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Product Details
| ISBN-13: | 9781481755719 |
|---|---|
| Publisher: | AuthorHouse |
| Publication date: | 05/28/2013 |
| Pages: | 112 |
| Product dimensions: | 6.00(w) x 9.00(h) x 0.44(d) |
Read an Excerpt
Opening Doors within the Margin
By Sean O'Brien
AuthorHouse
Copyright © 2013 Sean O'BrienAll rights reserved.
ISBN: 978-1-4817-5572-6
CHAPTER 1
Lead Generation
So, Mr. Buyer, you want to buy a house? You get on-line, cruise though any number of websites, all of which provide you with enough of a teaser to compel you to give up some personal information. That information generally has to do with the following: Name, phone, email address, current "pre-qualification", time frame, size and price of different homes that you might be interested in and the area. Guess what happens next: You become a "lead".
Lead generation is (or should be) the largest investment of any real estate brokerage. It is prudent; however uncommon, for such brokerages to actually do the homework and determine what the return on investment (ROI) will be prior to making that investment in lead generation. Because this homework isn't normally done, the following generally takes place: The only qualifying factors that can possibly serve as qualifying metrics are the factors that those "leads" personally input when filling out their initial registration information. As you can probably see, there is an inherent skew if these metrics are used as part of a marketing presentation to you the seller.
The ability to qualify, and eventually close, that lead on something that they are ready, willing and able to purchase becomes entirely dependent on only a few factors; one being, that lead's own tenacity to purchase something despite the best efforts of an inexperienced agent with their own agenda. Another factor being the fact that some buyer agent still has to pair the listing with a qualified buyer.
Tell me if you have ever heard this: "Did you know that in some States it takes roughly 1500 hours of pre-license education to become a hair dresser, also in some states, it takes less than 200 hours of pre-license education to become a licensed real estate agent?" Who cares, right? The reason I bring this up is not infer that I may or may not be a smarter, more qualified real estate agent than someone else.
The reason I bring it up is to bring light to the current reality within the real estate system. Co-existing brokerages within a common market depend on cooperating with one another in order to get anything done. That means that any listing can be sold by any cooperating brokerage, regardless of who the listing agency happens to be. From that perspective, doesn't it seem alarming to entrust 7.5% to an agency that will actively depend on its direct (and equally as inept) competition to sell your home? Scary.
Obviously, you can see where I am going with this. When you consider the "time versus return" ratio involved in each side of the transaction, it becomes very clear that there is a lot of money to be made by listing your home. Conversely, and using the same ratio, the anguish and effort associated with qualifying a lead and getting them all the way to a closing doesn't seem to make much sense for a broker to focus many resources. But, that's what "buyer specialists" are for. These are real estate agents who legally, have to work under a broker (as do all agents).
This is important, because they are just sales people ... and they work for the brokerage ... just like any other situation. They do pay to play, so to speak, and this is how.
Brokers compensate their agents, in this case, the "buyer specialist". Selling-side and listing-side brokers are both compensated by the seller as defined by the terms negotiated within the listing agreement. The buyer agent's compensation is generally based upon their performance within the brokerage and paid from some sort of a split agreement stemming from the buyer side compensation of the accepted offer. That "buyer side compensation" comes from a home seller's original listing agreement that was discussed above.
A common example might be a "55% split". What that means is that if a home sells for $200,000, and the seller agreed to compensating the selling broker 3%, then, the lowly real estate agent—who got someone under contract and all the way to closing (a 40 day process)
is compensated an amount equal to $200,000 × .03 × .55 equaling roughly $3300 less any other in-house dues or admin/marketing fees. The remainder of the buyer side 3% compensation goes to the broker of the buyer agent. The broker easily justifies that compensation split under the premise of lead generation and support staff expense.
If that brokerage were also the listing agency, then there would be the selling side (listing) commission earned as well. I routinely see 7% total; so in this example, that 3% would be split between the agent and their broker, and the remaining 4% would go directly to the brokerage (Unless, of course the listing was the agent's own personal listing ... which happens at times).
Generally speaking, individual agents shy away from the complexities of listing. They are simply frightened by the details associated with abstract work, repairs, etc. But once they do figure it out ... The act of listing is either embraced or completely avoided.
There are also lots of other lines of income that are tacked on in the form of "Document Prep" or "Transaction Fees", all used to increase the margin.... and interestingly, most if not all of these are legally passed along to the seller's side of the HUD-1 settlement statement as some form of negotiated for buyer closing cost. It is a wonderful misconception in that we generally associate a buyer to be the one who is spending the money. As you can see, it is the seller who is doing the spending; the buyer is only taking out a loan and providing the brokerage a conduit to expense the seller.
