Identifying People’s Mindsets

Well, now that I’m in escrow, things will probably be quiet for a bit. I expect nothing much will happen for 3 weeks and then, during the last week of escrow, there will be a flurry of activity as the escrow agents realize the deadline is approaching. This gives me some time to talk about various things.

If you’ve read The Cashflow Quadrant by Robert Kiyosaki, you know of the four different quadrants people operate in – E for employees, S for self-employed, B for business owners, and I for investors. Most people are in the E quadrant – they work for someone else and are dependent on that person or company for their paycheck. They are focused on paychecks. Investors, on the other hand, are focused on rates of return and how hard their money can work for them so that they don’t have to work. In the book, Kiyosaki mentions he can tell what quadrant a person is in just by talking with them for a few minutes. I had an experience recently where this difference jumped out at me.

Two years ago, when I purchased my rental property, I tried to rent it out myself for two weeks. I had no luck. I ended up calling a real estate agent. She listed it for me and within 1 week, the place was rented on a lease-option deal. My contract with the agent said I’d pay the standard 6% commission – 3% to my agent and 3% to the buyer’s agent - when the sale was complete. I asked her what would happen if the sale did not go through. She said she wouldn’t get paid. Well, as long as she knew that, I was ok with it.

As an investor utilizing a lease-option, I WANT the sale to fall through. Because when it does, I get to keep the tenant’s option fee, which is a couple of thousand dollars, plus I still have the house. I can then repeat the process, collecting another option fee, increasing the selling price of the house, and possibly increasing the rent. However, this puts me at odds with a real estate agent, who only gets paid if the house sells.

When it became clear to me that my tenant was not going to purchase the house, I spoke with my agent about putting the property up for a lease-option again. I explained the above to her and told her we needed to get our goals aligned. I offered to pay her $1,000 of her commission on signing and the rest when the house was sold. If the tenant did not buy the house, she could keep the $1,000 and we’d do it all over again. It was a win-win for both of us. Initially, she agreed. About 3 weeks later, I got an email from her, out of the blue, saying she was resigning as my agent. She said it was hard to find tenants who would pay a non-refundable option fee equal to what her commission would be if she sold the place and she couldn’t take the time to work on leases. In other words, she didn’t just want $1,000 now and the rest OR MORE later – she wanted to be paid her full commission for selling the house up front, even if the house didn’t sell! I said thanks for your time and found another agent.

Just to recap – she had an opportunity to get a good cashflow stream going. Yes, she wouldn’t immediately get a full commission (about $4,000 in my case) if the tenant didn’t buy. But she would get $1,000 and, when the next tenant moved in, she’d get another $1,000 plus commission on a higher sales price. And if THAT tenant didn’t buy, another $1,000, etc...

She was firmly in the E quadrant and so focused on her next paycheck, she couldn’t see the benefits of the deal I was offering her. And then, of course, my plans changed and I ended up selling the house anyway, so she lost out there too.

I can understand her fears. Just last week, our local newspaper had a story about real estate agents’ fees and how the once iron-clad rule of paying 6% commission is being eroded. A seller’s market not only affects housing prices, but agent prices as well. You can use a bare-bones service and get your house in the MLS for about $500. If the only way you know to earn money is from a paycheck, these are scary times to be a real estate agent.