| | If I want to Invest in Real Estate, Should I Become an Agent?
Q: I am just getting started in real estate investing, and I’m thinking about getting a real estate license. What kind of problems am I going to have when I am both an agent and a buyer or seller in a particular deal, and what do I need to do to avoid them? -B.A., Asheville NC
A: Getting a real estate license has always been a popular option for real estate investors looking to get better access to MLS listings and/or supplement their cash flow by earning commissions buying and selling properties for others. And in the reverse, many “traditional” agents eventually get into real estate investing as a way to earn additional income and to take advantage of the great deals they come across in the course of listing and selling. That’s why the question, “How do I invest in real estate AND keep my real estate license?” has been one of the most common I hear.
There are two major issues that licensees face when buying, selling and leasing properties on their own behalf. The first is disclosure; the second is agency. Disclosure relates to what you say to people and when; agency describes who you represent in a transaction—or who the parties BELIEVE you represent. As long as you play by the rules in these areas, you’ll avoid trouble in the third area: as you probably already know, a licensed agent is held to a “higher standard” in court than a non-agent, meaning that an unhappy buyer, seller, or tenant has less to prove in order for you to be found liable for irregularities in a transaction. That’s why it’s really, really crucial that you dot all the “i”s and cross all the “t”s when you’re an agent as well as the investor in a transaction.
When, as an agent, I advertise to buy, sell, or lease houses, I must make certain disclosures to my potential customer. For instance, at the time of first contact, I have to let potential buyers, sellers, and tenants know that I am a licensed real estate agent. I handle this by putting disclaimers on all of my flyers, cards, and letters that say “Buyer is a licensed real estate broker in the state of Ohio. Buyer is purchasing properties for her own investment. This is not an offer of agency. If this property is already listed with an agent, please disregard this notice.” My ads in the paper end “buyer/agent,” or in the case of a property I am selling, “owner/agent.”
In most states, license law requires that you disclose that you are a licensee “upon initial contact” with the potential buyer/seller/tenant. So just to be sure, you should make another, verbal disclosure whenever anyone calls you to inquire about whether you’ll buy their home, or about a property you have on the market.
All of this disclosure, by the way, is the source of a school of thought among some investors and gurus who believe that you should NOT get a real estate license if your real goal is to buy and sell properties for yourself. The theory goes that many of your potential customers–particularly sellers–will not want to work with you once they know you’re an agent, or that they’ll assume that you aren’t serious about BUYING their property, but instead, want to list it. As an agent for over a decade, I have not found this to be the case. In fact, I find that when I say to a potential seller, “Legally, I have to let you know that I’m a licensed real estate agent, but I’m not interested in listing your property. I mostly buy properties for myself as an investment,” some sellers actually become MORE comfortable with working with me.
But this verbal disclosure is not the end of the red tape: when you actually meet the buyer/seller/tenant in person for the first time, you’ll need to have him sign the Agency Disclosure form prescribed by your state. The purpose of this disclosure is to put into writing the fact that the customer understands that you (and your brokerage) are NOT representing them in the sale or lease of the property. One of the most common reasons that agents get sued—and lose—is that some party in a transaction claims that he misunderstood who the agent was representing, and acted accordingly.
In your case, the fear is that seller will claim that he believed that you were acting as his agent–and that you were therefore legally obligated to try to get him the highest and best price for his property. Instead, you went out and made a profit reselling it to someone else. That’s why you need to clearly state on your Agency Disclosure that you are representing the OTHER party in this transaction–and that this other party is YOU. There should be an agency disclosure, signed by all of the parties involved in the deal, in your files for every single offer you make.
And by the way, forget trying to get around these disclosures by having your husband or your corporation or your trustee make the offers. That sort of obfuscation is certain to lose lawsuits—and your license—if discovered. Following the letter of license law is relatively simple and costs you nothing in terms of money OR deals, so just learn it and do it.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com