Monday, August 02, 2004

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.


Anonymous said...

Hi Shaun - ohbejoyful, aka Susan, from RDPD here. Quick question - did you pay the agent any fee for successfully finding a lease-option tenant?

Fascinating blog - I'm reading it thru from the beginning and learning so much. You are a wonderful writer - very clear.


Shaun said...

No, I paid my first agent no fee for finding the lease-option buyer. She was to get paid when the tenant bought the house - which didn't happen.

Ryan said...

Wasn't this tenant there for 2 years? And if you found a new tenant, wouldn't you sign them to another 2 year lease?
If so, wouldn't the agent get $1,000 every two years?
$1,000 every couple years doesn't seem like too sweet of a deal to me, even WITH the chance that someone would buy it, and she'd get her full commission at that point.
I fully agree with being an I and/or a B, but I can see how she would want out.
Just playing devil's advocate here, let me know if I'm totally off base :)
Love your blog!

Shaun said...

That's one way to look at it. Try looking at it this way:

She worked for 1 week to find a lease-option purchaser. (And I doubt she really worked a full week. She probably spent 15 minutes entering the property into the MLS plus maybe another 2 hours with the paperwork. I'll be generous and say she did 16 hours of actual work, which includes taking the tenant to the property to show it.) She could have gotten $1,000 for that. If the tenant buys the place, she gets the rest of her commission on the sales price. If the tenant moves out, she works for another 16 hours, finds another tenant, and gets another $1,000. If that tenant buys, she gets commission on the new, HIGHER sales price. (The price would reflect 2 years of appreciation.) So if the second tenant bought, she would have already mdade more money than just selling the place outright- $1,000 from the first tenant, plus commission on the sale at the higher price. If the third tenant buys, she'll have received $2,000 from the first two tenants, plus commission on an even higher sales price. When you realize the vast majority of lease-option tenants never buy the property, you begin to see the income potential.

I would have also used her for any other lease-option properties I bought in the future.

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