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There’s always something to howl about

Everybody loves Ramen . . .

Here’s a true fact of life for almost everyone with a real estate license: This job pays really badly.

Here’s a true fact of life for a favored few people with real estate licenses: This job pays really well.

I don’t know if we can safely count ourselves among the favored few just yet, but being Realtors is throwing off a lot of cash for us, and that cash is throwing off a lot of opportunities to make more cash.

Last year was phenomenal, of course, and this year hasn’t been awful for us, considering how awful it was for other Realtors in Phoenix. We got a lot choosier about listings, which helped keep our money in our pockets, and we’ve both done more than we ever have before with new builds.

But: Do Realtors “deserve” all the money they make? I’ve had transactions — two closing later this month — where my total involvement was around five hours. I’ve had others that have run to hundreds of hours over the course of years. But looking at my added-value by hours or tasks or ergs of energy expended is a mistake. The value I bring to the transaction comes from knowing what to do, how, when — and why. Our clients do a lot better because of our involvement, and they are gracious enough to say so.

For now, our earning goal is $1,000 a day, each, call it $700,000 a year, gross. Obviously our expenses are huge, as are our taxes (grr!). Worse yet, we’re not hitting that goal yet. And to put things in perspective, Russell Shaw’s annual broadcast advertising spend approaches our total earning goal.

In the near term, I think we can double our numbers to something like $1.5 million a year, before taxes and expenses. From there, with a couple of assistants each, we might be able to push things to that amount, gross, each. In other words, without growing our head-count very much, we might be able to knock down $3 million a year in gross commission income. The net from that might not be all that great, considering, but it will still be a lot of money.

But wait. There’s more.

We bought the house we live in now in January of 2005 — in the midst of the boom. El Caminito had been beautifully remodeled and pitifully marketed, so we picked it up at a bargain price. We held onto our old house through the boom, so we had two domiciles appreciating at a mad rate.

We sold our old house in May of this year, pocketing over $100,000, net, all tax-free.

Our new house is in the last affordable ghetto in North Central Phoenix, an avidly-desired neighborhood. Two streets south of us, houses go for $750,000 and up — way up. If people want to find affordable homes in our neighborhood, they’re going to come here, and they’re going to bid up our house with the rest of the street.

In the time we have been in this house, it has appreciated by $205,000. We bought this house with 5% down and a 15% second mortgage, no PMI, seller paid closing costs, with the 3% buyer’s agent’s commission providing 60% of the down payment. We’re in the process now of refinancing to retire the second mortgage, and we will come out of that refi with about 30% equity in an asset that is now worth over $500,000. In other words, in less than two years we turned $6,000 cash out of pocket and 21 mortgage payments into $150,000 of equity.

After the start of the year, we will tap that equity to acquire income property. If we buy in Metro Phoenix, we’ll pick up between three and five rental homes, the kind I encourage my investors to buy. If we can structure these to be cash-flow neutral, each one will throw off six figures by the time we sell, along with favorable tax benefits while we own them.

Alternatively, we might take that equity and use it to buy a 20-unit apartment building in the rust belt. This won’t appreciate appreciably, but it will throw off a lot cash income every month.

And if we can keep hitting — and keep growing — our income targets, we’ll have that much more to invest — coupled with professional knowledge of where to invest.

We’re not rich — far from it. I drive a Hyundai station wagon, and most days I have a luxurious luncheon a la drive-through, stuffing my face between phone calls as I race to the next appointment.

And here’s another true fact of life in real estate: I work a lot. A normal day is 6 am to 9 pm. A long day is a lot longer than that. I work hardest when everyone else is off work, and I can count the days when I know for sure I won’t have to work on one hand: Thanksgiving Day, Christmas Day, New Year’s Day, Independence Day and the morning — but not the afternoon — of Mother’s Day. Even on those days, I’ll have phone calls and email to deal with.

One of the reasons this job pays as well as it does is that very few people, including many Realtors, want to do it. Everyone wants the money. Nobody wants the hours, the stress, the potentially-ugly conflicts, the legal liability, the stark and sometimes terrifying knowledge that you are always three bad months away from failure.

