And: Value Proposition of a Commercial REALTOR
And: Why Use Mortgage
I work in the Real Estate
Brokerage industry and I am amazed at how poorly most of the industry is at
explaining their value proposition. The FSBO (For Sale by Owner) market is
growing and REALTORS in Canada
and the US
are losing ground. Now I realize I am biased because of the work I do, but
surely Residential REALTORS (and commercial ones too—but that is a subject for
a separate blog entry) can do a better job at explaining what it is they do and
how they add value to a transaction.
In my view, most Residential
REALTORS do a great job. I can say this because I do mostly commercial work and
I must say I admire the stick-to-it’ness of most of these folks. They work seven
days a week (most showings are on weekends and evenings), they are always on
call (their clients want 15 minutes or less response time so they are tethered
to their cell phones and email phones*), they drive around clients they don’t
know much about showing them two dozen homes only to find out that: a) they are
not qualified to buy (maybe they exaggerated their ability to purchase) or b)
they find something on their own (despite sometimes having signed a Buyer
Agency Agreement tying them to their Sale Representative) and put the
transaction through the Listing Agency (not realizing that the Listing Agency
is now a dual agent representing the Seller and the Buyer and not necessarily
looking out for the Buyer’s best interest).
(* A residential REALTOR who
was helping me out in a commercial transaction this summer answered his cell
phone on a Saturday night while sitting around a camp fire after the deal blew
up and we needed to speak with him urgently. I said: “George, you are amazing.
No Commercial Sales Rep I know would answer his phone at this time. I salute
you.” I couldn’t believe his dedication.)
Here is another example. I was
at a Sens versus Leafs last year and with five minutes to go in a tight game,
one of my buddies got up to leave. “Mike, where are you going? The game’s not
“I have a client who wants to
meet me at Tim Horton’s at 10:00 pm to make a counter offer on the home they
are buying. Got to go, thanks for the game…”
Now that is dedication and, if
you know Ottawa,
Residential REALTORS are out there at night in 20 degrees below zero doing
deals and servicing their clients.
Commercial people like me have
it much easier—our clients get in early but by 5 or 6 pm, that’s it, they go
home and they don’t want to hear from you evenings and weekends unless it is
Now Residential REALTORS aren’t
just heroes because they brave cold weather, waste their gas on clients who are
not really serious or get left at the altar by clients who ditch them at the
last minute. They add real dollars and cents value to transactions.
Here are some of the ways they
can do that:
1. A decent Residential REALTOR
does dozens of Agreements per year. The FSBO does only one or two in a
lifetime. The Residential REALTOR is going to have much higher levels of
expertise in doing these transactions, in all likelihood. Most people don’t
know that REALTROS in Ontario
must go through six quite difficult courses and exams to become fully licensed
and, if they want to become Brokers, they must do additional study and
examinations. They must get 75% or better to pass and the OREA College
is completely inflexible on this*. Then, every two years they need to do 24
additional credits. In another generation, REALTORS will go from being a second
career to being a first choice career and a profession and maybe even a
calling. (I know the latter sounds corny but I certainly enjoy working with
clients and I feel good when a client buys his or her own building for their
company and they walk in and they have realized their dream to own their own
(* Some of my very smart University of Ottawa students are taking their real
estate licenses. Some are scraping through with 75s and 76s. Some are failing
with 74s! So the courses are non-trivial and, in my view, actually quite good.)
2. If the FSBO fails to sell
his or her property and then enlists an Agency, the likely selling price may be
lower because the listing has become ‘tired’.
3. The Agency has access to
MLS.ca and a list of established buyers. More than half of all real estate
transactions are deriving from web based searches and from existing clients.
4. The chances of not
completing the FSBO Agreement is also much higher. Real estate transactions are
the only area of commerce that I know about where, by law, the Agreement must
be in writing. I guess because of the importance for most people of the sale of
their home, Ontario
made it compulsory that these transactions be in writing. Real estate is tricky
and a lot can go wrong*. Introducing the probability of failure would
significantly increase the value brought by the REALTOR to the transaction.
