, a real estate investor generally focuses on two things:
- A niche
- A strategy
A “niche” is a type of investment property, like single family homes, small multifamily, apartments, etc. A strategy is the way the investor makes money, such as fix and flipping, buy and hold, or wholesaling. Although investors may focus on several different niches or strategies, it’s important to recognize what kind of investing your client does and how they view a potential deal.
Investors look at a property in a very different light than others, and if you want to excel at working with investors it is important that you learn to think like an investor. This section is going to look at some of the key differences – and help you better identify with the needs of an investor so you can close more deals, faster. First, let’s take a look at several different types of investors – so you can more easily identify with the kind of investor you are working with.
Fix and Flippers
If you’ve ever watched one of the flipping shows on television, you know what a house flipper does. Essentially, a house flipper buys a house in need of cosmetic help (for steep discount,) fixes the problems, beautifies the project, and re-lists the house for a retail sale. Working with an experienced fix and flipper may be one of the most profitable ways to work with an investor, as busy fix and flippers sometimes buy or sell dozens of houses a month. Some investors focus on complete rehabs that can run in the hundreds of thousands of dollars, while others are simply looking to add some paint and new carpet and re-list the home.
Fix-and-flippers, by necessity, need to get incredible deals in order to turn a profit and hedge against any unforeseen problems. While some investors will fire off hundreds of low-ball offers, hoping to get just a small percentage accepted, other investors work more methodically and only go after targeted properties. Either way – expect to have a lot of offers rejected when working with an investor, simply because an investor must get a good deal. As an agent, this can clearly be an obnoxious task, so it’s important to decide for yourself what you will and won’t do – and make it clear to your investor up front. We’ll talk more about this later in the section on “making offers.”
Additionally, when working with fix and flippers – speed is incredibly important, both when buying or selling. In a competitive market, often times properties are snatched up in just minutes – so be prepared to work fast and have systems in place that can allow for fast offers.
During the sale, the flipper generally has tremendous holding costs so getting the property sold as quickly as possible is especially important, as holding costs can quickly eat up the flipper’s potential. Most flippers don’t try to shoot for the moon when selling their properties, but would rather price their property competitively, so keep that in mind and don’t tell your client a “hopeful” number, but be realistic and your investor will respect you for it.
If you are working with a new investor, I encourage you to introduce them to the House Flipping Calculator from BiggerPockets. This tool allows investors to estimate all the costs of flipping a house to maximize their chance of making a significant profit. For more information, be sure to check out the video below:
The 70% Rule: One of the easiest tools an investor, or agent, can use to analyze a potential flip is known at the 70% rule. This “rule of thumb” is used to quickly determine the maximum price one should pay for a property based on the after repair value (ARV). Though most-often used by house flippers, the 70% rule can actually be used for any strategy when you want to find a good deal. The 70% rule says that you should only pay 70% of what the after repair value is, less the repair costs.
Real World Example: A home which, after being fixed up, should sell for approximately $200,000, needs approximately $35,000 worth of work. Using the 70% rule, a person should multiply $200,000 by 70% to get $140,000 – and then subtract the $35,000 in repairs. The most a person should pay for this property, therefore, should be $105,000.
Remember, a rule of thumb like the ones above are used only to quickly and efficiently screen a property and decide if it’s worth further investigation. Never use a “rule of thumb” to decide exactly how much to pay or if you should invest or not. If a property passes the above rules (or gets close) it may be worth a more detailed analysis on paper or via a computer spreadsheet. Don’t confuse a rule of thumb for a license to skip doing your homework. However, as an agent, you can quickly and easily scan through many properties to see which are the closest to fitting what your client wants, sending over only the best deals for them to look at.
Wholesalers work to find amazing deals from motivated sellers, sign a “purchase and sale agreement” with that seller, and then assign that deal to other investors for a fee (typically ranging from $2,000-$10,000, though dependent on the deal.) In a way, they are doing similar jobs to what you are doing, by getting paid for bringing together a buyer and a seller. While you won’t generally have to do a lot of work with a wholesaler, since typically they are looking for properties to buy and sell without involving an agent, it’s still a good idea to understand what a wholesaler is and how they work. You are most likely to work with a wholesaler when one wants to offer on a house listed on the MLS, which does happen quite frequently.