CHAPTER 2
Buyer Agent Compensation and Motivation
I have found out that I am very effective on the phone, but deadly face-to-face. It isn't about ripping out client's eyeballs or tearing out throats ... It is about rapport and relationship building, trust building, sounding brilliant and being very excited and sincere as quickly as this can all be established ... and then helping that client to see that you are the best at what you do and that you are passionate about helping them to reach their goals. This is not a home buying or selling idea. It is about getting them to their ideal situation. This is "sales 101".
When shopping for a good buyer's agent, you may or may not encounter such a polished presentation. But, if you do, give them the opportunity to get through it. Just make sure that your agent is extremely knowledgeable about the systematic process and timelines involved. The perspective buyer's agent that you are interviewing will not like it when you make them clearly articulate this process to you and in a way that you understand. It doesn't matter though; they must demonstrate a solid understanding of these principles prior to doing you doing anything. I will go into that entire process as well as give you a few examples of some of my more effective closes.
Be sure that you understand that your agent's motivation has nothing to do with you. That isn't a bad thing at all because they are in business to make money as efficiently as possible. Their time is as valuable as yours, so use the agent's focus as a qualifying metric in your search for the right agent for you.
The agent is qualifying you as well. This is why you will almost always be asked, "Are you pre-qualified?" (This refers to being prequalified for a loan). This is their juvenile way qualifying a buyer and determining who is ready, willing and able. Don't be offended; you as the buyer have a large piece in this process. Do it before you even consider talking to an agent or a seller. You are getting ready to make one of the largest transactions in your life, so you should probably talk to a qualified, licensed mortgage lender in order to determine exactly what and how you can buy. I will go into the treatment of mortgage lenders in a moment, but first, let's continue to delve into a buyer's agent mindset.
Effective agents shouldn't default to a larger priced transaction ... only the number of transactions in their pipeline, so let's look at that difference in real terms. What is the difference between a $200,000 sale and a $220,000 sale for an average buyer's agent? You will understand why I am defining this for you in a moment, but for now, bear with me.
A well-compensated (non-broker) buyer's agent will make approximately 1.7% of the gross sales price. That means that for $200k they will make $3400. For a $220k sale, they will make $3740, or a $340 difference. That means that they should have the same care and approach to the $75k deal as they do the $400k deal. The process is identical. If the agent is any good at all, they will have their systems in place and make the process feel as smooth as silk, regardless of the size of the transaction. Your expectations will have been managed and there will be no surprises; and not a lot of dialogues, outside of a possible twice-weekly check-in "hug" call.
Back to the example, it is quite normal to have a $20k swing in price during the negotiations of a transaction. This is important to consider in that the seller is almost always focused on price, while the buyer is focused on cost.
I want you to consider that based on these numbers, your buyer agent's advice for making a good offer has an effective compensation margin for them of $340. This equates to a night at the bar with several friends; which when balanced against the anxiety you will bear throughout the negotiation phase, isn't much. In those terms, their advice is really not worth much. Another consideration is that a difference of $20,000 in price when financed over 30 years at a fixed rate of 3.5% costs roughly $89 per month.
Is $89 per month worth $20k to you? It is to the seller, so you could just give it to them ... and then ask for everything else, they will give it to you, do you know why? They have likely been told that these concessions have already been accounted for in the worse case scenario listing presentation they likely received.
OK, so if you offered $200k (instead of $220k) and are asking for $13.2k in concessions, the seller will see this and likely counter back with what they need to make it work. Again, you must consider the FACT that the seller has very likely rolled all of your closing costs to include a home warranty, a high repair cap, etc., which will equal as much as 6% gross sales price, or $13,200 ... as well as any negative equity they may have. So, help "get them out of jail". If your buyer's agent fails to articulate this 5th grade math to you, run away.
Had that seller not been managed to expect this request at the outset, this may be too painful of a request to float by way of an offer. However, they won't be opposed to the idea of getting what they need to make it all "just work", which will hopefully prompt them to compose a seller's counter to the buyer's offer. Just remember, that's a good thing because 1: now you are having a conversation and 2: you already know what their counter will say before you have seen it. You will very likely get everything you asked for, and you will be paying (financing) a few thousand dollars less than what you would have in the first place.
What I am trying to articulate to you is that you can do this yourself if you choose to. If you do use an agent, make sure they completely understand these concepts. Further, the seller is only thinking about their net earnings. So if this makes sense to you, read on for some terms and concepts that you will need to be able to articulate when approaching a seller on your own; again, if you so choose to use a buyer's agent.
Remember, it isn't you the buyer, who is footing the buyer agent's cost ... it is the seller. In this regard, it is actually better to use a buyer's agent that has a clue. Use them up; they will be happy that someone is talking to them. Leverage their professional insecurity to your benefit, so long as they can demonstrate these principles prior to you starting.
CHAPTER 3
A Thought on Lenders (for Buyers)
Conventional banks are funny places. You stick in your money and it essentially becomes an idea. You are putting an organization in charge of managing your money, so why wouldn't they charge you for the facilitation of your assets.
