Aaron asks,
I’ve been listening to your podcast for several months now and really like it. Thank you for all your insight into real estate investing. I was curious do you have an episode where you discuss further about whether or not someone should get their real estate license if they are getting serious about personal real estate investing. If you haven’t answered that question what are your thoughts?
Aaron, this is a great question. Real estate agents and brokers have access to a lot of tools that regular folks don’t easily access. If you go back 30 years, before so much of the real estate world became accessible online, it seemed like realtors had a monopoly on access to the information.
However, as technology has progressed, we find increasingly that the tools realtors used can also be accessed by the general public, sometimes for a modest fee.
Some jurisdictions have stricter privacy policies than others.
The other benefit of having a realtor on your team is that you can collect a commission on your transactions if you represent yourself. That can amount to a 2-3% saving on the gross purchase and a 2-3% saving on the sale. That’s significant and can improve your profit margins quite a bit.
Not only that, you can often market yourself as an investor friendly broker and many investment colleagues may throw business your way. That steady flow of transactions can smooth out your income stream. The life of a real estate investor can often be pretty inconsistent from a cash flow perspective. That income roller coaster can be great one month and swing to negative the next month.
In many real estate boards, new listings go out to the realtor community a few days before being published to the public Multiple Listing Service website. That two day head start in front of the buying public can be a real competitive advantage.
On the other side of the coin, there are responsibilities that come with being a realtor that you carry with you everywhere you go. If you are at a cocktail party and you hand someone your business card, your real estate licensing board will probably require that you disclose that you are a licensed realtor at the same time. You will have to hand out two business cards, one for your investment firm, and one for your real estate firm.
The biggest issue you have with being a realtor is that you have a duty to fully disclose. You might be selling a property that has a historic problem. It might have been a past water damage that was repaired, or perhaps asbestos that was remediated. It might even be an existing risk item that you would expect the buyer to examine in their own due diligence. As a seller, you can allow the buyer to conduct their own due diligence and you have no duty to disclose. But as a realtor, you have a duty to disclose no matter what. If the buyer finds a problem after closing, your risk of litigation is much much higher.
Everyone knows that realtors carry errors and omissions insurance. So even if the realtor has no money, the plaintiff in a lawsuit knows that there is a good chance of collecting from the insurance policy if they sue the realtor.
For that reason, realtors attract more than their share of litigation.
Failure to disclose is enough to trigger a lawsuit and a sanction by the regulator for your real estate license. The thinking is that when you are in a conflict of interest position, you have a fiduciary duty to protect the public and your clients ahead of your own self interest. When you’re a realtor and a principal in a transaction, you are in a conflict of interest position.
I can’t advise you on which way to go on this question. There are pros and cons that you will need to weigh. I know investors that carry a real estate license. I also know many investors that have tight relationships with brokers who are not direct owners in their projects.