Buy and Hold Investors:
The most common type of investor is the Buy and Hold investor. As the name suggests, the buy and hold investor is a real estate investor who buys property for the long haul. Some of these investors are looking for turn key, beautiful homes while others are looking for junky properties. Most, however, are looking for something in between. The primary goal, and life blood, of most buy and hold investors is positive cash flow. Because of the importance of this topic, I want to dive in deep and explore the topic at a much greater length:
In the most simple terms, cash flow is the extra money left in the investor’s bank account after all the bills are paid, including those expenses that don’t come on a regular schedule – like maintenance and vacancy. Cash flow is typically reported in terms of “monthly cash flow” – though “annual cash flow” is also used. In the next section, I’ll show you exactly how to easily calculate cash flow, so you can find the best deals for your clients.
How to Really Calculate Cash Flow
To calculate potential cash flow, simple take the total income potential for a property and subtract all the expenses. While that may sound easy – it can actually be much more complicated when unknown expenses occur. For example – how much should be planned for vacancy during a year? How about eviction costs? Legal fees? Maintenance costs? These expenses can be difficult to determine, but averages can be found by talking with local investors and looking at a property’s previous history. Let’s look at an example of determining cash flow:
123 Main Street is a single family home, currently listed for sale at $100,000. Your investor client plans on purchasing the property with a 20% down payment, thus taking out an $80,000 mortgage at 5% for 30 years, making the total mortgage payment $429.46 per month. Taxes are $1200 per year, or $100 per month, and insurance will be around $600 per year, or $50 per month. The future tenant will be responsible for all utilities and other charges, so the total fixed expenses come to $579.46 per year.
If the total rental income on this property is $800 per month, it would appear that the cash flow should reside right around $220.54 per month. However – this is where the average real estate agents stop – and they tell their clients about this great cash flow deal. However, there were some other charges not included in this calculation which should be identified. For example, if the investor is planning on using a property manger, you can assume, depending on the area, another 12% each month in property management fees. Additionally, there may be another 5% or more in vacancy (average per month, over the course of a year) and 10% or more in maintenance costs (average per month, depending on the age and condition of the property.) Suddenly, the cash flow looks a little different:
$800 Total Income
- $479.46 Mortgage
- $50 Insurance
- $80 Property Management
- $40 Vacancy
- $80 Repairs
Total Cash Flow: Negative $29.46
Notice how quickly the once “awesome cash flow” deal disappeared and was replaced by a negative cash flow property – and these numbers don’t even include eviction costs, major repairs (new roof, parking, etc), or other unforeseen charges.
At this point, hopefully you can see where some of the disconnect is between real estate agents and investors and what qualifies as a “good deal.” Most decent investors will run these numbers ahead of time, and by sending your client deals that are not deals – you are simply going to waste their time and cause division.
Let me show you one more really great trick for quickly and easily checking out the potential cash flow on a deal. Rather than typing it all out, I’ll just share a recent video I made teaching you how to use the “50% Rule” to analyze a property in just seconds. While the video talks mostly about multifamily properties, you can use this for any property type:
When is negative cash flow okay?
For me – never. However, every investor is different, which is why it’s important to understand what your investor wants. Some investors will accept negative cash flow because they believe that the appreciation, or the rise in home values over time, will increase more than the loss they are taking on their monthly cash flow.
How to Interview a Potential Investor Client: Ten Questions to Ask
Now that you understand the basics behind a real estate investment, let’s talk more about beginning the working relationship with your investor client. As I mentioned above, there are numerous different types of investors out there, so discovering what kind of investor you are dealing with is incredible important to building a lasting business relationship with that client. This section is going to look at 10 topics you should discuss with a potential investor, to get a solid understanding of the kind of investor they are.
A brief note before we get to the ten questions: If you are dealing with a brand new investor, they may not have the answers to all these questions. It is our goal, at BiggerPockets, to be your support team for these investors. All of these items are thoroughly covered in our Ultimate Beginner’s Guide to Real Estate Investing, which is available for free to read online or for for free in the Amazon Kindle store.)
Chances are – a lot of those you will be talking with will be completely brand-new to the business. Most real estate agents avoid these kind of investors like the plague – because they waste everyone’s time and end up with no results. It is up to you, obviously, how long you want to work with these investors.
