Qualifying
Your Investment Property Realtor
Why qualify a realtor? Aren’t
they all sufficiently trained before they get
their licence? Don’t all realtors have a licence
to conduct trade in investment properties? Yes,
all realtors in Ontario are licensed to conduct
trade in any kind of real estate, including
investment properties. But they’re also required
by law (REBBA) and the industry regulator (RECO)
to provide a level of duty and care to act in
the best interests of their clients. That means
they shouldn’t be assisting you in buying or
selling an investment property if they don’t
know what they’re doing. And you don’t want to
wait until after you’ve made an investment to
discover that your realtor wasn’t acting, or in
a position to act, in your best interests. In
all other professions, licensing and
certification is designed to give the public
comfort and recourse that the professional is
trained and ready to assist you in whatever
service they provide. Almost all professions and
trades also require every person to spend time
as an intern or apprentice. That’s not the case
with realtors.
Questions to
Ask your Investment Property Realtor
If you do an Internet search on
questions to ask a commercial realtor, they
generally suggest you ask about reputation, size
of office, specialties and other marketing
fluff. That’s all it is—fluff. Forget about the
‘strength’ of the real estate brokerage. They’re
all the same. The difference is in the care and
skill provided by the
individual realtor, just like other
service industries.
If a realtor can’t answer the following
questions satisfactorily, they’ll almost
certainly do you more harm than good, and the
realtor's brokerage won’t protect you. Most
brokerages require their realtors to sign
indemnification clauses as part of their
employment agreement, which essentially leaves
the realtors on their own if they mess up.
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How many
commercial investment properties have
they bought or sold? Of course,
everyone has to start somewhere but
should you be the person that finances
their trial-and-error learning curve? |
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Is being a realtor their full-time
job? With hundreds of thousands or
possibly millions of your investment
dollars on the table would you want
anyone that was moonlighting and not
fully committed to the real estate profession? |
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Have they owned or managed any
properties? If they don't know the
pain points of being an owner how can
they spot the best and worst
opportunities. If they don't know
tenancy law, I can almost guarantee that
they--or you--will become a victim of
it. |
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Have they owned a company or had
profit and loss responsibilities in a
company? If they don't know
financing and they don't know whether a
particular expense or claimed income
stream is reasonable, how do you spot
inconsistencies, mistakes, innocent or
negligent misrepresentation and intended
misrepresentation such as fraud? |
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Ask them to explain return
of
investment and return
on
investment. If they can't do this
then how can they possibly know whether
the buy or sell deal is a good one? |
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How do they determine the value of a
property? If they use the
comparative approach (these other two
properties sold at this price, a la
residential house sales) ... run! Not
intimately knowing the Income Approach,
cap rates, capital costs and a number of
financial ratios that determine whether
a property is cash flowing positive
could cost you your cash investment, the
property you're buying, and possibly a
lot more. |
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Ask them to name some of the ‘pain
points’ or challenges that an investment
property owner faces. If they
haven't walked a mile in the shoes
you'll be wearing then odds are high
that you'll soon be shoeless. |
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What makes them different from, and
better than, the other realtors, and
especially other commercial realtors? |
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What can they tell you about the
legal obligations a landlord has and
legal challenges a landlord might face?
Tthey should give you some
highlights of the Human Rights Code
(HRC), Residential Tenancy Act (RTA),
and possibly other concerns such as the
Electrical Code, Fire Code, Building
Code and local municipal by-laws. |
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Should you hold the title to the
property in your personal name or in a
company name? Why? Your accountant
may say one thing and a lawyer the
complete opposite. How do you decide?
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Aside from listing on, or searching,
the MLS, what else will they be doing to
sell your property or help you find
one? Most of the 77,000 Ontario
realtors
have access to the MLS. These realtors
are nothing more than gatekeepers of
information. Investment property
realtors have personal networks of
contacts, suppliers and trade knowledge. |
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Will they list the property on the
MLS? If not, why not?