If you want to open a checking account, you go to a bank whose main activity centers on the maintenance (and consequent multi-level billing) of those funds. Why then would you go to a bank (conventional lender), whose main focus is the consistent, gradual, persistent and predatory bilking of your checking and savings accounts when trying to find someone that can help you with mortgage lending?
All financial institutions have investors. Those investors have minimum requirements that must be met in order for a transaction's risk to be authorized. The management of that risk is commonly referred to as "overlays". If you have a lender that if primarily focused on mortgage lending, then their overlays will be much more timely and flexible in terms of dealing with your specific need and situation; or better, your priorities.
Those priorities (of yours) often entail not paying for closing, which the lender can sometimes mitigate with lender credit. Other priorities have to do with the amount of down payment that may be needed in the event a government-backed loan is used. Yet another consideration is the management of mortgage insurance.
Bottom line, conventional banks will generally treat your home purchase as if you are purchasing a used car. Also, in those conventional banking situations, those "loan officers" are not individually licensed. The bank holds the license and the "loan officers" all work under that bank's umbrella. There is an obvious disconnect between the loan officer (in that situation) and their access to the investor or their underwriters.
Wouldn't you rather deal with a lender that deals specifically with the type of transaction that you are trying to figure out? Wouldn't you rather deal with a licensed mortgage lender? Wouldn't you rather deal with a person that has exponentially more transactions and experience under their belt?
A lot of agents have non-official relationships with different mortgage lenders. If you ask any agent for a recommendation on whom to use as a mortgage lender, they will most definitely give you 1 or 2 options. They will give you these recommendations based on comfort level of reporting, getting information, simple things like the lender picking up their phone and being upfront with the situation, etc.
The industry is based on relationships and experience. A good lender/agent team is incredibly valuable and this will cause your transaction to look and feel insanely simple and without drama. At the end of the day, the lender that you use is your choice. You can shop around, but do so before you get into the offer/negotiation phase.
I sometimes make a recommendation for a specific lender based on the buyer's priorities and personality type. For example, if the buyer is concerned about the expense associated with closing costs, I will try to find a lender that has a lender credit program.
I know what price point the buyer is looking at, so I just ask the prospective lender how much lender credit they could come up with if pushed. Then, I do a worst case scenario "net-sheet" for the buyer for that price point identifying highest case values for home-owners insurance and taxes (pre-paid buyer expenses) and figure out what the worst case scenario closing costs will be. After that, I subtract that lender credit amount offered from that lender from the "worse case" number I came up with.
When the buyer finds something to make an offer on, update the numbers and then offer the seller an offer with seller conceding a lower buyer closing cost value then they expected to concede. I am essentially leveraging the lender's "lender credit" into the buyer's offer.
Sometimes, I upset the lenders I work with because I will initially send the buyer to a bank and then tell them to, "Ask the lender for a fee sheet". (The biggest reason that I do this is because it isn't really that ethical to steer a perspective client to a single lender). Then, when they go to my preferred lender, they simply need to state: "Here you go, beat this", which almost always happens. That newly discovered savings is generally realized in up front overhead costs like transaction fees, origination fees, etc.; but not interest rates, those are based on your credit history.
Prior to submitting an offer, the buyer will need to obtain a Conditional Loan Approval from a valid lending institution. It is during the qualification phase that the lender will assist the buyer in determining the maximum buyer's purchasing power. It is not a guarantee that a loan will be given; however, it does check your credit worthiness and known history. The Buyer or Seller should not confuse this with a Final Loan Commitment that is not obtained until prior to closing to ensure all of the Buyer's financials are considered.
(Continues...)
Excerpted from Opening Doors within the Margin by Sean O'Brien. Copyright © 2013 Sean O'Brien. Excerpted by permission of AuthorHouse.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Contents
Acknowledgments.................... vii
Introduction.................... ix
Chapter 1 Lead Generation.................... 1
Chapter 2 Buyer Agent Compensation and Motivation.................... 5
Chapter 3 A Thought on Lenders (for Buyers).................... 9
Chapter 4 The Process.................... 13
Chapter 5 The Listing Appointment (you are the Seller now)................. 23
Chapter 6 The "sale assist" approach (not popular among listing agencies).. 31
Chapter 7 Staging and the Principles of Marketing.................... 34
Chapter 8 The Pre-Inspection.................... 42
Chapter 9 Pre-paids, Buyer Closing Costs and External Agencies............. 46
Chapter 10 Transaction Fees.................... 54
Chapter 11 Buyer Agent Perspective.................... 65
Chapter 12 Chasing that last 1%.................... 71
Chapter 13 Responsibility.................... 76
Chapter 14 Why.................... 78
Appendix 1 Residential Contract of Sale of Real Estate (Example)........... 81