Keep in mind, however, that we all have to start somewhere. Had my first agent not helped me through my first deal – I would have been completely lost. The following questions should help both you and your client find out what your client knows – and again, we want BiggerPockets to be your support team. Let us train your client for through our free guides, books, Podcasts, forums, and other resources – and send them back to you ready.
1.) What’s Your Experience?
Perhaps a great way to begin the discussion with a new investor client is by simply asking about themselves. What kind of investing experience do they have? Did they just get out of a hype-filled weekend bootcamp where they were sold pie in the sky dreams? Do they have a background in real estate, finance, or business? Have they done their homework – do they even know what they are talking about?
Keep in mind – real estate investing is more of a “business” than you might think, and the best investors are often those who have the most business skills. Look for investors who are not afraid to read a business book, and can carry on a conversation about running a successful business.
2.) What’s Your End Goal?
I believe this question should come early on – because often times an investor without a clearly defined end-goal will have trouble deciding what kind of investing they want to pursue. For example, if an investors goal is to continue working but retire in ten years from passive income – then flipping houses is probably not an ideal strategy for them. If quitting their job next month is the goal – flipping might be just right.
By understanding the big picture, you can anticipate the kind of properties they may be interested in and the kind of services they may seek from you. Don’t be afraid to get personal if you feel comfortable with them. What do they dream of doing ten years from now? What kind of legacy do they want for their children? These are important “big picture” questions to know, so you can help your client achieve their gaol more effectively with you by their side.
3.) How Are You Financing Your Investments?
Financing can often be the most frustrating part of dealing with investors, so knowing how the investor plans on financing their investments is key. Have you ever worked with an investor, only to have a deal fall apart because they couldn’t line up the financing? It happens frequently in the real estate investing world, largely because many investors eyes are simply larger than their checkbooks. Many investments require “creativity” to close the deal, while others only require a simple bank loan with 20% down or even 100% cash.
This question is so important that we’ve dedicate the entire next section of this guide to helping you understand the different financing options that exist for investors, so you can offer suggestions and guide your investor into making better financing decisions.
4.) What Strategy, or Strategies, Do You Use?
We touched on this at the beginning of this guide, but as a quick reminder – there are numerous different strategies that investors can use to invest in real estate. From wholesaling to flipping, lease options to buy and hold – understanding the way that your investor client makes money is important to understand how YOU will make money. Knowing the specific strategy the investor will use is also helpful in determining other questions to ask and to better understand what kind of services the investor will be needing from you.
5.) What Kind of Investment Properties are you Looking For?
Next, the obvious question: “what are you looking for?” As I discussed earlier, there are numerous different niches within the real estate investing realm – from single family homes to multifamily to commercial. Even more so, each of those niches has numerous “sub-niches” and most investors have a fairly narrow field of pursuit.
For example, currently I am personally pursuing small multifamily properties between 2 and 4 units that can provide $200 per unit, per month in positive cash flow after following the 50% rule. (If that didn’t make sense, be sure to scroll back up and watch the video on the 50% rule.) Knowing the precise property niche and sub-niche is extremely important, so be sure to narrow this down as specific as possible with your investor.
6.) How Much Do You Want to Spend?
Is the investor looking for multimillion dollar homes or small starter homes? Are they looking for a high-end multifamily or a low-end multifamily? Within every niche and strategy there are many different price points – so understanding what kind of prices the investor is looking to spend is helpful in deciding what to keep an eye out for.
Additionally, this question will help you to better understand the kind of investor you are dealing with. For example, if your investor is looking for starter homes in the $100,000 range that don’t need much work – but the lowest price houses on the market are in the $300,000 range – your investor may not have a strong grasp on what is available or may be looking in different neighborhoods than you currently serve.
7.) What Neighborhoods are You Buying In?
Speaking of neighborhoods, most investors have places they enjoy buying in and places they would never step foot in. Typically, most investors are not looking in the classiest parts of town (though, some are) and most are not looking in the war-zone (though, some are) but most are looking for something in the middle. Find out from your investor where they plan on buying or selling, and where they won’t even consider.
8.) Who is on Your Team?
It’s a good idea to know who your investor is working with on their projects. Even if they are a one-man (or woman) operation, no investor can do it all together. It’s a good idea to see how prepared your investor is with:
- General contractors
- Property Managers
- Insurance Agent
- Escrow/Title Representative
- and more.