So: What are we after? Money. We love our clients, and we love helping them achieve their real estate goals. But if this job didn’t pay this well, we would be doing something else that either paid better, provided actual benefits or left some time free for other pursuits. We’re doing this — and we’re dancing as fast as we can — so that one day we can stop doing it.

How much is enough? Right now, I’m thinking around $10 million in net worth. That sounds like a lot of money, but it doesn’t feel like it to me from here.

Normally I think of money in terms of houses. The unit of currency that means something to me is the average commission on the sale of a house — call it $5,000. Cathy wants a Toyota Highlander. Call it five houses with the options package. Greg wants a giant plasma flat-panel TV. Used to be a house, now about half that. The entry cost for a newer cash-flow neutral Phoenix-area rental home that will appreciate well is five or six houses.

But since our enbubbulated friends started predicting that we’ll all be eating Top Ramen soon, I’ve been trying to think of money in terms of Ramen. It’s not that easy. Everybody loves Ramen at least once in a while, but the numbers get impossibly large very quickly.

How much is enough? I think something like a hundred million packages of Top Ramen oughta do the trick…

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20 comments

20 Comments so far

  1. Kaiser Sose December 14th, 2006 8:08 am

    Greg,

    Does the price appreciation on your homes and projected future profits from RE broking make rational sense to you? All you have done, and plan to do, is buy a house for yourself and sell houses to others. Do you seriously think unusual profits like this in the RE industry as we have recently seen are sustainable? Are you delirious?

    I bought my house in Denver for $145k and is now estimated to be around $350k. It’s insane. All I did was..tada!…live in a house. Who is going to be able to afford this house when I want to sell it if it is worth $500k in a few years?

    Why can’t you see that this kind of price appreciation is unsustainable?

  2. mike December 14th, 2006 8:49 am

    One of the undeniable truths of transaction brokering is that whether your customers make money or lose money, whether you give good and honest advice or bad and dishonest advice, you make money on every transaction.

    That’s what draws many people into the profession.

  3. Kris Berg December 14th, 2006 10:03 am

    Greg – Bravo!

    Mike – If that is my mindset, my “every transaction” that you refer to would be just one. In an industry that relies HEAVILY (yes, that was screaming) on repeat clients and client referrals, being dishonest and dispensing bad advice is a really bad and short-sighted business model. Those that are able to rack up a transaction or two in this manner do not last long. A single serving of Ramen can not feed the family for long.

  4. Benjamin December 14th, 2006 10:37 am

    Hey Greg
    You’re definitely on the right path!

    Keep up the excellent work and you’ll be financially independent and prosperous your whole life.

    Be Great
    Benjamin
    http://www.benjaminbach.com

    PS – if you want to make some hot investments, come down to my market! Nothing like that southwestern Ontario student housing market!

  5. Anonymous December 14th, 2006 11:22 am

    Mike – If that is my mindset, my “every transaction” that you refer to would be just one.

    Money is clearly the primary, if not exclusive, theme in the two recent posts by Greg Swann and Russell Shaw.

    And just so we understand each other, it’s not the pursuit of money that troubles me, but the blind pursuit of it.

    In recent years, lenders and realtors – and I’m speaking generally, not about anyone here – have put a lot of buyers into homes they couldn’t afford by any traditional, sensible metrics, and with loans that are time bombs if the market turns downard – and it has.

    If your goal is $1,000 per day, then you can justify that kind of behavior.

  6. Greg Swann December 14th, 2006 11:31 am

    > If your goal is $1,000 per day, then you can justify that kind of behavior.

    You don’t read carefully. My long-run earning goal is $4,000 a day. I’ll get to it, if I do, because I take insanely great care of my clients.

    You have moved from paranoid prognostications to specific accusations. The funny part is, you seem not to know very much about thieves, who are much more likely to be found at the bottom of the earnings ladder.

