Below is a story geared towards newer real estate agents. However, I think anyone with an interest in real estate brokerage might find it useful. At the time of this transaction, I was having a good spring sales season and things were looking up, until COVID materialized and everything hit a brick wall. But I had a source of leads, a trusted local friend who seemed to know everything that was going on in town.
Certain names, locations, and other minor details have been changed out of respect for privacy.
It’s Friday. 2:44pm. Mid-June. COVID is in full swing. My phone rings, it’s my source. He tells me, “Quick, quick. I’ve got a tear down here. They are ready to sell. 123 Smith Street. Wants assessment. Get your guys in there.” Click, the line goes dead. If you want to have success in real estate, you are going to have to understand how this type of call works. Let’s break it down.
As we know, real estate transactions involve two parties, a buyer and a seller. Where I live, home values have gone up at extraordinary rates, meaning that even modest homes in nice condition might be more valuable to a developer than to an end user (aka people who want to live in the house). Developers generally use different formulas to calculate value rather than end users. For example, a developer may be willing to pay one million for a home, knowing they can knock it down and build a new one for one and a half million, that ultimately sells for three million (500k profit); whereas the value to an end user is no more than $800k.
Setting up the Deal
A teardown means that this home is suited for a developer. Assessment means that the owner of the home wants the City assessed value for it, in this case about 1.1 million dollars.
So, I have two ways I can play this opportunity. On the one hand, I can try to convince the seller to list their home with me. On the other, I can try to find a buyer for the home. More often than not, my source gives me sellers who do not want to sell with an agent. Also, more often than not, this is an unwise decision on the part of the seller, but it is ultimately their decision.
How to Work With Real Estate Developers
As a real estate agent, staying organized and being creative is imperative. A while back I came up with the perfect solution for this type of deal; my Builders Spreadsheet. Here is how I have set it up. I have a list of ~20 builders and developers who I will work with. Builders and developers are essentially interchangeable in this example, the only difference is that some want to keep a home while others want to renovate it. Either way, they both want to make money.
In my Builders Spreadsheet, I have ranked each builder in terms of strengths and weaknesses in a number of easy-to-define categories. For example, one category is consistency. If a builder is known to pull out of deals at the last second, they get a bad score. If they always follow through, they get a good score.
In this particular instance, the home was a tear down and due to zoning regulations, the new home would have to be a single-family residence. Because some builders prefer different types of projects, my list was already narrowed down to about 10 different builders who I knew would be interested in this type of project. I knew the builder that ranked #1 would come through for me with an offer. The one ranked #10 was a long shot, someone who I thought 9 times out of 10 would cut me out of the deal, one way or another. But remember, even the builder ranked #10 was still worth calling (after the first 9 say no), because if I did not turn the deal onto anyone, I would guaranteed to walk away empty-handed.
Verifying All Claims
One caveat before we move on. In this deal, I represented the buyer, the builder. So, I was a buyer’s agent and not a seller’s agent. Because the seller did not list their house with me, I had no ethical or legal obligation to share with them my thought process or to call a builder that may have made better sense for them.
Before calling my builders, I did what I thought was a fair amount of due diligence under the time constraint. I wanted to make sure the home wasn’t already listed, or if the seller was playing any sort of games. In this case, after some initial online research, I then called the seller, who gave me the same story as my source. I then felt pretty comfortable that they were a legitimate seller who was ready to sell.
An Important Lesson on Trust
Trust goes both ways. If I bring builders too many deals that end up not working out because sellers turn into a tire kicker, then developers tend to see me as a time waster too. It sucks, but that’s the way it is.
The builder who ranked #1 on my list was Joe. He is consistent, a good communicator, and among other things doesn’t mess around when making an offer. If he says he will pay X, he pays X. He is a straight shooter.
The #2 builder, Bob, is almost the same, except that he is slightly less timely in his responses. I might call him about a listing, and whilst Joe would get back to me about the deal asap, Bob might take the night to think about it. Bob is also a bit of a wildcard, he usually offers more than Joe, but sometimes far less. As noted, as I went further down the list the likelihood of me making the sale went down. However, I never work with those I consider shady. In fact, I consider it an ethical duty of any agent to avoid those types of deals.
How I Would Get Paid
So, I called Joe. Joe told me he was interested in 123 Smith Street and he would take a drive by later that afternoon. As expected, later that day Joe called. He told me liked the house and he was willing to buy it for one million, but that the seller would have to pay me my 2.5% commission. Therefore, his total purchase price would be $1,000,000, with $975,000 going to the seller, and $25,000 going to my firm. My firm would then split that $25,000 with my source because he referred me the deal, and then I would get most of the remaining $12,500. I could have suggested we make the offer for $975,000 with no commission (Joe would pay me on the side), but $1,000,000 with a commission sounds better.