By looking at the team that your investor has surrounded themselves with – you can see where you fit within their needs and maybe find other great sources for referrals for yourself.
9.) How Many Offers Do You Plan to Submit?
We’ll cover this with a lot more detail later, but understand that this is an important question when knowing what you will be doing for the investor. Some investors submit hundreds of offers, while others only submit one each year. This is also a good time to get to know the general philosophy the potential investor client has when it comes to making offers. Are they simply throwing noodles against the wall to see what sticks, or are they seeking out only the best properties and going after them will full force?
10.) What do you need from me?
Finally – a great question is simply “what do you need from me?” Rather than trying to determine how you can best help your client – many investors have a good idea already what they are looking for. Some investors may only be looking for someone to send over deals. Others may be looking for someone to show properties and submit offers. Others may be looking primarily for a sales agent. If you don’t ask, you won’t know. So find out what your investor client needs.
Helping Your Client with Financing
I believe the job of a great real estate agent is more than just opening doors and submitting offers. A great real estate agent should be a catalyst for moving a client forward through every stage of the process. (Tweet This!) As such, one of the most important areas I believe a good investor-friendly agent should be well-versed in is that of creative financing.
When dealing with first time home-buyers, chances are your client will be either taking an FHA loan or a conventional mortgage for their property, so this is where most real estate agent education ceases. If a client can’t obtain a traditional loan – many agents won’t have the know-how to help their clients continue moving forward. However, you are reading this guide because you don’t want to just be an average agent- you want to be a great agent.
As such, this section is going to guide you through multiple different financing strategies that you keep in your bag of tools – to help guide your investor clients through the financing of their deals. Not every financing strategy is going to work in every case – but by becoming familiar with the many different ways investors financing deals – you can increase your own ability to serve clients and close more transactions. Let’s begin.
1.) Conventional Residential Mortgages
I don’t need to go into incredible depth on this one – you deal with it every day – though for investors, there are some unique twists. Conventional loans are those obtained from traditional lenders, like large banks or credit unions. Typically, these loans require 20% down and are notoriously inflexible – as they need to conform to Fannie Mae or Freddie Mac standards. For many real estate investors, the conventional loan is the best-case loan they can get – for a conventional mortgage is going to offer the longest term and the lowest rate.
Conventional mortgages can typically be used to finance single family rentals, duplexes, triplexes, and quadplexes – but loans on properties with more than four units fall in the “commercial” loan category, which we’ll cover in a bit.
Due to restrictions from Fannie Mae and Freddie Mac, investors are limited with the number of conventional mortgages they can have – usually 4 (though sometimes up to ten, depending on the bank and the position of the borrower.) However, due to debt to income issues (because every mortgage adds debt to their credit report, making it more and more difficult to qualify for more debt) many investors don’t even make it to the four loans before being denied a mortgage.
In a perfect world – conventional loans would be enough. However, for most active investors, conventional mortgages will not be used in the bulk of the investments – which is why understanding other creative financing techniques is imperative for an investor-friendly agent. Let’s look at some of those other creative methods now.
2.) FHA Loans
You already know about FHA loans, but I wanted to briefly address them here because many agents don’t realize that they can also be used for small multifamily investment properties up to four units – when the investor lives in one of the units. In other words, Investor John can purchase a four plex for just 3.5% down with an FHA loan as long as he lives in one of the units upon purchasing. This is an popular method for new investors to get into the game with limited funds and, if purchased at a smart price, begin building wealth through both appreciation and cash flow.
Keep in mind, however, that an investor can only have one FHA loan in their name at a time, so this is not a strategy that most large active investors can use.
203K Loans: A subset of the FHA loan product, the 203K loan allows homeowners to wrap needed home remodeling into the cost of the property purchase. This can also be used for small multifamily properties when the owner lives in one of the units. Although the red-tape can be a little cumbersome, when used correctly the 203K loan can be an awesome tool to help new investors build immediate sweat equity into their properties.
3.) Portfolio Loans
Portfolio loans are loans that are not sold to Fannie Mae or Freddie Mac, thus don’t necessarily abide by the same strict standards – and therefore can be more flexible. Many small community banks offer portfolio loans and are able to customize a loan program for either a homeowner or an investor. To find a lender who specializes in portfolio loans, an investor simply needs to pick up the phone and start dialing – as most portfolio lenders are not shy about their loan programs.