(* The list of what can go
wrong is endless. Conditions that are waived before building inspections or
financings are completed. Chattels or fixtures that are thought to be included
that aren’t. Lawyers who don’t get the paperwork on time to complete deals. How
about an Oklahoma
Offer? Ever heard of those? (The term comes from the Dust Bowl of the 1930s in
that State where some smart Yankees fleeced naïve Okies out of their farms.
Read on…) Suppose you get an Offer on your home from a nice young couple that
you think are terrific. You are a FSBO and they need a ‘bit of help’. Will you
give them a second mortgage for just a couple of years so they can buy your
home? Sure, why not! So you sell your home to them for $300,000 with a $75,000
Seller Take Back Mortgage with interest at 8%, interest only paid monthly in
arrears. But what you don’t know is that you have to specify what is the
maximum first mortgage they are allowed to place on the property. You didn’t
know that. So on completion, they have arranged a 95% first mortgage which
together with their second mortgage that they got from you they have $360,000
to buy your $300,000; that means, they have an extra $60,000 in their jeans. If
they default, you can repo your house (by a foreclosure proceeding) or order
its sale (through a Power of Sale proceeding) but, you have to deal with the
fact that the mortgages on the property are now worth more than the home’s
market value. God forbid that they used it for a grow op too. Many grow op
homes have to be condemned because of the uncontrolled spread of mould due to
the high humidity levels in the house. Anyway, this is how sleazy con men
defrauded many innocent Okies out of their farms and walked away with huge
fortunes from the misfortunate of the hardest hit folks during the Great
Depression. Use a professional REALTOR, people.)
5. Legal disputes are also a
costly reality: for example, if there are certain fixtures or chattels or outbuildings
in dispute, this can further increase the value of the REALTOR’s services by
avoiding costly litigation. REALTORS are insured in Ontario to provide the Sellers and Buyers
with additional protection. The FSBO is not insured against these risks. What
if the FSBO takes the deposit and the conditions in the transaction are not
fulfilled? Will the FSBO return the deposit? In the case of REALTORS, the
deposits are in trust accounts, which also happen to be insured.
6. Legal fees for FSBO
transactions may also be higher as lawyers attempt to fix mistakes.
7. The benefits of Agency are
likely to be higher for higher priced homes.
8. The Agency also brings other
services: for instance, experts on home staging that cost as little as $260 but
can add significantly to the value of the home. Other experts such as home
inspectors, home appraisers or mortgage brokers can also be brought into a
10. One other item needs to be
mentioned and that is the value of a person’s time. It takes time to gain the
expertise of a REALTOR and also it takes time to sell a home: to list it, to
put it on MLS, to show it, to draw up the Agreement, to arrange for inspections
and financing, to waive conditions, to provide the lawyers with documents, etc.
If a person’s time is worth $20
per hour or $100 per hour, you have a significant saving for
homeowners who use REALTORS. Homeowners are often better off using their time
more productively in the things that they do for a living rather than trying to
11. The Agency saves the FSBO
their marketing costs and their costs to join a FOR-SALE-BY-OWNER network.
12. The Agency will do the open
houses and showings and negotiating. It is not easy representing yourself and
Canadians especially find it difficult to tout their own horns…
13. Now when people hear that a
home is For Sale By Owner, they immediately discount the price by 5% (because
the client is not ‘paying any commissions’) and then takes a bit more off so
that they have some negotiating room.
14. Buyer’s will often not feel
comfortable representing themselves, so while they may show up to look by
themselves, when it comes time to present an offer, they will engage a Buyer
Rep to do that for them.
15. Of course, the Buyer Rep
will ask the Seller if they will pay a commission but only 2.5% instead of 5%
because they are only representing the Buyer and giving what is known in the
trade as “Customer” service to the Seller.
16. The Seller figures they are
still coming out ahead by ‘saving’ 2.5% of the Sale Price but they could be
fooling themselves—they could actually be paying the full commission and more
because: the price offered is more than 5% below what they would have otherwise
received because of the strategy employed by the Buyer and their Buyer Rep.
17. Compounding this, they may
end up with less money from the transaction than if they had used an Agency
while doing all the work and taking all the risks.
18. It may also take longer to
sell your home if you go the FSBO route. If you are changing jobs, moving
cities, need the money, whatever, that extra time to sell could place quite the
burden on you.
