The harsh reality is that many real estate agents are unable to assist investors in assessing potential purchases. Their shortcomings include limited experience as property owners, limited understanding of the tax benefits of investment real estate, and an inability to look at real estate’s income production aspect. See the following article from The Street for more on this.
Eight out of 10 people would probably say they don’t like their real estate agent. I’m among the eight and would never have imagined myself being a real estate agent. Today, however, I’m a real estate agent in Manhattan, partly driven by observing opportunities from the points I’ll outline here.
During my last three years in banking, I was investing in property on the side. I visited numerous cities and viewed thousands of properties. It was during this time that I interacted with a lot of real estate agents in New York and other states.
The top 5% of real estate agents in Manhattan are very good. They deserve a lot of credit for such things as understanding their product and market and managing client relationships. I learned from them. But the majority of real estate agents were … an experience. If you’re a real estate agent reading this, you know I’m not talking about you.
There are seven things that your Manhattan real estate agent doesn’t want you to know.
1. Anyone Can Get a Real Estate License
In New York, the real estate qualification consists of 75 hours of classes followed by an exam. Anyone can get a license. In comparison, the Series 7 is rocket science. As example, the top concern is usually math questions — things like what is 5% of $150,000. Yes, these fifth-grade math questions were most worrisome to the majority of licensing students.
Let’s put things in context. At college, we expect a teacher to have a master’s or Ph.D degree to teach calculus, a subject that most of us would never use again. But when buying the most expensive investment of our lives, the norm is to take the advice of a real estate agent who went through a 75-hour class. Hmm…
2. They’re Still Renting
The majority of Manhattan real estate agents don’t own property. Rather, they sell property as a job. As a buyer, the rare occasion when I dealt with an agent who owned his property or even better, investment real estate, was so welcoming because of the personal insights gained. Why should a buyer take advice from an agent who is still renting? Interestingly, that’s how we’ve come to accept it.
3. They’re Investment Professionals Without Their Own Investments
Investment real estate professionals, who focus on investment property, typically don’t own investment real estate themselves. I’m talking about direct property investment, not real estate investment trusts that require a mere $100 to get in. I’m referring to people at the top investment property companies who are much more sophisticated than the average residential agent. They have MBAs and can talk about yields, operating income, LLC structures, capital gains structures. Next time, ask whether they personally own any investment real estate. You’ll hear a brief silence and then a cleverly crafted answer.
4. You Are Part of Their Numbers Game
Ever wonder why your real estate agent is always in such a rush? It’s because you’re part of their numbers game. The more clients they meet and the more property they show, the higher the probability of a sale. There’s a formula. For example, 30 properties shown results in one closed deal. That’s why they rush you from one viewing appointment to the next.
5. Forget a Long-Term Relationship
Top priority is the next commission. Unless they get the commission to pay the coming rent, real estate agents may be doing something else by next year. The barrier to entry in this profession is very low, hence there’s no sunk cost apart from time. No expensive MBA or degree required. Given that, do you think they’d tell you not to buy a property they personally won’t buy? Or do you think they would accentuate the positives of even bad properties?
6. That They May Not Know What an ROI Is
Next time, ask your residential agent what he thinks of the ROI (return on investment). I bet he won’t know the term and would think you’re talking about a fish (mistaking ROI for Koi). Ask about the yield potential and observe what he thinks “yield” means.
7. Taxes? They’re Not CPAs
One of the biggest benefits to owning real estate is tax advantages. These include depreciation allowances, favorable long-term capital gains and tax treatment. But ask your agent anything about taxes and the likely response will be he’s not a CPA and will refer you to one.
That’s totally fair but shouldn’t a real estate agent have a basic sense of tax implications? Oh yes, they don’t care because the teacher at the real estate school said to always refer to a CPA. Likely, your agent will feel a lot more comfortable talking about granite counter tops and marble baths.
Wei Min, CEO of Castle Avenue Partners, is a real estate entrepreneur focused on brokerage, investments and management.
This article has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.