  7. Joe December 14th, 2006 11:37 am

    >In an industry that relies HEAVILY (yes, that was
    >screaming) on repeat clients and client referrals,
    >being dishonest and dispensing bad advice is a really
    >bad and short-sighted business model.

    Unfortunately, Kris, that is demonstrably not true. I have run across more than my fair share of disreputable agents and mortgage brokers, all of whom are still in business today. Why? Because contrary to your statement, there will always be people who aren’t aware of how bad the person is. There will always be new arrivals to the area, people who haven’t heard your word of mouth (or don’t trust it, thinking that you are just digruntled), people who are taken in by charming personalities, etc.

    Now I realize that these people are the minority. But statements like “we’d go out of business if we weren’t 100% honest” are just ridiculous. It just doesn’t work that way.

  8. Jim December 14th, 2006 11:53 am

    Majority of people are idiots. They’ll willingly buy a house they can’t really afford just to show off, or own a car that costs more than they make a year.

    Should we blame the dealer for selling some idiot a BMW he can barely afford to lease. Realtors are no different. If someone is dumb enough to stretch their monthly payments to the limit to buy a house, it’s their choice.

    Taking this “logic” further. Are makers of fatty foods and alcohol (responsible for thousands of actual deaths) unethical as well? If some idiot chooses to smoke, drink and eat junk food all his life, it’s his fault.

    IMHO, an honest realtor is one who gives their client all the information they possibly would need to make an informed choice. After that, it’s up to the individual to decide to do something stupid.

  9. mike December 14th, 2006 12:13 pm

    Should we blame the dealer for selling some idiot a BMW he can barely afford to lease. Realtors are no different. If someone is dumb enough to stretch their monthly payments to the limit to buy a house, it’s their choice.

    If the BMW salesman misleads the buyer about the value of the car and/or doesn’t fully explain the loan or lease terms, then yes, we should – at least partially – blame the salesman.

  10. Charleston real estate blog December 14th, 2006 12:24 pm

    Greg, very nicely said and I wish you well in your journey. An agent’s income should be in direct proportion to the quality of service he/she provides.

  11. Kaiser Sose December 14th, 2006 2:10 pm

    Greg…LMFAO @ $4000 per day!

    You have delusions of grandeur and will wind up in bankruptcy with such incredibly unrealistic expectations.

    When an under-educated, self-loving shill like yourself makes such rediculous claims, it only further confirms my beliefs that not only is this country experiencing a debt bubble, but that the average Joe is an idiot.

  12. Spencer Barron December 14th, 2006 3:00 pm

    Impressive goals and achievements Greg.

    I still can’t believe how bold people can be when they can sit behind the keyboard in anonymity. The ignorance is almost overwhelming.

    Real estate is a business. A broker is the CEO of his brokerage. Shouldn’t a broker have the right to set goals to motivate him and his company to success?
    Few businesses carry the responsiblity and liability than that of being a Real estate broker. If they screw up, they will be held accountable.

    Those naysayers that sit out there and act like real estate is easy need a reality check. Making money in this business is about risk verses reward. A broker risks his own time and money to promote other people’s properties. Sometimes you win, sometimes you lose.

    People assume that if you are successful, you must have been unethical.

    Most agents aren’t successful so when you find someone that is successful to work for you, you can be sure of two things.

    1. He didn’t get there by screwing people over. Each client got some real value out of the deal.
    2. You don’t make money in real estate by being lazy and uneducated.

    Making money in real estate can be easy. Making a living in real estate is a different story.

  13. Rob Chipman December 14th, 2006 3:54 pm

    Great post, Greg! Two things occur to me. First, you’re right to point out that while selling Real Estate generates income, being in the game allows you to invest for yourself, and that can be very good for your long term financial health.

    Second, some sales pay well with little or no work, but remember: they pay for all the non-sales, starting with all the sales you don’t make because you’re blogging! And you never get the easy ones without paying some dues.

  14. Kaiser Sose December 14th, 2006 4:20 pm

    “Making money in real estate can be easy. Making a living in real estate is a different story.”

    Nice cliche’ Spencer. Did they teach you that in Realtor School, or did you invent that one yourself? I’m guessing the former.