This marketing approach almost
assuredly won’t guarantee you maximum
market exposure and such realtors are
almost certainly not acting in your best
interest to get you the highest sale
price or the lowest buyer price.
Some
brokerages advertise ‘Principals
Only’. This means they want to
take the commission on both ends,
sometimes called ‘double-ending,’
multiple representation, or dual agency.
Multiple representation has recently
come under significant scrutiny and criticism and, in
my view, rightly so. I believe it is
not possible for one representative to act
in the best interests of two parties
(same as lawyers).
The role switches from obtaining the
best price to arbitrating a price
between two known limits. The buyer can’t
get the lowest price possible
and the seller can’t get the highest
price possible. The representative is
automatically trying to negotiate a price,
perhaps a fair split, between these two
limits. That is not providing
their client with the duty of care and
skill demanded by the Real Estate and
Business Brokers Act (REBBA). Such
brokerages and representatives also may
not list your property on the MLS since
the MLS requires a commission to be paid
on both sides. These brokerages are not
acting in your best interest to market
the property to the widest possible
audience in order to command the highest
possible sale price. |
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What is
cap rate? Many realtors will tell you how
it's calculated (easy enough) but they
don’t know what cap rate actually is.
Most importantly, if they don't know
what it doesn't tell you about an
investment property then you could end
up with a property that is a financial
sinkhole.
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How does the
market
determine the cap rate? What causes the
cap rate to change? These two
questions could be a huge qualifier. I
believe most realtors can't answer these
two questions. |
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Why does property value go down when
the cap rate rises? If the realtor
doesn't know the answer, how can they
possibly provide you with the guidance and
advice you need to properly protect you?
Isn't your protection the realtor's
first priority? |
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What requirements
do lenders have and what financial ratios do
they rely upon? If the realtor can't
provide this kind of knowledge and
insight then you could be wasting your
time as a buyer looking at properties
for which you'll never get financing
or wasting your time as a seller tying
up your property with a buyer who won't
succeed in getting financing. A realtor
should know beforehand whether a buyer
has a reasonable chance of obtaining
financing. |
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Can they
determine a property’s true NOI? A
lender's calculation of Net Operating
Income (NOI) can be quite different from
that of an investor. The lender wants to
know their mortgage investment is
protected. A property owner wants to
know how much money is going into their
pocket. |
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Can they explain
the breakeven ratio, cash-on-cash return, and
why a buyer can fail to get financing even if
they’re a multimillionaire? |
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Will they tell
you not to buy something if the
financials don't make sense? Will
they tell you why you might consider
making a conscious and well-informed
decision to over-pay? Many realtors depend solely on their
commission. If they don't sell then they
don't eat. Despite the law's embedded
Code of Ethics, this situation can put
a realtor's needs at serious odds with their
client's investment needs. |
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What makes them
qualified to tell you how to spend your money,
especially since they have no vested
interest in the property beyond making
the sale? |
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Do they know what
an estoppels letter is? It can be a very
useful tool for keeping a seller honest.
If they don't know it then they're not
doing the best they can to protect their
buyer's interests. |
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What were the
first questions they asked you? Those initial
questions can give you a lot of insight into the realtor’s motivations and
whether they’ll be acting in your best
interests, especially if your interests don’t
align with theirs. |
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How do they
determine a selling price for your property when
they ask for your listing? Any realtor who
accepts whatever price the seller wants has an agenda different from
seller's, or they're desperate for any listing
regardless of how unreasonably priced it
might be. |
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Does the realtor
know the appropriate governing law for the type
of investment property? Most type of properties have specific legislation
that applies to the property type
and all real estate is affected in some measure by
municipal by-laws. |
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If they quickly
offer a discount on commission, ask yourself
why? Will you be
getting what you pay for? Most likely
... yes. |
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Why Do You Need
an Investment Property Expert?
