As a broker of over 50 agents in 12 different counties, I am exposed to many different local markets and aware of their fluctuating prices in Northern California.
To answer the questions upfront, yes, the real estate market is in a general state of decline and may continue this trend (according to some experts) into half of next year. However, please keep in mind interest rates are low. This low interest rate combined with the low house prices, provides for a great mortgage payment. IF house prices continue to decline and interest rates rise, the mortgage payments will most likely rise because MOST of a mortgage payment is interest. So, does it matter to the consumer that house prices havent bottomed out? No, but the consumer doesnt see the relationship of interest payments vs house prices. They just see the falling house prices and decide to wait.
As the broker for a large real estate company (VM Group), I get many calls from investors wanting to start flipping houses. After 5 minutes in the phone call they always reference a show they saw on TV such as "Flip That House", Flip This House" or "Flipping Out" or the dozen other similar shows like this. The investors (or potential investors) see these shows and the huge profits and think its not out of their realm. In many cases its not, but please understand those profit prices are inflated. Never once did I see them mention closing fees, carrying costs, mortgage interest, Realtor fees, insurance, taxes or a dozen other fees that cut into the profit. What you are seeing is GROSS profit calculated on FULL ASKING PRICE. I guarantee if you go to 99% of those individuals you see on the show and ask them what their actual profit was, it would be about 35-45% of what was shown on the TV.
So, lets take a typical example. A claim of profit of $100,000 really equals about $35,000. This flipper risked about $50,000 (down payment) and about 6 months of time, headaches and huge liability just getting to the part where they can put it on the market. Then, they split it with their partner, or partners. So, $35,000 divided by 2 equals $17,500. Would you risk all of that and 6 months of work for that little amount of money? I would rather invest it elsewhere especially in this market.
Am I, a real estate broker, discouraging you from flipping houses? No! There is excellent money to be made, but I dont want you to think you are walking away with a years salary on one house. Plus, you have to know a fair share about construction, permitting, etc.
There are great deals out there, but please do your research first.
Mike Volkin
VMGroupOnline.com
Having attended the National Association of Realtor Expo in Las Vegas this year I wanted to write down a few thoughts and open a forum for those who attended. Feel free to post a comment if you attended and have something to say about the Realtor Expo.
My first observation was the overall size of this event, it was massive. However, upon further review I noticed at least half of all the booths were companies that want to develop websites for agents. I couldnt believe how many companies make money off of this. There are so many ways to produce a free website, I was astonished at the prices some of these companies charge. At the VM Group, we provide our agents with a FREE lead generating website, so I was amazed at all the agents who would pay for something like this.
My second observation was the large amount of international investment booths. Without looking into these investment opportunities further, I was amazed that literally every corner of the globe was covered. It seems that every place BUT America is a good place to invest in right now.
Again, feel free to post your comments here if you attented the Expo.
How to Evaluate Real Estate Franchises
Hidden expenses not often evaluated by franchisees before it's too late
There is no doubt that if you want to start a real estate brokerage, purchasing a franchise is definitely the route to take. This industry is dominated with numerous regulations, rules and high fees that "reinventing the wheel" is a huge waste of time and money. There are numerous companies to evaluate when choosing a brokerage but more importantly there are numerous fees to evaluate as well.
You might already have a company in mind. The intent of this article is twofold:
•1) To allow you to fully examine a company you already have in mind and reinforce or eliminate this company based on the below criteria.
•2) To help you evaluate the numerous companies and decide which best matches your goals.
Renewal Term Fees
All franchises have renewal terms. Approximately 60% of real estate companies require their franchisees to pay renewal fees to renew these terms. These renewal fees are typically a few thousand dollars and are required every year or every few years. These franchisors claim these fees are for administrative costs, technology fees or other support related costs. This is essentially a junk fee. Do not choose a real estate franchise that charges renewal fees. These fees should be included in the costs that are collected during the normal course of business. Companies that charge renewal fees aren't concerned with their franchisees financial independence.
Territory Size
Real estate companies make their money by zoning small territories for their franchisees. Zoning by zip code is the most common type of territory to offer. Paying a high initial franchise fee and portion of your profits for exclusivity to only one zip code is unacceptable. Avoid any real estate franchise that offers exclusivity to a territory with less than 150,000 people. Check the census bureau website (http://www.census.gov/) for the latest figures of the area you are interested in purchasing.