If the deal with my source doesn’t seem fair, let me make two points. The first is that while my source gets $12,500 just for the phone call to me, I would get nothing if he did not make the call (or call another agent). When someone has valuable information, they come from a position of power. In reality, this is an agreement my source and I have negotiated for these types of deals. I am ok with this because I would likely spend less than ten hours of work on this entire transaction, netting me $1,250 an hour, minus my firm’s fees. Not bad.
On the flipside, I would expect Joe to give me the first crack at selling the renovated home (Joe usually renovates homes). On that sale, I might make 2% of the purchase price. If the home sold for two million dollars (more if I sold it direct), I could potentially make another $40,000, of which I would not owe my source a referral fee. So, in total, I could make up to $52,500 on this entire deal (minus my firm’s fees), with $12,500 all but guaranteed if I put the first transaction together. I promise that is just about as “math heavy” real estate brokerage can become.
Talking to the Seller
Back to the story. I reminded Joe the assessment was 1.1 million, but he said he would not pay that much. He said the seller could take his offer or leave it. Fair enough.
Naturally, I called the seller. After exchanging pleasantries, I got to the point: Joe was willing to pay one million dollars. Of course, I made the one million sound like the best offer in the universe (that’s my job), and the seller thanked me for Joe and I’s time, saying they would have to think about it. Understandable. I told the seller the offer was good for the day, but I was not sure how long Joe would be willing to wait: In the past I knew Joe would lower his offer or even walk away after a seller took too long to get back to him.
The Waiting Game
So, I waited. It would have been easy to call up the seller and ask for an update, but I knew that would serve no purpose and if anything, make my position seem desperate. It’s like a staring contest: The first person to blink loses.
A few hours later I got a call from the seller. They said they would agree to the offer, but only if I dropped my commission. I told them I would not. The seller, somewhat surprised, said they would need to think about it, and would get back to me later.
This is a frequent strategy by sellers, especially those looking to cut agents out of deals. In reality, the seller could have found Joe’s number and asked him to make his offer directly to him. Joe and I never signed an exclusive right to represent contract, so I could legally be cut out of the deal. But, Joe knows that if he wants me to keep him in the loop on future deals, he is better off keeping me in on the deal. Reputation is extremely important in real estate, and when you start to play games your status drops like a rock.
At this point, it would have been very easy to simply give up some of my commission. But, I would not budge, for two reasons. The first is that the seller was not likely looking for $1,000 or $2,000, but rather a third, $4,000, or half, $6,000, of my commission. That is a lot of cash to give up. And at the end of the day, I know more often than not that a seller isn’t going to let a $1,000,000 offer go over $4,000. They have much more to lose than me, because the next offer could be far less.
The second reason is that if I give an inch now, I will give a mile later on. I always make it clear early on in a transaction that I don’t mess around with commission, even if on occasion I do drop my commission in order to get a deal done. If I were to drop my commission, I usually wait until near the closing of the deal and only if a deal is in jeopardy. I don’t want buyers or sellers coming back to me at every stage of the deal wanting to nibble off of my increasingly shrinking commission.
A Deal Is Made
Later that night I got the call I was waiting for. The seller said they would accept the offer. I thanked them for their time and told them I would be in touch soon. In the meantime, I confirmed with Joe that he was still good for it, and as expected, he was. So, I typed up the offer, got a copy of proof of funds, and organized the drop-off of the deposit check. Remember, for a contract to be valid, the seller must accept the deposit money, so it is vital that we get it to them quickly. I then sent the offer back to the seller, who e-signed it. Finally, I was able to go to bed knowing everything was on course.
Once we have an accepted offer, the buyer is in the driver’s seat. As long as a buyer sticks within the parameters of their original contract, they will get the piece of property. A buyer will have some outs via contingencies or any other language added to the offer. However, it is important to make sure a reputable agent or attorney reviews the offer to confirm that this is the case. Regardless, we soon found out there was a problem.
Where Things Went Wrong
Our buyer wanted to rush to the Purchase and Sale Agreement immediately. I had no issue with this because they would be putting down a larger down payment, about 5% of the purchase price. Since our buyer had no contingencies, this would mean the 5% would be nonrefundable. This would essentially guarantee the deal would go through.
