3. THE REALTOR
The third major source of down payment capital is the realtor. By convention, most people assume that the real estate commission for listed properties is a fixed cash element of a transaction and that a seller is responsible for paying it. In fact, the commission is not fixed in any of its dimensions: rate, form, or source.
Like almost anything else, the percentage rate for calculating the commission is negotiable. Indeed, there would be legal problems if the real estate industry were to publish uniform fixed rates. Moreover, there is nothing written dictating that one must pay a commission in cash and cash only. Of course, almost all real estate professionals would prefer cash. It makes a deal clean and tidy and allows one to buy bread for the family table.
However, most informed agents know that some transactions may involve commissions in the form of paper - promissory notes that may provide for monthly payments or a single payment balloon note at the end of an acceptable period. Generally the time involved does not exceed a year or two. Occasionally the commission may be in the form of a share of ownership, with cash emerging upon sale of the real estate property down the pike. Still other possibilities include commissions paid in personal real estate property. In Technique No. 14, the agent received a beautiful 0.81-carat diamond for his services. He was delighted, as are most agents who are shrewd enough to realize that a commission in an alternative form is better than no commission at all.
One of the important techniques available to the real estate investor who is interested in reducing the cash down payment for a deal is the technique of "Borrowing the Realtor's Commission" (No. 19). While it is true that according to current agency practice, the seller pays the commission, the real estate investor is at liberty to negotiate alternative arrangements with either the listing or selling agents (or both). If the real estate investor can induce the agents to defer the commission, the down payment can be reduced by the same amount because the seller's immediate obligation is relieved.
Who pays for the deferred commission in the final analysis? It is negotiable. If the real estate investor can strike a nothing down deal with the seller paying the commission over time, all the better. In many cases the real estate investor himself assumes the seller's obligation (Technique No. 11) and pays the deferred commission. Occasionally they share.
The whole point is that the flexibility of the realtor may be an important factor in whether the deal comes together. Since the commission is usually the largest cash obligation of the seller in a transaction, the power of this technique cannot be overestimated.
There are examples that illustrate how "Borrowing the Realtor's Commission" works in practice. In one Albuquerque transaction we heard of recently, the seller of an 8-plex arranged to pay $3,000 of the commission on a note, the balance being paid in the form of a real estate contract invested in the deal by the real estate investor's partner. The two notes not only constituted the entire commission, but the entire up front cash needs as well. In another deal, this time in St Petersburg, Florida, a 35-unit motel and restaurant were acquired using, among other approaches, the technique of borrowing $30,000 in commissions ($15,000 in the form of a personal unsecured note signed by the real estate investor, and $15,000 in the form of a third mortgage on the real estate investor's home). Similarly, a note for the commissions was instrumental in closing a deal on two duplexes acquired by an investor in Homestead, Florida. This technique is very frequently used. As a matter of fact, our research among the Robert Allen Nothing Down investors shows that as many as 20% of the transactions involve some degree of realtor carry back of commissions.
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