I am sure you have heard the
one about the Lawyer (or Doctor) who represents (treats) himself. He has a
client who is a fool.
I estimate that for the sale of
a $315,000 home, the Agency will receive a commission of around $15,435 but the
Agency will add a total of around $38,000 to the transaction. So if my
calculations are right, the FSBO is better off to enlist the services of a good
quality REALTOR to the tune of approximately $23,000. The spreadsheet shows the
assumptions I used to get there. You can download it and fool around with the
variable—higher selling prices, lower selling prices, higher or lower
commissions, more or less time spent selling a home by a FSBO, etc.
Value Proposition of a Commercial REALTOR
The value proposition of engaging a Commercial REALTOR as well as
owning your own real estate can be summarized as follows:
1. The Agency has access to MLX, the back end system of MLS.ca, as
well as a list of established Sellers. More than two thirds of all real estate
transactions are derived either from web based searches or from existing
2. A Commercial REALTOR typically does dozens of Agreements per year
and develops a facility with these agreements that is unmatched even by most
3. The probability of completing an Agreement is significantly higher
through their involvement. Real estate transactions are the only area of
commerce where, by law, the Agreement MUST be in writing. Real estate is
complex and a lot can go wrong*.
(* The list of what can go wrong is endless. Due diligence is
especially important in terms of building inspections, examination of leases,
timely fulfillment of Conditions, completing financings, arranging for Seller
Take Back Mortgages, environmental audits, ensuring that chattels and fixtures
are properly accounted for and included, examination of maintenance records,
understanding building systems, examination of contracts and sub-contracts for
property management and maintenance, equipment rental agreements, appraisals,
providing law firms with the paperwork to complete deals on time, etc.)
4. Legal disputes are also a costly reality: for example, many
arguments revolve around fixtures, chattels or outbuildings in dispute.
REALTORS are insured in Ontario
to provide Sellers and Buyers with additional protection. Deposits are held in
trust accounts, which are also insured.
5. The Agency brings a sense of what the market is doing at any given
time. CMA (Comparative Market Analysis) gives Buyers the confidence that they
are entering into a sound arrangement.
6. Spreadsheets that estimate the Internal Rate of Return (IRR) for a
project are one of the key decision tools that a Buyer needs to have. The IRR
takes into account the three types of returns that real estate provides: cash
on cash returns, forced savings (the pay down of the mortgage principal each
month) and real estate inflation.
7. There is also the additional potential financial advantages of
owning real estate including the sheltering of income using depreciation
8. One other item needs to be mentioned and that is the value of a
professional’s time. It takes time to gain the expertise of a REALTOR and also
it takes time to sell or buy a property. Professionals are often better off
using their time more productively in the things that they do for a living
rather than trying to be REALTORS.
9. The Agency will do most of the negotiating. It is not easy
representing yourself and many Canadians find it difficult to negotiate
aggressively. Buyers often do not feel comfortable representing themselves.
10. It may also take longer to source your own property, negotiate the
Agreement and complete it if you go without representation.
11. Owning your own real estate can alleviate future rental increases,
provide for security of tenure, allow the owner to develop brand equity in the
location that they can retain over long periods of time, diversify their asset
mix, provide for retirement, make the operating business more sellable and/or
provide for a hierarchy and diversity of ownership that makes tax sense and
12. Real estate investing is quite stable in Ottawa—it is get rich slow.
13. It can be less expensive to own than to rent.
14. Owning your own real estate gives you more financial flexibility
too—if there is a sudden need for cash, you can re-mortgage your property to
15. Interest rates are hitting historic lows and prices have come off
their peaks. You make money in real estate when you buy not when you sell. That
is, buy low, sell high. Or buy when everyone else is selling and sell when
everyone else is buying.