Keep in mind, however, that just because a portfolio lender is not required to conform their loans to Fannie Mae or Freddie Mac guidelines – it doesn’t mean they are less conservative in their lending. They simply have more flexibility. For example, some portfolio lenders may not abide by the “four loan maximum” that conventional loans have, or perhaps they may have different down payment requirements or the ability to collateralize other investment property to make a deal work.
4.) Commercial Loans
Commercial loans are designed for either commercial properties or residential properties that have more than four units. Like a portfolio loan, a commercial lender has some additional flexibility in the terms and structuring of the loan – though you can typically assume higher interest rates and lower term lengths. Where most residential loans are amortized fully over 30 years, a typical commercial loan will usually be amortized for a maximum of 25 years but with a balloon payment due after five or six years (more or less depending on the lender.)
Most banks and credit unions lend commercially, and there are numerous large commercial lenders and brokers that deal with only commercial loans.
5.) Hard Money
Maybe you’ve never heard of hard money before, so maybe right now you are picturing a mobster sitting in his smoky bar, waiting for the townspeople to pay back their debts. However, a hard money lender is (hopefully!) not some enemy looking to rob you, but simply a tool used by many investors for short term financing.
If you are unfamiliar with hard money - this is going to shock you so you might want to sit down. Typical hard money carried an interest rate between 10% and 15% depending on the lender. However, before you start screaming “extorition” and try to file a complaint with your state government, understand that this type of financing is not for homeowners or those in trouble. It’s simply a business expense for many investors – especially house flippers. Because the term length is so short (typically less than a year) – the high interest rate doesn’t actually affect the deal that significantly (unless the home doesn’t sell quickly!)
Additionally, hard money lenders generally charge fees known as “points” (a point is 1% of the loan amount) which are sometimes paid upfront and sometimes wrapped into the loan. These points can range between 1 and 10, depending on the lender.
Let’s do a quick “hard money” example.
Investor John is looking to flip a house but doesn’t have all the money needed. So he talks with a hard money lender who agrees to fund the cost of acquisition if John funds the repairs. The purchase price is $100,000 and the hard money lender charges 12% interest with 3 points wrapped into the loan. Therefore, the total loan amount becomes $103,000 with a monthly interest only payment of $1030.00. John hires contractors to fix up the property using his $40,000 in repairs and sells the property six months later for $190,000. In total, he paid just over $6,000 in fees and interest on the money and while – yes, this is expensive – it’s all factored into the numbers when John did the deal. Without the hard money – John may have had nothing.
Hard money lenders are also not difficult to find – because BiggerPockets contains the web’s most comprehensive hard money lender directory online. Your client can search by state and get in contact with multiple different lenders – so send your clients over to BiggerPockets.com/HardMoneyLenders anytime to search the directory.
Hard money can be one of the most risky ways to invest in real estate, so be sure your client has a solid deal before recommending the use of a hard money lender.
For more information on hard money lenders, check out this video I recently made.
6.) Private Money
Private money is similar to Hard Money in many respects, but is usually distinguishable due to the relationship between the lender and the borrower. Typically with “private money,” the lender is not a professional lender like a hard money lender but rather an individual looking to achieve higher returns on their cash. Often times there is a closer relationship with a private money lender ahead of time (such as a family member, friend, or co-worker) and these lenders are often much less “business” oriented than hard money. Private money usually has fewer fees and points and term length can be negotiated more easily to serve the best interest of both parties.
Private lenders will lend you cash to buy property in exchange for a specific interest rate. Their investment is secured by a promissory note or mortgage on the property which means if you don’t pay – they can foreclose and take the house (just like a bank, hard money, or most other loan types). The interest rate given to a private lender is usually established up front and the money is lent for a specified period of time, anywhere from six months to thirty years.
7.) Equity Partnerships
If your investor client can’t finance a property on their own, a good solution can also be to use a partner who can make the deal happen. This can be structured in a number of ways, such as:
- Both partners split funding and pay cash
- One parter supplies all the funding needed and purchase the property for cash, the other manages/does repairs
- One partner supplies the down payment, the other supplies the ability to get a mortgage
- Both partners supply the down payment, but one partner gets the mortgage
There are numerous ways to structure a deal like this but be sure to advise your client to seek legal assistance when setting up the structure for the partnership. Partnerships can be a great tool for investors, but only when done properly.
