Investors: Should You Get Your Real Estate License?
Not a week goes by where I don’t read a thread on BiggerPockets or receive an email asking the question, “Should I get my real estate license?” For anyone planning to become a long-term real estate investor, it’s a tremendously important decision that should be given a lot of thought. And while you can read plenty of opinions on the BP forums (including my own), I just wanted to spend a couple minutes putting down my thoughts in an organized way, so that in the future when I get this question, I can just point folks to this particular post.
First, let me begin by saying that there is no “right” answer to this question, and what I pose here is my opinion only, and is largely based on my investing experiences and my particular business model. I’m sure some others will disagree, and I’m also sure that they will have very valid reasons for disagreeing, most likely based on their specific investing experiences and their business model.
It's been about a year and a half since my wife got her real estate agent's license for the sole purpose of benefiting our investing business. And given our experience over the past year and a half, I couldn't imagine being a full-time real estate investor and not having someone in our business who had their license.
Benefits of Getting Your Real Estate License
- Access to MLS. First and foremost, having your license means getting access to the local MLS. While there are certainly other ways to get access to the MLS, having your license will allow you access without having to rely on other agents, friends or colleagues to get access. This means you don’t have to worry about it going away, and you don’t have to worry about anyone getting in trouble if they’re giving you access to their account “illegally”.
- Make More Money. Many investors realize that every time they sell a house through another agent, they are spending about 6% of the sale price in agent commissions. What they don't realize is that when they buy property, their agent is also collecting up to 3% for facilitating the transaction.
- Controlling Our Deals. Being our own agent for our purchases and sales allows us full control over our deals. We can submit offers to and negotiate directly with listing agents. We deal directly with the lenders, the appraisers, the inspectors, the closing attorneys, and all other parties involved in the closing of our transactions, both on the buy and sell side. We control our marketing, our sales, and the showing of our properties to prospective buyers.
- Enticing Listing Agents. Imagine your the listing agent for (the one selling) a bank owned foreclosure property. And imagine one day you get a call from an agent whose client is interested in buying that property.
When we first decided that my wife would get her license, this was the impetus. We wanted access to the MLS not just to be able to run search queries and find candidate properties, but also because we wanted access to the wealth of historical data that the MLS provides. I have spent literally hundreds of hours on the MLS mining data to determine which areas to focus on, which types of houses to focus on, and which types of buyers to focus on.
I credit this research with much of our early success in this business. And I never would have had access to this data without access to the MLS.
This means that on a typical purchase and sale of a property, an investor has access to up to about 7-8% of the total sale price of the property in extra profit, if he didn't have to give that money up to his agent. If you buy a property for $50K and sell it for $100K, that's $7500 in additional profit (assuming your buyer didn't have his own agent) you could have if you were your own agent on the purchase and sale of that deal! Doing just four deals per year, having your real estate license could earn you an extra $30K.
In the past year, we saved/earned nearly $50K in extra income by not having to use another agent. Even with the brokerage fees we paid ($300 per month and $40 per transaction), we still netted an extra $45K in our business by having a real estate license. It made the extra paperwork well-worth it.
While there is certainly overhead involved in being the agent for your own deals, that headache is far outweighed by the fact that you have full control over every aspect of the deal. Will your agent drive to your property before every showing, turn on the lights, open the windows, and put out fresh cookies? Will your agent follow-up with everyone who has viewed your property to get feedback and recommendations? Will your agent send marketing materials to renters in the neighborhood who might be looking for a house to buy? Will your agent make sure to be at the house with the appraisers to ensure that get a favorable viewing of the property?
Probably not…but because all aspects of the transaction go through us, we can (and do) do all these things. It’s a good part of why our typical property only spends two weeks on the market before we get our first offer.
That agent says to you:
I’m going to submit an offer on this property. All you need to do is get the bank to accept the offer. After that, I will take care of letting my client into the house for inspections, I will take care of getting the utilities turned on for the inspections, I will complete all the additional paperwork, I will work with the title company on the title search, and I will work with the closing attorney on scheduling the closing. Then, on the day of closing, you don’t need to even show up. I will get your lockbox and your sign from the property, I will get your commission check from the closing attorney, and I will drive all of it over to your office immediately after the closing is finished to drop off to you. Oh, and by the way, I’ll also give you MY half of the commission as a bonus, so you’ll earn twice as much money on this deal.
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So, do you think the listing agent would be interested in working with you? Of course they would. And this is what we do with most of our deals. That's why the listing agents let us know when they have properties getting ready to hit the market, they let us know when their properties are about to have price drops, they let us know how much the bank is willing to negotiate, etc.
Basically, they give us an advantage over all those investors who don't have the ability to do this for the agent. And that's why nearly 40% of the houses we make offers on, we get under contract.
The Drawbacks of a Real Estate License for Investors
All that said, as I mentioned above, depending on your specific business model, there are some drawbacks to having your license. Among them:
- Getting Your License. First and foremost, you need to actually get your license. This often requires a couple hundred dollar investment, and then about 100 hours in coursework, studying, and taking exams to qualify to get your license. In addition, once you have your license, you need to find a broker to work under, and that may involve some additional fees and responsibilities. Plus, you’ll probably be required to earn about a dozen hours per year in ongoing education credits to retain your license.
- Paperwork. Okay, I’m not going to lie to you. If you do a bunch of deals, you’ll end up doing a bunch of paperwork. This is the most annoying part of having your license, but it comes with the territory. You’ll be responsible for writing your own offers, submitting forms to attorneys, agents, brokers, the MLS, etc.
- Disclosures. When you have your real estate license, you are held to a higher standard. You must disclose to buyers/sellers that you are a licensed agent; you can't "knowingly take advantage" of a buyer/seller; etc. Some investors feel that having to make these disclosures and being held to this higher standard negatively impacts their business, and that is why they don't want to get their license.
In our case, we pay our broker $300 per month and $40 for every purchase/sale we do, and beyond that, we don’t have any extra work required by the broker. In addition to the $300/$40 requirement, my wife has to take about 10 hours per year in continuing education classes. But, if you’re a part-time investor, the time commitment required to get (and keep) your license may be prohibitive.
In the past year, my wife has handled about 20 transactions for us (both purchases and sales), and has probably averaged about 5-10 hours per week doing paperwork required for those transactions. That said, there are people who can handle most of the paperwork for you (for a fee), so even that’s not required if you really don’t want to or can’t do it. But again, part-time investors may find the paperwork requirements a bit daunting in terms of time commitment.
While I can’t speak for other investors, I haven’t had an circumstance — and can’t imagine one — where I would have any issue disclosing to a buyer/seller that my wife is licensed. In fact, in my experience, this has been a selling point for those buyers who are untrustworthy, and now feel more confident that they are dealing with someone who is licensed and knowledgeable.
Given all that, I would personally recommend that any serious investor — especially those who plan to buy/sell using the MLS — get his/her real estate license. Better yet, have you spouse get his/her license so that you get all the benefits of it, but can generally get around the disclosure requirements if you ever really need to.
Photo: Images Money