Additional Branch Fee
It goes without saying that when you buy a real estate franchise you will want your franchise to grow. Growth should be to the benefit of the franchisee, not the franchisor. However, many franchisors charge an additional fee for branch offices. If you have plans for owning a small brokerage of 6 or less agents, then this fee won't matter to you. However, if you want a franchise with unlimited potential this fee will have a huge impact on your bottom line. When considering a real estate franchise, always ask the franchisor about additional fees for branch offices.
Office Requirement
Statistics overwhelming show that clients don't like going to real estate offices. They would much rather meet in their house or a neutral location (such as a local coffee shop). Statistics also show that most agents prefer to work out of their house. With a computer and printer, this can easily be accomplished. A brick and mortars office is large expense for a broker. The broker must then pass that expense onto the agents in the form of higher commission splits. This makes everything more expensive. A real estate franchisor should have the technology available for a franchisee to work out of their house. Any company that requires the franchisee to maintain an office should be avoided at all costs. This is a large, expensive and unnecessary expense with an old-school mentality. Your real estate franchise will never reach your desired level of success within the confines of a brick and mortar office.
Percentage of Profits
Perhaps by a lack of imagination or a lack of leadership, franchised real estate companies are dominated by one out-dated type of business model. This business model calls for a percentage of sales on gross profits (typically between 4 and 6%). Do not buy a real estate franchise that collects fees on a percentage of gross profits. At first, this might seem like an acceptable form of payment. However, you want your real estate franchise to be large and successful or else you wouldn't be spending thousands of dollars and hours investing in one. The first rule of business is to always think big. If you truly believe in yourself and your abilities you must know that building a large successful real estate brokerage is well within your capabilities. With your franchisor collecting a percentage of gross profits, you are paying a higher fee the most successful you become, when in fact that opposite should occur. This type of fee constantly drags down your profit margin and returns your success rate back to normalcy.
Always look for a company that charges their franchisees a monthly fee per agent. This type of fee structure is much better for franchisees that plan on growing a successful brokerage.
Touting Brand Name
Statistics overwhelmingly show that choosing a Realtor based on their company affiliation is a virtually obsolete practice in today's society. In the past, it was common for someone to pick up a phone book and find a Realtor right out of the yellow pages. Nowadays a vast majority of clients find their Realtors by referrals from their friends or via the Internet. If a Realtor does a good job for their client, that client will call that Realtor again and again no matter which company s/he works for. Do not allow a real estate franchise to justify their high fees by claiming their brand name is recognizable in the Industry. It may be true, we can all name at least 5 major real estate companies, however, when it comes down to choosing a Realtor, the client won't care which company it is, as long as the Realtor performs well.
There are several companies who have been established for decades whose fees are astronomical. Their main selling point is their brand name. Make sure you weigh the value of those extra fees to the benefit of the brand name; you will find it's not worth the money.
Residuals/Profit Sharing
Profit sharing and residual payouts is the newest "scam" available that is unfortunately dominating the real estate industry. It ruined the insurance industry decades ago and has now spread to the real estate industry. Some new companies are using this business model as a central marketing campaign to spread their business. These same companies are advertising these profit sharing programs as retirement programs, when in fact they are the exact opposite.
The concept of the program is as follows: Agent Jones recruits Agent Smith to ABC Realty [made up company name]. ABC Realty offers agent Jones a percentage of all closed transactions Agent Smith closes. So Agent Jones goes out and helps his brokerage company grow. Only after Agent Smith closes a transaction, Agent Jones gets a portion of the commission. Agent Jones thinks this is great as he didn't close a transaction to collect a check.
Here is the problem: In order for brokerage companies to offer these profit sharing payments, they have to raise commissions and fees in the first place. A brokers profit comes from agents closed transactions. Therefore, if a broker wants to offer MORE money to an agent as a referral fee, they have to raise commissions. The money has to come from somewhere.
Never choose a company that has a profit sharing or residual program. Here are several reasons why:
•1) These programs are advertised in "perfect scenario" situations. In other words (keeping with the above example), Agent Jones recruits 10 agents and they all earn $100,000/year, so Agent Jones will receive a huge payoff. In realty, if Agent Jones recruits 10 agents (which is extremely difficult to do in the first place) the chances are extremely slim that even 2 of those 10 will be top producers.
