The Last Tango: How to Go Broke as a Broker
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Editor’s Note: This article first appeared in the October 1973 issue of the Real Estate Observer.
Work on every offering: Many real estate brokers feel that the secret of success is to keep busy. This theory is far from true. The successful broker knows the secret of success financially, is to work on one project at a time. Concentrating your talent, knowledge and time into one project is far better than dividing your efforts over a broad based program of scattered ”maybe” transactions. By devoting full time to one project, you allow all your resources to be “tuned in” on one effort. For example, the broker who wants to get ahead should have one major project and fill in idle moments with a few alternate ones. However, he should concentrate on one project and not work on every potential transaction that comes down the pike.
An example is the broker who is caught up with “busy-itis” is he who is working on a few listings, sales or exchanges, serves as office manager, holds two positions in civic and community service, is active on his real estate board committees and lastly, devotes a little time to his family. Soon this man’s diversification of time and talent will cause him not to be successful in any of his projects, resulting in his whole life’s work crumbling. Adios, Mr. Busy, we’ll miss you!
Forget about the time involved: A good way to go broke is not calculating the time involved in a transaction and weighing it against the final profit. Many brokers encourage their sales people as well as themselves to take on any and all listings. Some listings are not worth accepting when you consider the time that must be expended to consummate the transaction.
An example of “time versus profit” is the broker who accepted a listing for a $5,000 unencumbered lot. His fee called for a 10% commission (based on the broker’s performance -if he did not produce a buyer and close the transaction, he would not be paid a fee). The lot was at Lake Tahoe and the client lived in San Francisco. The broker who lived in San Jose, drove to San Francisco, a two hour round trip, spent two hours with the client, and spent the better part of the day just securing the listing. The following day he made a five hour trip to the lot and spent the rest of that day talking to local brokers about his offer. He put his sign on the lot and spent $25 on advertisement in the South Lake Tahoe newspaper. He returned to San Jose the next day. Three months later he renewed the listing which entailed another trip to the client’s home in San Francisco. A cooperating broker in Lake Tahoe sold the lot, and a trip to San Francisco was needed to present the $4,500 offer on the $5,000 lot. The offer was accepted and twenty days later the broker returned to the Client’s home to sign the closing papers. The brokers split the fee of $450, each pocketing $225. By the way, someone stole the listing broker’s sign and it was never found (sound familiar?).
The listing broker did not consider the amount of profit involved for the time and money expended to sell the property. His $225 profit was a gross profit less the $25 for the ad, $4 for the sign, $18 for his motel stay in Lake Tahoe, $38 for gasoline, $15 to put the lot on multiple listing service, $9 for lunch with the cooperating broker and eight days work and travel time. Adios, Mr. Broker!
Take the client’s word: Some brokers have the misconception that all clients tell the truth. Without being harsh, one must consider that some clients do not want to face the facts, as they feel the broker will use them to beat down the price of their offer, or liberalize the terms. Other clients who have held their property as a passive investment simply do not realize the real world problems affecting their real estate. Face it, many times people do not want to be realistic and they select a broker to buffer fact from fiction. An example of a broker taking a client’s word and not getting everyone down to earth happened last year. The broker listed an apartment house and went about his job gathering data on the units. All twenty units were rented at $165 per month. The broker’s brief inspection of the property showed little deferred maintenance (a quick drive-by inspection). The owners told the broker that the unfurnished units enjoyed a history of 90% occupancy and that all units were in good shape. The broker completed his counseling as to the client’s motivation and type of acceptable terms for the eventual sale. He traveled to a regional marketing session and presented the property to cooperating brokers. An out of state broker and his client made an acceptable offer on the units and a month later arrived in town to inspect them. The out of state broker discovered the following in less than two hours: every unit needed to be re-carpeted, half the units needed new drapes, the tubs and showers needed to be re-grouted, the rental of $165 was for furnished units, and two of the twenty units were illegal as the property was zoned for 18 units but the owners “re-arranged” a few of the larger 2 bedroom units into one bedroom units. The final “ouch” in the transaction was when the owner told the broker that the existing loan on the property was fully assumable and in fact, it wasn’t.
By taking an owner’s word and not seeing for himself, a broker immediately assumes a contingent liability – a potential lawsuit from the cooperating broker’s client. The professional practitioner will never leave any portion of a transaction contingent on a verbal claim. The professional will secure the facts and reduce the transaction to good business practice. The broker in the preceding example will soon be another “former” real estate broker always wondering why he couldn’t make it in such a great industry.
Guarantee the deal: “If the buyer is so good and you are asking me to carry part of the financing, why don’t you guarantee the paper, Mr. Broker?” Heard that one before? “I don’t mind buying the property, but will you guarantee me 8% on my money?” Heard that one before? “Will you guarantee to sell this property I am asked to take in within six months?” Heard that one before? “Look, if it’s so good, why don’t you just give me your personal note for the property?” Heard that one before?
It’s a very common trap for real estate brokers to get involved in some kind of guarantees. We wave our hand goodbye to those brokers who do get involved in guarantees, as they will soon be leaving the business. Real estate people do not have to give guarantees.
Does a stock broker give a guarantee for profit when selling stocks? Does a bond salesman guarantee a profit on a bond sale? Have you ever seen a commodity salesman guarantee a profit? You guessed it! All investments carry risk and some real estate brokers in their desire to hustle a buck, fall into the trap of getting involved in the highest form of contingent liability-a guarantee.
A guarantee is a moral and financial pledge of all the financial and ethical assets of the one making the guarantee. Why pledge your future to a past transaction when no one can predict the future?