    All of you remind me of the dot-commer, gell-headed kids in NYC when I worked on Wall St. They didn’t have a clue about finance or economics, but were good at spinning the mantra of the “new paradigm”. It was rediculous and ended in tears.

    You need to have reasonable expectations, as in not believing prices will always climb at 10+% per year, that markets do adjust, and that all you are doing is driving people around to show them houses. You are really getting paid to do the legwork for them, and that’s fine. But, please, stop BSing yourselves into thinking that you are entrepeneurs redefining real estate. You are salesmen, that’s all.

  15. stephen December 14th, 2006 4:29 pm

    And there is nothing wrong with being a salesman. A fine profession if I do say so myself!!

  16. eric December 14th, 2006 5:00 pm

    Yikes Sose, your words remind me of the saying:

    “Those that can’t do, teach. Those that are too lazy to teach, complain”.

    I liked the article Greg, and to remain on point, I don’t think that I saw you mention anything about crazy appreciation in the properties you one day dreamt of buying. All agents are salespeople and that’s why we attend sales-related training to better focus ourselves.

    I wouldn’t call it “doing all the footwork” for people either because there comes a time when an experienced opinion is needed. If I’m going to court, I’d rather pay a lawyer than study law and represent myself. When I’m buying a home, I’d talk to someone who seems they appreciate my business and is a top producer. Someone who can help explain the area, things to watch and watch out for, and that can provide resources to do that.

    True, there are many inexperienced and shady agents out there, but the same goes for every profession. From Wall Street to Auto Lane (to use a local Arizona reference).

    Though I’m out of real estate and back in technology, real estate wasn’t ONLY about the money for me. I was motivated by it and wanted to earn very well. But my ultimate love was involved with helping people get in and out of houses. I love that part of the American dream and helping others with that was attractive and romantic to me.

    Just my opinion, but I think you’re off base Sose, from my recent experience reading this blog, Greg’s writing is refreshing. AgentsOnline.net and other real estate blogs also talk RE, but the character of the writing isn’t the same as coming here.

    Good luck wih the ventures Greg, keep us posted!

  17. Russell Shaw December 14th, 2006 10:12 pm

    VERY nice post, Greg. As usual, there are those who can see a communication for what it is and those that only see something that “needs attacking”.

    Some people are not simply having a “button pushed” when they see someone else writing about money, financial security or success – they see it as something that needs to be STOPPED in order to protect others. (the “others” all being people who do not have their superior powers of observation)

  18. Greg Tracy December 17th, 2006 12:33 am

    Three things strike me about your post and the following comments.

    First, you have some lofty goals. Good for you having goals in the first place and for making them something worth striving for.

    Second, people who post anonymously mean-spirited things are cowards.

    Third, why the hell aren’t Realtors allowed to want great things for their families? If a landscaper who was doing well claimed that he was on track to make $700,000/year would there be public outcry and people insulting his profession and calling all landscapers crooks?

    According to Mike Realtors shouldn’t get paid at closing for their work, but apparently should wait for a few years to make sure the client made some equity before receiving their commission.

    I would take Mike up on that payment plan with the caveat that if the house he buys does appreciate I get half of it, since it would completely my doing and responsibility that made it happen.

  19. 3 Oceans re-finds its bearings January 18th, 2007 8:10 pm

    […] Last time I went AWOL for a week, I blamed it on the Martian Death Flu. This time, fortunately, it was because I was busy finding another warehouse for all the ramen. At any rate, I’m back… […]

  20. Brandon Kitchen June 28th, 2007 8:35 am

    “We bought this house with 5% down and a 15% second mortgage, no PMI, seller paid closing costs, with the 3% buyer’s agent’s commission providing 60% of the down payment.”

    As a Realtor, when buying a personal home, what advantages are there is taking the the 3% commission and using it as part of the down payment? You have to pay income taxes on that commission. If you have the price of the house reduced by the commission amount, you avoid paying the income taxes but have to come up with more down payment out of pocket. I guess it really depends on the individual situation. What are your thoughts?