About the Author: James Mwaura is a technology writer specializing in fintech, software, and B2B SaaS. He spent five years working in the residential mortgage space and is the author of LendingHome’s “Flipping Houses 101”.
The Broker’s Guide to Working with Real Estate Investors
As a real estate broker, working with real estate investors seems like an amazing opportunity to do a number of deals and collect plenty of commission, especially given the high number of homes that investors are regularly buying and selling. And it may certainly be a great relationship; a broker can see a big increase in volume of deals if they find a high-volume investor.
What is important to remember though, is that the relationship a broker is used to having with consumer mortgage clients is much different from one with an investor. When working with consumer clients, you are selling a dream and a future as much as you’re selling a property. There is a very personal connection that a retail client has to feel with a home; after all, they are probably envisioning their family’s future in the property.
An investor, on the other hand, views this investment as exactly that—an investment. They speak in terms of ROI, margin, rates, and terms. Your deal depends less on selling a dream, and more on agreeing on the right numbers, at the right time.
This transition can be a difficult one for a real estate broker to make if they don’t have much experience working with real estate investors. That’s why we put this handy guide together to help you learn the “Do’s” and “Don’ts” of working with real estate investors.
Do: Understand the market
Investors care about ROI, plain and simple. For them to agree on a deal, it has to be financially prudent for them to do so. Margins, speed, and efficiency are the name of the game, so be prepared to negotiate and move quickly.
Investors are also extremely savvy and informed, so you should be too. Make sure that your knowledge of real estate financials is deeper than surface level. Your customers will be throwing around real estate jargon and you should be prepared to engage with them in these conversations. If you’re unfamiliar with how to calculate debt-to-income ratio, or what an FHA loan is, study up!
Don’t: Overly engage
The typical retail home buyer will need a lot of handholding and assistance. You may be accustomed to doing a high level of research for your client to help them make the best decision, and serve as a partner to them in this very important milestone in their life. This will usually not be necessary for an investor. He or she will most likely have already done tons of research, know their comps, know the market, and be making (at least in their opinion) a very educated financial decision.
Don’t overly engage with the investor, especially early in the process. He or she most likely needs you to make the deal happen, and not much else. It’s important to note that you may need to reduce your commission in exchange for doing less work, but you can negotiate to find a deal that makes sense for both parties.
Do: Move quickly
We mentioned it above, but it’s worth mentioning again: speed is extremely important when it comes to real estate investors. Some of the deals that come across your table may be from auctions, foreclosures, and other very time-sensitive deals. Investors need to be able to move quickly on a property, and need their broker to do the same.
Make sure that you have the capabilities to turn a deal around much more quickly than you would with a retail client, and that you don’t sacrifice quality and accuracy when you do so.
Don’t: Compromise too much
As mentioned, you may need to lower your commission fees a bit to accommodate an investor due to how competitive real estate can be and how tight margins are. Since you’ll likely be more hands-off than with a typical deal, this is not necessarily unfair. That said, don’t compromise too much. You may end up with much less money than you usually make, and not much in return.
Try and find other ways you can secure revenue for yourself, whether it be in this deal or subsequent ones. If you cut an investor a deal, see if they can give you priority for future deals, or if you were involved in the purchase of the property, see if you can negotiate representing the investor when they exit the investment. Investors love reliable partners and close relationships, so you may see a lot more business down the road in exchange for a sweeter deal than you are typically willing to do.
Do: Thoroughly vet the borrower
“Investor” can be a very loose term, in this business or any. Someone may come to you claiming to be an experienced and qualified real estate investor, and in reality they are neither financially nor professionally qualified to do a deal.
Make sure you do your research to make sure you aren’t doing a lot of free work on a deal that will never close. Ask pointed questions without being too invasive: Do they have cash? Do they have a good FICO score? Have they been pre-approved? An investor should be comfortable answering these types of questions if they are legit, and you deserve to know early on whether someone is going to be worth your time.
Don’t: Waste your time
In the same spirit of the above, try to waste as little of your time as possible on deals that won’t work out or were never going to. Much like an investor can claim to be qualified for financing when they aren’t, they can also claim to be interested in a deal when in reality they are just shopping around or gauging the market.
Look out for outlandishly low offers, short attention spans, and inquiries on multiple properties at once. These could all be signs of someone who is just poking around. Don’t be afraid to ask an investor if they are genuinely interested in making a deal happen. Again, if that’s not a question they are comfortable answering, it’s a red flag.
Do: Set clear expectations (on both ends)
The relationship you form with an investor will be different from that of a retail client, and also different from ones you have with other investors. Some may want you to be extremely hands-off, and just need you to sign when the paperwork is ready. Others may lean on you for advice, and be willing to compensate you in exchange. Many will lie somewhere in the middle.
Ask early in the process exactly what an investor expects from you, and vice versa. This will save both of you from a) wasting time and effort (we cannot stress the importance of time enough), and b) establish trust and open lines of communication from the get-go.
Don’t: Present listings as you would with a retail client
Many of your usual tactics and day-to-day operations aim to serve retail clients. One in particular is how you present listings to prospective customers. Retail customers love elaborate presentations, fancy brochures, etc. when checking out your various listings. Investors, on the other hand aren’t always concerned about your snappy marketing collateral and want to talk numbers.
Be comfortable moving away from presenting listings with snazzy drone footage and glossy paper, and towards a system which shows investors what they need to know: financials and data. You will save money in the process (drones, glossy paper, etc. aren’t cheap), which will help you out if you have to sacrifice margin elsewhere later in the deal.
Opportunities as a real estate investing broker are fruitful but there is an added layer to management that needs to be contributing into your strategy. These tips are a great rule of thumb as you continue to grow and further understand what works and doesn’t work for you and your own business model.
To learn more about how LendingHome supports real estate investors, , visit www.lendinghome.com. LendingHome has what you look for most in a financier—great rates and terms, with a supportive team.Get a rate today!
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only. All views and opinions expressed in this post belong to the author. You should contact a tax professional to obtain advice with respect to any particular tax matter.NMLS ID: 1125207 Terms, Privacy, and Disclosures. Copyright LendingHome Corporation 2020.