September 25, 2013
What Real Estate Agents Should Expect When Working With Investors
John Marion and Sandra Watkins are licensed agents representing a number of investor clients who are buying houses in the Atlanta market. In this blog post, they explain some of the expectations real estate agents should have when an investor is involved in a real estate transaction. Some of the expectations presented will be true for the the agent representing a seller with another agent representing an investor buyer. Other expectations are relevant for agents representing investors who are buying.
No Emotions, The Numbers are Important / ROI
Investors buy real estate to make profit. That’s it. They expect their transaction to put money into their pocket, either for monthly cash flow as a rental property or for a quick resale after making some repairs.
They don’t care about the existing paint or carpet colors. They only care if the walls need to be repainted, if the carpet needs to be replaced and, most importantly, how much will it cost.
When deciding to move forward with a real estate purchase, investors run their numbers. They have minimum criteria for a Return On Investment (ROI). They calculate the Cap Rate, cash-on-cash return, and monthly cash flow. They are looking at the purchase price, the tax payment, HOA fees, cost of repairs, and insurance costs. If they are relying on an investment loan to make the purchase, the investor will include the cost and terms of the loan in the numbers.
Blind Offers on Properties
Investors will make blind offers on properties.
This means they will make offers without seeing the property.
The investor who makes a blind offer is relying on the listing for accurate information. The more accurate and detailed the listing, the better informed the investor will be when making an offer.
The pictures of the property in the listing are important also. Agents should put the maximum number of pictures allowed in the listing.
If the house is a fixer-upper, state it in the listing. If the listing implies the house is in good condition when in fact it needs a lot of updating and repairs, you will set up a situation where the investor will offer too much only to discover the truth during the due diligence period and either attempt to negotiate the price down significantly or suddenly terminate the transaction.
Don’t be too concerned about blind offers from investors. If the information in the listing is accurate and the investor is a strong buyer, chances are the investor will move forward with the purchase when the due diligence has been completed.
An Active Due Diligence Period
The investor views the due diligence period as a time to conduct due diligence! For the investor, the due diligence period is not simply a time to schedule a home inspection. It’s a time to do a lot of work.
Once a property is under contract the investor is verifying all the data in calculations used to make the original offer. If the tax rate or HOA fee is incorrect in the listing, the investor will discover this during the due diligence period. If the housing association limits the number of rental units in the subdivision, the investor will verify if the unit being purchased is eligible to qualify for a rental unit. The investor is verifying the rent rate, insurance costs, and repair estimate.
The investor may send out a home inspector, a contractor, and a property manager to the property during the due diligence period. In short, the investor is doing homework and verifying the numbers.
The investor will often use the full due diligence period. An 11th hour termination is possible (as is possible with any buyer, but investors seem to do this more often than owner occupant buyers). Please be aware that the investor may actually terminate at 11:59 PM on the last day of the due diligence period.
As an agent involved in the transaction you can help maximize the effectiveness of the due diligence period by responding to the requests promptly. For example, if the property is currently rented, provide a copy of the lease (and by the way, you should expect the security deposit to be credited to the investor at closing).
Getting the information and data the investor needs as quickly as possible will help the investor determine whether or not to move forward with the transaction. If a termination is coming, it is better to get the transaction terminated sooner rather than later so you can move on to the next transaction.
Some investors will have multiple properties under contract simultaneously. If the investor decides to move forward with one transaction, you will have it the pipeline sooner rather than later by responding the the investor requests promptly during the due diligence period.
Earnest Money Deposit Glitches
Many agents are accustomed to one of the Brokers holding the earnest money deposit. Many investors, however, prefer that their closing attorney hold the earnest money deposit. And the deposit is often wired, especially with out of state investors. This sometimes can cause a glitch in the earnest money deposit process.
For example, the standard GAR (Georgia Association of Realtors) contract used in the Atlanta market states that the holder of the earnest money is responsible for confirming that the earnest money has been received. Brokers seem to be more aware of this than closing attorneys. Sometimes the process of confirming that the earnest money has been deposited with a closing attorney can be a convoluted process, especially if the deposit was wired and there is no copy of a check.
