How to Select a Good Investment Realtor
Once you make the decision to invest in real estate, the next decision is where to invest (for more info on that, please see Criteria for Selecting A Good Investment Location and Obtaining In-depth Local Knowledge). Once you choose an investment location the next task is putting together an investment team. The most critical member in your team is the property manager. Please see A Process for Selecting the Right Property Manager for how to select a good property manager. After the property manager, you need a good investment Realtor. This article focuses on how to select a good investment Realtor.
The vast majority of Realtors deal with homes, or life needs and wants: first home, expanding family or downsizing, schools, commute to work, relocation, etc. However, while most realtors are great for home buyers, they have little or no knowledge of investments. Investing in real estate requires in depth knowledge of tenant pools, area economics, job growth, demographic changes, understanding and estimating returns, selecting high performance properties and much more. There is actually little overlap with a residential Realtor except for the physical process and paperwork of closing a sale.
Also, do not be confused by Realtors who have sold investments. In most cases, the Realtor sent the buyer MLS sheets (almost worthless to an investor) and then made the offer as directed by the client. This does not make a Realtor knowledgable of investments. So, what should you look for in a good investment Realtor?
- Deep knowledge of investment real estate including expertise in estimating returns and rehab costs.
- Deep knowledge of the local investment market including areas and types of properties to focus on or to avoid.
- Access to a network of service providers for various needs.
- Highly skilled in selecting good investment properties especially in a competitive market.
- Highly skilled in process management and problem solving and deal making in order to bring a property from identification through acquisition, rehab, and property manager hand off.
How do you then, from thousands of Realtors in any market, identify a good investment Realtor? The following chart shows the process that we recommend in order to select a good investment Realtor. The diagram is divided into Critical Skills and Highly Desirable Skills. If the Realtor does not have ALL the Critical Skills, if they are missing ANY of the skills, find another Realtor. You cannot afford to depend on anyone without all the critical skills.
The Highly Desirable Skills are critical for success, but you can accomplish these tasks with someone other than the Realtor if necessary. For example, if the Realtor does not have the skills to over-watch the rehab, the property manager may be able to provide this skill.
Know that you will have to interview multiple Realtors before you find one with even a portion of the Critical Skills. Do your interviewing via phone before you travel to the location. Create a written list of questions. During the phone interviews, ask them the same questions and write down their responses.
If the Realtor does not possess ALL of the following skills, you need to find another Realtor who does. And, just because the Realtor is uncle Harry or aunt Jean does not somehow replace the requirement for these skills. Investing is business and you will be investing a lot of time, money and effort. You cannot afford family or friends who you cannot fire if they do not perform.
Personal Investment Experience
If the Realtor has never owned an investment property they will not have the basic knowledge you need:
- Cost drivers (Insurance, repairs, taxes, rehab costs, time to rent, eviction time and cost, etc.)
- Major issues to avoid. For example, China Dry Wall, Kitec plumbing, aluminum wiring, ground water, class actions and many other local issues to be aware of.
- Local tenant pool characteristics - which tenant pool is most likely to have the most good tenants
- Legal and code issues
- And many more
If the Realtor has not owned investment properties, find another Realtor.
Closed Multiple Investment Properties
Realtors with investment knowledge are rare and the ones that do tend to specialize in this market segment. You should expect that the Realtor have closed multiple investment properties for their clients. If they have, then they have been through the steps necessary to take a property from purchase through handoff to the property manager. If the Realtor cannot provide specific examples (and references) of investment properties they closed, find another Realtor.
A Realtor once told me that they had handled more than 100 investment properties in a single year. I was impressed, until I dug a little deeper. Turned out they were employed by a large investment company that provided lists of properties and prices to offer. The individual's job was to write offers. Essentially, though they "sold" many investment properties, they have zero knowledge of the selection process.
This is the situation we've found with most Realtors who handle investment properties. They send MLS sheets (almost worthless) and the client makes the selection. In such a scenario, the Realtor actually has no knowledge about how to identify a good investment property.
If the Realtor did not actually select the properties, find another Realtor.
Note: Do not expect the property manager to offer investment advice. Without exception, all the property managers I've met are very good at knowing what will rent and most are good at estimating what a property will rent for. The better ones can even give you guidance on what changes to make. However, property managers do not know what to buy in order to maximize return on investment.
There may be hundreds or thousands of properties available at any given time. The challenge is knowing which ones are most likely to be good investments. The Realtor must have a specific set of criteria for narrowing the selection down to a few good candidate properties. This is critical for two reasons: time and money. Time, because you will never have enough time to evaluate each and every property. Money, because if you buy in the wrong area or the wrong property type or configuration you may never achieve the return you desire.
If the Realtor cannot concisely explain their selection criteria, find another Realtor.
Estimating the Rent
An accurate estimate of rent and time to rent is critical when you are selecting an investment property. You will base your purchase, offer price and everything else on the rent and time to rent. If the Realtor does not have a process (and can provide substantiating evidence) for estimating the rent, how will you know whether a given property is a good investment? Or even if the property will break even?
If the Realtor cannot concisely explain how they accurately estimate rent and time to rent, find another Realtor.
Highly Desirable Skills
You can work around a Realtor not having the following skills but it will make your life much more difficult.
Unless you buy a property at the right price the odds are low that you will achieve the return you are seeking. We make offers based on the desired rate of return, not based on the asking price. Consequently, we only get about 1 out of every 7 offers. But that is the nature of investment real estate. If you pay too much for a property, you will not make the desired return.
This is different than buying a residence where there is more flexibility in price. For example, the difference in monthly payment for a $290,000 home and a $300,000 home is about $50/Mo. A $50/Mo. difference in payment may not matter to a home buyer but can make or fail an investment property.
If the Realtor does not understand the importance of the offer price in terms of profitability, then you need to replace the Realtor or you will be the one to determine the offer price. Note that knowing how much to offer is based on multiple factors and not just recent similar sales.
The property manager is the most important member of any investment team. Note that finding a good property manager is about as difficult as finding a good Realtor. If the Realtor has been involved with multiple investment properties they have worked with various property managers and probably know who is good and who is not. It will still be your responsibility for selecting the property manager but you need all the input you can get.
Quiz: Do you want a property manager with a great Yelp rating? The answer may surprise you. Ask if you would like the answer.
While highly desirable for the Realtor to have direct knowledge of a good property manager, you must do your own evaluation because the property manager is the one who will monetize your property and you can not afford any one but the best.
All properties need some work. So, you will need a handyman, perhaps a landscaper, maybe a plumber. If the Realtor has worked with investment properties (especially if they have owned investment properties) they will know who to call to get things done cost effectively and quickly. If not, the property manager may be a fall back option.
Know that most property managers make more money from maintenance than they do on management fees. This is because most have an in-house maintenance department or they mark up all invoices by 10% to 20%. If you can work directly through the Realtor's contacts, you can probably get things done quicker and at a lower cost.
Every property will need some amount of rehab and you need someone to ensure the work gets done, on budget, on schedule and correctly as well as keeping you informed on the progress. Especially if you are investing remotely, it is critical that you have eyes and ears on site, usually every day.
Also, if you have problems with the property manager in the future, the Realtor is the one to investigate the situation and get back to you with a second opinion. So, the role of your investment Realtor does not end at close of escrow.
Having a good investment team in place is critical to being successful in real estate investing. The two key team members are the property manager and the Realtor. Finding a Realtor with the investment knowledge you need will not be easy. Investing with a Realtor that does not understand real estate investing is high risk.