8.) Owner Financing
Finally, owner financing can be a easy way for a real estate investor to fund a deal. While most sellers will not agree to seller financing, many still do. Keep in mind, also, that a seller may not need to finance the entire cost. A seller may be able to carry back a small potion – enough so the investor can get a bank loan for the rest.
Generally, a seller should own their home free-and-clear before selling with seller financing, to avoid the “due on sale” clause that most mortgages have in them (which allows the lender to foreclose if a sale has occurred) however, this is not a legal requirement. Although the due on sale clause gives the bank the right to foreclose, it does not mandate it. The process of buying property in this way is known as “Subject To” and is used by many investors to buy property. To learn more about subject-to investing, definitely read through “Is There a Problem with Buying Properties Subject-to Existing Financing?”
Summary on Financing
These eight financing strategies I’ve outlined above are some of the most common – but are definitely not the entire list. Creative financing is a field of study that investors continue to explore, learn, and grow throughout their entire career. You, as an agent, do not need to fully understand the entire process but by having a general idea of the different financing options available, you become a more valuable asset to an investor’s team and hopefully allow you to close a lot more transactions and grow your business.
Making Offers for Investors
By far, the largest complaint I hear from real estate agents regarding working with investors is the annoyance of having to submit too many ridiculous offers – and I completely understand. You see, the problem is a result of a disconnect between the agent and the investor.
For an investor, making offers is largely a number’s game. For example, for every 10 offers made – one deal will result. For an agent – they see large amounts of wasted time submitting worthless offers, which hurts an agent’s credibility among peers (as mentioned to me by Michael McClure [@ProfessionalOne]Broker/Owner at Professional One Real Estate on the awesome Raise the Bar in Real Estate Group on Facebook… which if you are an agent – you need to join.)
Clearly – there is a conversation that needs to take place, preferably before making the first offer. It’s important to find out from a potential investor client how many offers they typically make (or plan to make) which is an important part of the interview process.
Some investors throw such ridiculous numbers out there, hoping just one in one hundred actually stick. For others, they only offer on the deals that they believe they can actually get. It’s obviously up to you what kind of investor you want to work with – so decide for yourself what you will and won’t do – and let them know up front. However, keep in mind that most investors are NOT the “see what sticks” type.
The benefit of working with investors is making more money with less clients – but if you are spending more time – it’s probably not worth it. Just be upfront with your client on what you will and won’t do from the start, and you’ll have a great working relationship.
Whether your investor client offers on dozens of properties a month or just a small few, either way you’ll probably submit many more offers than working with the average homeowner. However, there are two reasons why this might not be such a big deal:
The Formula: An investor typically follows the same formula for every offer. For example, when I offer on a property, I offer “all cash,” 20 days close, 7 day inspection. Sometimes that may change slightly, but usually it’s the same. My agent knows this, so the process is very much streamlined for him. Additionally – because I submit many offers, my agent does not need to sit down with me in a conference room each time I want to make an offer. Our conversation typically is done over text message and we never actually meet face to face, which brings me to my second point…
New technology: Today, you have technology available that can make submitting offers easier and faster than ever before. As I mentioned above, when working with an experienced investor, you won’t need to spend half your day at a conference table talking about the offer and explaining each deal. Submitting an offer can be as easy as emailing a contract to your client, having them e-sign on their iPad, and submitting the offer within minutes, not hours. This new technology can make it easier than ever to make offers faster and more frequently.
Finally, remember that an experienced investor is not simply blindly throwing out wild numbers trying to see what might happen. Most seasoned investors have done their math and determined a price that makes sense for them, and know from experience how many of their offers get accepted. If your investor client is not experienced, again I invite you to send them to us to help them build up their knowledge base, and work to build up your own so you can help guide them in the offer making process.
Selling for an Investor
If you, as an agent, are working for an investor, it’s highly likely you’ll be selling properties for them. I want to briefly share some thoughts on selling properties that I believe all investor-friendly agents should be aware of.
First, I believe it’s important to state an obvious truth:
Don’t exaggerate the after-repair value.