The answer itself is a constantly
moving target. An expert must stay on top of the
trends and factors that affect what the answer
is at the time the question is being asked.
Every investment property investor's
requirements is different at any given time and
the market can change literally in a matter of
days. An expert can ask the investor the right
questions to factor in a client’s personal
circumstance to modify the answer, which could
actually be the opposite of what the expert
might have said without knowing the person
circumstances.
For example, a doctor might
have prescribed a certain medication under
‘normal’ circumstances but learned from their
patient that they are allergic to corn. Many
pills use a corn derivative as a binder so most
pill medications would have to be ruled out.
The same type of investigation about a buyer or
seller's specific circumstances should be done
by a realtor too.
Another key differentiator
or realtors in the real estate industry is how well the industry
itself is monitored and
regulated. The medical, engineering, accounting
and surveying professions have done an excellent
job in Ontario. Consequently, the odds are high
(but not guaranteed) that the person you speak
to will be qualified and have some level of
experience and expertise. These industries set a
high bar for education and for obtaining a license
to practice their profession. Unfortunately,
that’s not the case with realtors. A realtor can
obtain a license by taking five two-week courses
over six months and is then officially licensed to sell any kind
of real estate from an oil refinery and a farm
to a factory, home residence, retail plaza or
cemetery. It's impossible for a realtor to
provide the competent skill necessary to be all
things to all people.
Skill is Knowledge and
Experience ably Applied.
It's not enough to have experience.
There are veteran realtors with 20+
years of experience who don't have the
requisite skills and knowledge to sell
an investment property. Knowledge is the
single greatest mitigator of any kind of risk,
whether as a general fighting an enemy army or a
doctor recommending a resolution to an illness. Real estate
markets change constantly. Knowledge is
power and properly applied knowledge is
a powerful leverage in buying and
selling negotiations. Experience alone
won't win the day but a lack of
experience will assuredly lead to
client disappointment and possibly worse
You Gotta Know When to Hold
up and When to Fold Up.
Some realtors list a high-demand
property and then wait for buyers and
their reps to bring them an offer.
Multiresidential and retail plaza
investment properties are in super-high
demand and virtually no supply. So it's
relatively easy for realtors to receive
multiple offers for these types of
investment properties. Multiple offers
are generally desirable for a seller but the due
diligence period is often measured in
months so knowing which offer to accept
can have significant consequences. The
highest price isn't always the best
offer. There may be significant hidden
upsides that an inexperienced realtor
may overlook, not know, or simply 'leave on the table.' Locking up a
property for several months of due
diligence only to later learn that the
buyer didn't obtain their financing
still remains the number one reason
investment property deals fail. An
experienced investment property realtor
will minimize the chances of that
happening
Meet Aztech's Broker of
Record
Chris Seepe
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Chris has considerable experience as
an owner and operator of many multiresidential
investment properties. He teaches a course and has
written a book that covers everything from finding an
income-generating property (very difficult in today’s
market) and managing its operation to protecting yourself
against tenant abuse and government bias, setting up
property legal and accounting structures, embracing the
power of digital management, and ultimately extracting
value to finance the next property.
Chris has over 30 years of
executive-level business experience and can
provide business model investment analysis
services, go-to-market strategies, real estate
business plan implementation, and has a personal
base of over 4,200 real estate-related contacts.
Use the tabs at the top of
this page for more details about the
Landlording in Ontario course and the book
of the same name. Click on the Articles
tab to see a large number of articles on a range
of landlording and investment property topics.
Before entering real estate,
Chris worked in various technical, marketing,
and business capacities for companies including
American Express, Geac Software Systems, and
Honeywell Information Systems. More recently he
worked at the forefront of the geospatial
technology industry as General Manager of Web
Mapping Services – bringing the Google Earth
Enterprise relationship to Canada, and
pioneering the development of geo-referenced 3D
building model cityscapes from aerial imagery.
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