Another oddity regarding earnest money deposit wires is that some sellers (usually banks), require that a copy of a check be provided to them as evidence of the earnest money deposit. With an investor who only wires money, sometimes getting a copy of a check can be a challenge. In most cases, we have found that what the bank is looking for is simply a copy of a check for the purpose of marking it off their task list (they are not actually confirming that the earnest money has been deposited). The seller’s agent can verify the deposit directly with the closing attorney, but for whatever reason, the seller bank on an REO transaction will insist on seeing a copy of a check.
Investment Company Corporate Documents
If you’re an agent who represents an investor who is closing in an LLC or a large investment company, get a copy of the corporate documents. You will need them. At least the basic documents such as the Articles of Organization or Articles of Incorporation.
Some investors may own an LLC in the name of another LLC or a larger corporation. This can be a roadblock on some transactions.
Some investor buyers have significant experience closing properties all across the United States and they know what documentation they need to provide and what documentation is not needed. However, we have run into some situations where the seller’s side or a closing attorney asks for additional corporate documents.
In a few cases, selling banks have been somewhat invasive in their requests regarding the ownership of the corporation, such as the birth dates off the corporate officers. The investor usually will not provide such information and the seller can either decide to terminate or move forward anyway.
We have found in most cases, a bank or attorney who asks for additional documentation regarding the ownership of the larger corporation that the investor is not willing to provide, the bank or attorney is satisfied anyway and the transaction moves forward. It seems that the request originates from someone going through a task list but that the documentation requested is not actually needed. Simply refusing to comply with an invasive request satisfies the the bank or attorney rather quickly most of the time.
On rare occasions a transaction is terminated by the seller bank because the investor refuses to provide what they consider to be information that is none of the seller’s business.
Verifiable Proof of Funds
The agent representing an investor buyer should inform the investor that they will need to periodically update their proof of funds.
Agents who are representing the seller with an investor buying the property should carefully examine the proof of funds. Investors who are not cash buyers may be relying on an investment loan from a private lender. A letter from the private lender should contain their contact information, including a phone number.
Of course a bank statement showing cash on hand for the transaction is an awesome proof of funds.
Investors Will Close on Multiple Transactions
The great thing about investors is that they are in the business of buying more than one house over whatever time period they are in the market. You can usually expect multiple transactions with your investor clients. It may be 50 in one month or 1 every year.
If you represented a seller of a property purchased by an investor, you can go back to the agent representing the investor when you have another listing that is similar to the previous transaction. You may get a very quick sale!
Actual Investor Buyer or Investor Looker?
Over time, you will see that the best investor clients will be making good offers. As market conditions fluctuate, they will change their strategy of what they buy or how they structure the offer. And they will close on most of the properties they get under contract.
But some potential investors turn out to merely be lookers. They will look at comps, want more comps, ask tons of questions, make few offers then not close when they get one under contract, and otherwise being time wasters.
How can you tell the difference between the investor looker and the real investor buyer? Sometimes it will just take some time to find out by experience. But the agent who is considering devoting time to a potential investor buyer should ask for the name of the entity they are buying in (personal name or LLC usually). Ask if they have closed on any transactions and verify by looking it up in the tax records.
If the investor is new, they may not have any completed transactions. In this case, the agent should find out more about the investors strategy and get a copy of the proof of funds.
New Investors / Wholesalers
Sometimes the new investor is not a qualified buyer but an intermediary or investment partner who is “wholesaling” deals to other investor buyers. This is a specialized strategy used by investors.
In our experience most agents are not willing to work with wholesalers.
While we prefer to be involved in wholesale deals directly as investors who are principles in the transaction, it’s possible for an agent to do multiple transactions with a new investor using the wholesaling technique.
The agent who understands wholesaling may be able to close multiple transactions with a brand new wholesaler investor who has built up a network of cash buyers.
Make Money With Atlanta Real Estate Investors by Being an Investor Friendly Agent
Agents who are willing to work with investors in the Atlanta area are making money closing multiple transactions with their investors. Working with investors can be very profitable for agents, but requires an understanding of how investors think and how they view real estate compared to the typical owner occupant buyer.