In other words – when dealing with an investor, be careful to let them know the reasonable price a property will sell for, not a higher price just so the investor will work with you. As we’ve talked about before, working with an investor can be a career-changing move because of the multiple deals you’ll get. However, if you exaggerate prices, you may display your inability to sell the property should they choose to use you and lose that client forever.
The Most Important Thing
For an investor – many times it comes down to one important word:
This is especially true for flippers, as the holding costs can quickly eat up any profits in the property. When selling for a owner occupied family, the family is generally balancing “price” more than “speed” but not so for investors. Obviously, the price matters and getting the highest price possible is great. However, a home sitting on the market for 6 months because it is priced too high can be financially devastating for an investor.
It’s Worth How Much?
Everyone has an opinion of how much their property is worth. You know this – you’ve dealt with it before, and investors are no different. You may believe that a property is worth only $150,000 when the investor believes it can achieve $200,000. This is why I believe it’s essential for an agent to be involved from the beginning – helping the investor determine the after repair value during the purchase phase. Granted – you may not get paid for your help in this if the investor is buying directly from a homeowner – but by providing solid data to help the investor, you are in a much better position to reap the rewards when it comes time to sell that property.
How to Attract Investor Clients
Real estate investors are not hiding.
In fact, there are probably a number of investors within your circle of influence that you don’t even know about. With 28.1 million real estate investors in America, chances are there are investors in your church, your child’s PTA, your neighborhood get-together, and right on your Facebook wall. But how do you find them and attract them to work with you?
I want to explore some ideas to start attracting investor clients to your rolodex, so you can begin finding those “80/20″ clients who will bring you the most bang for your buck!
Seasoned Investors are Always Looking for a Great Agent
A good agent can be hard to find – you know that. While the 80/20 rule exists for investor clients like we talked about at the beginning of this guide – it also exists for agents. I don’t know the exact figures, but I would guess that 20% of agents make 80% of the money in this industry. Therefore, if you want to attract agents, the first step is becoming exceptional. But what does that mean?
The traits I look for in an agent is someone who is available by phone, text, and email as much as possible. However, I know, you have a personal life too so I’m not asking for 24-7 availability. I want an agent who has systems and processes to handle each aspect of their business. An organized agent makes everyone’s life significantly easier, so find ways to keep things organized. I also look for agents who have technology skills, who understand social media, and can use a smart phone like a pro.
Additionally, I want my agent to know about investing. They don’t need to invest themselves, but I want an agent to understand what makes a great investment and what doesn’t. I want them to be able to quickly look at a deal on the MLS and in seconds be able to forward it to me, letting me know about a potential grand slam (as I mentioned earlier, the 50% rule or the 70% rule are great tools for quickly analyzing properties in just seconds!)
So if you are looking to get more investor clients – focus on becoming a great agent.
You’ve Got to Be Where Investors Are
When trying to find investors – you’ve got to be where the investors are! This may sound obvious, but you’d be surprised at the lack of real estate agents hanging out where investors hang out! So where to do investors hang out? Here are three of the most common places:
Real Estate Clubs: In nearly every major city in the country, there exist real estate clubs (most have several) where groups of investors get together on a regular basis to learn, network, and make deals. Keep in mind, however, that not all clubs are the same – some simply prey on new investors and exist to up-sell expensive information and training – while others actually create a platform for new AND experienced investors to network and learn. While you can probably find clients at either, I’d recommend you focus on the clubs that have the best networking abilities. Seek to provide value at these meetings, and maybe offer to speak. Show your expertise and you’ll attract attention.
BiggerPockets: Finally, BiggerPockets.com is probably the highest concentration of investors anywhere online or in the real world. With over 130,000 members and growing quickly, there are no-doubt numerous investors from your area. To find them, there is one tool that is especially helpful: The Keyword Alert Tool. The keyword alert tool allows you to enter in certain keywords that you are interested in and you’ll receive email or SMS notifications when those terms are mentioned anywhere on the BiggerPockets Forums.
As an agent - this is extremely beneficial to you, as you can set up keyword alerts for your city or town name – and when a new member introduces themselves – you can jump in and greet them, welcoming them to the community. Or, when investors are talking about your local area, you can jump in and join the conversation, establishing yourself as the expert in that area.