Why Use Mortgage
In an email exchange with one of my former students, I summarized some
of the advantages that Mortgage Brokers bring to the table:
can source mortgages from 8, 10, 12 or more lenders and get the most
competitive interest rates and terms for you to choose from.
saves you a lot of time: how long would it take you to get in front of and
apply to, say, a dozen lenders?
sometimes try to sell tied products: property insurance, mortgage insurance,
life insurance, car insurance, RRSPs, TFSAs, other banking services, credit
cards and more, ‘forcing’ you to buy things along with your new mortgage that:
a) you don’t need and b) at higher prices than you can get elsewhere. Mortgage
insurance is one of those: you are almost always better off buying life or term
insurance from an independent provider than taking the Bank’s mortgage
Brokers can source multiple lenders with ONE credit report on you and your
partner. If you apply to multiple lenders yourself, each one will ‘ping’ your
credit rating and each ping on your credit rating lowers your Beacon Score
(your credit rating) by 2.7 points. Thus, if you apply separately to 12
lenders, you would lower your credit score by 32.4 points. If your Beacon Score
was just above 700 (a good score) before, it would now be below 700 and this
could affect your loan rate (i.e., the interest rate goes up; your mortgage
just got more expensive.) The theory is that your credit score goes down since,
as far as the credit bureau is concerned, you are applying ‘all over town’ for
more and more credit. This is, of course, unfair because you are only applying
for one mortgage of, say, $200,000, but it appears to be multiple applications
for $2.4 million in financing and, hence, your Beacon Score drops.
doesn’t cost you a thing: Mortgage Lenders pay the mortgage broker a fee for
sourcing the loan (at least in the case of residential mortgages. In commercial
mortgages, the Borrowers often pays a fee as well.) These fees are fairly small
(anywhere between .75% and .85%, occasionally rising to as much as 1% of the
loan amount. If these lenders didn’t pay it to the independent mortgage broker,
they would have paid it anyway to their internal people who source mortgages
for them. So it really does cost you nothing extra.
isn’t just the interest rate that you need to be concerned about. Many people
are doing debt consolidations and need higher loan amounts and better terms and
amortization schedules. Your mortgage broker can get you that because the
lenders know they are competing for the business. Any Bank that tells you that,
because you are a loyal customer and have been with them a long time, you don’t
need to shop around and they will give you the best deal anyway is not being
straightforward with you.
More than 75% of all mortgage loans in the US are now sourced through mortgage
brokers. The rate in Canada
is about 30% but I expect it will increase a lot in the next decade.
Dilys Hagerman, Mortgage Agent:
Running short of cash? Paying a lot out every month and feeling like
you’re never getting ahead?
Take a look at your mortgage situation and your debt to see if you can
do what three of my clients did last week:
1. Income of $48,000. Mortgage of
$155,000. Credit card debt of $13,000. We paid off their existing mortgage and
all their cc debt by putting in place a new mortgage so that now their monthly
payment is $1,050 LESS than it was.
2. Income of $77,000. Mortgage of
$165,000. Credit card debt of $41,000. Same deal. Their monthly mortgage
payment now is $865 LESS and all their credit card debt is gone.
3. Income of $133,000. Mortgage of
$198,000. Line of credit of $105,000. All of it was renegotiated so that these
folks are paying $675 LESS than they were before with exactly the same debt.
Don’t be “scared” away by your current mortgage lender (probably your
Bank) who says you have to pay a penalty. In many cases, with the interest
rates now so low, it is worth it to pay the penalty to close out early.
A renewal offer from your current mortgage holder often comes quite
close to the renewal date so it makes it difficult for you to then price-shop.
It isn’t just interest rates you need to be concerned about—you need some
flexibility on loan amount and terms too.
John Walsh, Mortgage Agent:
I like what you say, however, using an actual numerical number for a
credit hit can be misleading.
As an example, I had one client who tried to get a new car lease. He
was consistent. He hit one car lease company every 3-4 weeks. His credit score
after 18 months of trying was down to 500 from probably over 700!
He had clean credit otherwise. So he went down roughly 200 points from
just 18 hits (approximately).
In this case, he was seen as ‘seeking credit’. Someone should have
told him what was happening (I did and told him he wouldn’t be eligible for a
home mortgage for 12 months). He, like so many, had no clue what was happening
to his credit.
A credit score is more of a ‘ranking over time’.
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD, ROYAL LePAGE Performance Realty broker, Ottawa Senators founder, Real Estate Investment and Business coach 1-613-762-8884 firstname.lastname@example.org twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com
MAKING IMPOSSIBLE POSSIBLE
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