•2) If you look at the profit sharing and residual plan from the simplest form, these companies are simply giving back to you money they withheld in the first place. Think about it from this angle. If the program wasn't in place, couldn't they offer you lower fees and a better commission split? The answer is yes, so in essence they raised your fees and commission to account for this payout of profits.
•3) If you purchase a franchise from companies that offer these profit sharing and residual programs your agents will focus on recruiting agents and not closing transactions. So now you have a large office with unproductive agents who are now realizing this residual system doesn't work because no one is closing any transactions. Remember the old adage there are too many chiefs and no Indians? That is exactly the case here. Your agents must have one job, sell real estate. The recruiting should be left to the broker. The more your agents spend on recruiting other agents, the less time they spend on closing transactions. Remember as a real estate broker, closing transactions is where your profit comes from.
Initial Franchise Fee
Franchisors actually incur numerous expenses when signing on a new franchisee, however, charging $25,000 or more for a franchise fee is ridiculous. You should not have to rearrange your life's expenses and put your family at risk just to start a brokerage. A respectable franchise fee is around $15,000-$20,000. Any company who charges more for a franchise fee is simply overcharging you. You should be concerned about the benefits, support and training from a company who charges less than $15,000 for a franchise fee.
Companies that offer low franchise fees are doing so for a reason. Think of it like this, when you go to a reputable clothing store and see a shirt you like for $40 you can see and feel the quality of the fabric, the stitching, comfort, etc. Now, if you go to another less reputable store and see the same style shirt for $10 and examine it, you will see the fabric is different, the stitching is shoddy and the shirt is less comfortable. From the outside the shirt looks the same. The $40 shirt will last longer and feel more comfortable. The same goes with a real estate company. Some offer low franchise fees and make many promise but don't deliver. However, a company with a strong foundation and support structure will always charge at least $15,000 for an initial franchise fee.
Virtual Office
Many companies claim they have virtual office technology but in reality, these virtual offices are just a File Transfer Protocol (FTP) site for downloading company forms. A true virtual office should replace what an agent and broker can do in a normal brick and mortars office. A virtual office should have communication capabilities. The communication capabilities should have:
•· Forums
•· The ability for the broker to post messages
•· The ability for the broker to view the agent's current and past transactions
•· The ability to store files
•· The ability to create broker demands
A true virtual office should allow a franchisee to operate the brokerage via the Internet without a brick and mortars office.
Operating Fees
Some real estate franchisors treat their franchisees like employees. They require all kinds of expensive add-ons and technology that cut into the franchisees profit margin. Before buying a real estate franchise, take a close look at the Uniform Franchise Offering Circular (UFOC). The UFOC clearly defines what the franchisor will do for you and what they expect of you. Items 5 through 10 of the UFOC defines the fees, royalties, advertising fees and all financial arrangements including restrictions as to sources of products and services. Review these fees carefully and look at the bottom line (total of fees).
So many investors have gone back into hibernation now that the market has turned south. These are investors who got in at the peak of the market and based their "investment" on appreciation. Appreciation is the LAST factor you should be buying investment property for. In fact, TRUE real estate investors dont factor appreciation in their decisions to purchase at all.
There is still a lot of money to be made in a wide array of real estate investing. If you want to flip houses, wholesale, be a hard money lender....anything. You have to determine criteria that is important to you. Below is a non-exclusive list that should be included in everyones criteria:
Understand the numbers
Dont just spend 3 hours at an investment seminar for someone to give you a pep talk to invest in a type of real estate that made you rich. You have to TRULY understand the type of investing you want to go into, and be sure to factor what you will do if something goes wrong, all your basis should be covered. I suggest taking out a local area expert to lunch to pick his brain and begin your networking opportunities.
Build relationships
No matter what form of real estate investing you are going into, you will always have to build relationships. So start an excel spreadsheet, and everytime you talk to someone, log the conversatation.
Risk Reduction
Real estate investing doesnt need to be high risk. In fact, there are many types of real estate investing that are safe. Be sure you educate yourself on ways to reduce all types of risk, including understanding tax write-offs.
Be prepared.
Real estate investing is all about preparation. Planning your strategy effectively is the difficult part, implementing it is the easy part. be sure to set criteria you will live by. You WILL be presented with opportunities that looks good that are outside your chosen niche and criteria, pass these along to a fellow real estate investor. Remember, if you go outside your niche, you are increasing your risk considerably.
Set goals and exit strategies
Alyways plan for an exit strategy, when you are signing papers to buy, you should know exactly when or under what circumstances you want to sell.