For many more tips on using BiggerPockets as a real estate agent, don’t miss our free guide, “Using BiggerPockets to Grow Your Business.”
Blog: Do you have a blog? Have you ever thought of creating one? If so – I recommend talking about investment properties on your blog as well! Having a blog can be a great way to reach new people, as blogs are great for getting traffic from the search engines to you. Talk about properties, strategies, interviews with local celebrities, the best local restaurants, great neighborhoods, trends, success stories, or whatever else that will intrigue your readers. A blog is a great way to establish yourself as an expert in the field, so definitely start today! We recommend using BlueHost when starting a blog! (Yes, that’s an affiliate link, but even if you skip the affiliate link and just go to www.BlueHost.com – we still recommend it.)
Create Your Own Investor
Real estate investing is “cool” to a lot of people. Whether it’s from the television shows, the stories of the rich, or even the gurus – people are fascinated with real estate investing. However, most people don’t know where to start, so they never do. However, as an agent, you have the unique ability to help wannabe investors become actual investors!
One of the best ways to do this is by simply talking about the investment opportunities on your Facebook wall. Don’t simply show off the prettiest homes on social media – show the undervalued ugly homes as well!
Additionally, I encourage you to follow BiggerPockets on Facebook as well, and share articles that you think your clients might like! Every day, we publish 3-4 in-depth blog articles that help people with all aspects of investing. Make it your goal to share a few pieces of investing knowledge on your Facebook wall each week to further solidify you as an investor friendly agent to those who follow you.
What about CCIM?
I can’t finish this article without at least touching on a very important designation that many real estate agents choose to pursue: a Certified Commercial Investment Member. However, rather than talk about something I’ve only experienced second-hand, we’ve asked a CCIM & BiggerPockets member, D. Scott Smith CCIM (@DScottSmithCCIM) to share exactly what the CCIM designation is and why you should consider pursuing it:
A CCIM (Certified Commercial Investment Member) is a recognized expert in the commercial and investment real estate industry. The CCIM lapel pin is earned after successfully completing a designation process that ensures CCIMs are proficient not only in theory, but also in practice. CCIM is part of a global commercial real estate network with members across North America and more than 30 countries. This professional network has enabled CCIM members to close thousands of transactions annually, representing more than $200 billion in value. As a result, the experts who possess the CCIM designation are an invaluable resource for commercial real estate owners, investors, and users.
CCIMs have completed a designation curriculum that covers essential CCIM skill sets including ethics, interest-based negotiation, financial analysis, market analysis, user decision analysis, and investment analysis for commercial investment real estate. CCIMs have completed a portfolio demonstrating the depth of their commercial real estate experience. Finally, they have demonstrated their proficiency in the CCIM skill sets by successfully completing a comprehensive examination. Only then is a designation candidate awarded the coveted CCIM pin, joining the ranks of highly skilled commercial and investment real estate experts.
Over 15,000 commercial real estate professionals have earned the designation. Currently, 5,500 professionals are pursuing their CCIM designation.
Numbers don’t lie, people lie, about the numbers. The hard part is knowing the difference between what someone tells you and what the most likely outcome will be. You can only get those answers through a lot of hard work, research, and experience. An easier way to get them is to educate yourself and to hang out with others that have some of the experience you are looking for.
Being a CCIM has done just that for me.
It has opened doors that would not have been opened had I not done the work and put in the hours to get the designation. As a result, my clients get a world class service, literally anywhere in the world through the CCIM network and affiliates. But I have to caution you, education is never ending. You have to commit to being a life long student. Although CCIM is the best commercial real estate education, hands down, that doesn’t mean that’s it. There’s still a world of experience knowledge out their to get. CCIM just shows you the path.
Conclusion and Where to Go From Here
Over the past 9,000 words I hope I’ve effectively communicated how you can get started today becoming a more “investor friendly agent.” I truly believe a great agent and a great investor can do amazing things together!
If there is anything I may have forgotten – please don’t be shy – jump into the comments below this thread and ask questions, leave feedback, and engage in the conversation!
Finally, if you found this valuable – can you do us a favor and share this article with other agents you know! It is our goal that every real estate agent in the country reads this guide! There is a large disconnect in this country between the agent and investor communities, and we want to bridge that gap – with your help!The Real Estate Agent's Ultimate Guide to Working with Investors by Brandon Turner