Joe asked to see the interior of the property the following Monday to take measurements. So, I set up the appointment. Although this was concerning, as I was afraid Joe may back out, we represented him. If Joe wanted to take measurement, I was going to make sure that it would happen.
The Monday Showing
On Monday, when we (A member of my team and I) pulled up to the showing there was a man in a pickup truck with tinted windows sitting outside, something I noted as odd. Regardless, Joe was outside too. After saying hello, all three of us (my team member, Joe and I) went inside and met the seller. It was then that we learned the whole story. The seller informed us that the man in the pickup truck was another builder and that he had made a better offer than our client! Well, a deal was a deal and Joe respectfully informed the seller that since they had already signed his offer, he would be moving forward.
While chiming in to reach some sort of resolution, the seller interrupted me. The seller told us that since they were not the only seller of the home, the contract was void. Stunned, we asked the seller to explain further. Without getting into the legal vernacular, here is basically what they said. The seller’s father had owned the home and died a few years earlier. We all knew that.
This is where it gets interesting. When the seller’s father died he did not leave a will, so the house went to his estate. Although the seller was in-charge of the estate, the seller did not have a license to sell the home. In other words, another family member was holding out. All family members would need to sign any offer for it to be valid.
A Discussion With Joe’s Attorney
The three of us left, disappointed, but understanding of the situation. Was it possible that the seller accepted our offer knowing it would not be legitimate? In other words, did the seller use our offer to get the other builder to offer more? Possibly, but it did not matter.
Of course, Joe called his attorney once he was outside. His attorney basically verified what the seller said. Our contract was never really a contract, only an offer. Although through a legal loophole our builder could have gone back with a higher offer, he did not feel it was worth it. Plus, he could have got outbid again, essentially starting a bidding war, something he did not want to deal with. Within a few minutes, Joe was already on the road looking for his next deal, this one long forgotten.
Putting It All Together
Later that day my team member got a text from Bob. The text read, “Hey, I saw you at 123 Smith Street this morning!” Putting two and two together, we realized it was Bob in the pickup truck! He was the other offer, and of course since another agent brought the offer to him, they would be getting the commission, and not us.
That’s when I remembered how close I was to calling Bob. While Joe was #1 on our list, Bob was right there behind him. If I had only contacted Bob first, I would have made the sale. Ohh well.
After taking some time to reflect, which I try to do after every deal, I came up with three lessons to take away from this saga.
#1) Always Do My Due Diligence as an Agent
Not checking into the ownership of 123 Smith Street was a rookie mistake which ultimately wasted a lot of Joe’s and my time. As the agent, I should have checked to see who owned the property and that they had the right to sell, even though my source and the seller both told me they were good to go. As the old saying goes (which I rarely agree with), buyers are liars and sellers are worse.
I always say a small mistake on the frontend will cost you big on the backend. In other words, one small mistake early on can compound into a big problem down the road. If I had spent 15 or so minutes checking with the County Registry of Deeds and a trusted attorney, I could have saved Joe and I from a big headache.
#2) Always Stay Connected With All Parties Throughout a Transaction
Our offer was “accepted” on a Friday, and we did not go back until the following Monday. During that period, Joe spent some time with an attorney and part of the weekend drawing up plans for the new renovation, thinking he had it under contract. If I had simply picked up the phone and talked to the seller on Saturday or Sunday, I would have learned that they were going to “accept” a higher offer, thus saving all of us time and minimizing any damage. Instead, I waited until Sunday evening to ask for a site visit. Granted, the seller could have reached out to me, but they did not, probably hoping to draw us up in person on Monday. Never rely on buyers or sellers to give you a courtesy call.
The time before an initial contract acceptance and the Purchase and Sale agreement is such a tender moment; being proactive is key. These days, during this period in limbo I try to reach out to both parties every 48 hours just to make sure everyone is on the same page.
#3) Always Think Carefully About Who You Turn a Property Onto
My builder’s spreadsheet is a work in progress. I know many agents who work with one or two builders and never branch out. In my opinion, that is a mistake. I liked Joe and trusted him (and still do), but he is a take-it-or-leave-it type of guy. He isn’t usually going to offer the most amount of money. In cases of sellers shopping offers around, I should have called Bob first, because when he is interested he will pay more.
Stepping Back and Using Perspective
At the end of the day, just like Joe, I was back in the office that afternoon making calls to other prospects. I cannot blame the seller either. Who wouldn’t take a higher offer? And this transaction did not fall apart due to laziness, forgetfulness or any other easily solvable problem. It collapsed simply because of a breakdown in communication. I will take these lessons to my next deal, and I hope you gain some pointers from this deal as well.