Trust in God! For everyone else get a signature. - anon airman, sign on a hanger wall, WW2.

Before setting out on any campaign of real estate investment, be sure to read the book Confessions of a Real Estate Agent by Terry Ryder. Although Ryder isn't actually an agent, he is a long time journalist and researcher in real estate, and wrote this book based on his own professional experiences, and from his discussions with the few truly ethical agents. I won't repeat the whole book here, for that would spoil all the fun for those who want to read something truly disparaging about one of the most unpopular professions of all, so here in summary is what he says about real estate agents and buyers, the book talks about agents from the vendors point of view also, and goes into talking about contracts and the "vendor from hell".

First of all, he points out that once-in-a-lifetime opportunities come along every week. Ignore the hype!

Property investment seminars given by real estate agents are invariably bullish greed inciting events where they get you all excited about negative gearing and show carefully prepared statistics that prove that anyone can make money in real estate. They are not at all particularly informative, merely painting a rosy picture that will get you all excited about real estate so you will rush off and buy some. Ever heard the saying "Never ask a barber if you need a haircut!"?

Then you get into marketing tactics. In Australia the vendor pays all expenses for the marketing campaign, in the USA the realtor does that (but in USA commissions are much larger, so we are better off here). Most advertisements are designed to promote the agent rather than the property. Auctions are especially loved by agents because the vendor pays thousands of dollars for the advertising, on which frequently the real estate agency logo is more prominently featured than anything related to the property, auctions summon buyers and gawkers who are all then placed in the sphere of influence of the agent who will take large amounts of publicity out of this, and be able to pass their card around to a lot of people. More on auctions in a moment.

When you are first taken out to view properties by an agent, beware being given "the run". The run is the term given for a bait and switch exercise carried out by the agent. First your attention is taken by a particularly attractive advertisement, when you visit the site the agent seems to be genuinely surprised and hurt when you do not like the property after finding the property's major flaws which are not mentioned in the ad. You are then taken on a tour of the locale, the whole time in which the agent is talking about properties that have enjoyed enormous capital gains over a few years ago, the booming market and the vast throng of happy purchasers. The houses you are shown are all inferior however, you are taken on a time-wasting tour off all the lousy properties of the area before finally a miracle occurs. As if by providence a newly listed property is just noticed on the agent's books, taking you to the site it is amazing how much better this place is than the awful ones you have just seen. Your expectations are lowered after a day looking at appalling properties and finally this one is just so much better. He says this one will obviously go quickly as it is so much better than anything else in the area, and makes a show of checking at the local office if any offers have been made. You are in luck of course, an out-of-state or international investor is to arrive tomorrow, if you are quick and make an offer you can secure this once-in-a-lifetime bargain before the other guy does. You buy the property, depositing cash that very day, and later realise that the place you have bought is actually nothing like what you wanted, in hindsight was a poor purchase, is $20000 more than you wanted to spend, and you have been had.

After reading that I can relate perfectly well, when buying my first home I was also taken on "the run" by at least two different agents. Now that I know there is a common phrase for it, it seems all the more obvious.

As well as "the run" you also get the infamous "BUY NOW!!!" and "BUY THIS!!!" advertorials in papers, where regardless of where in the cycle we are, and whatever the property is like, glowing marketing hype extols the probably non-existent virtues of the market right now being the ideal time to buy and this property being the ultimate investment opportunity. There is very little truth in advertising in real estate, you have to be very cautious when reading anything written by a real estate agent. The market is always "booming" and now is always the "last chance" and this is always a "once-in-a-lifetime opportunity". You cannot rely on real estate agents to provide any kind of realistic unbiased analysis. They make their money convincing people who thought they were happy where they were to tell their homes, and people who actually wanted something quite different to buy them.

Auctions can be a good way to buy and sell, but usually they best suit the needs of an agent. Apart from the fact that agents push them mainly for the purpose of gaining a huge amount of publicity entirely paid for by the vendor, auctions are plagued by dummy bidders and other scandalous tactics, so much so that a 1996 article on the auction of a charity house to raise money for the Royal Children's Hospital Foundation by a senior official of the Real Estate Institute of Queensland gushed "... the sale price should reflect the true state of Brisbane's housing market because it would not be influenced by real estate agents or dummy bidders who tried to drive it up.", and he went on, "... this will be a test because it will really be allowing the market to set the price without the real estate agent putting the price on it." In other words dummy bidding and market manipulation is so rife in the auctions business that the absence of it was indeed a treat for the public in that particular instance that the auction was to be genuinely fair.

The next thing he talks about is the "rental guarantee". In case you haven't heard of one, a rental guarantee is a written guarantee by the developer that a tenant can be found that will pay a specified amount of rent. Most investors shoot for at least a 6% yield on real estate rents, so to lift the example straight out of Ryder's book...
"Assume a developer and his agents are trying to dispose of 30 townhouses in a tough market. The product they hope to sell for $150,000 would need to rent for $175 a week to show a 6% return which is considered acceptable in the industry. But rents are weak in the area and the real market value of rents is $150 per week (a return of only 5.2%). Finding tenants at $175 will be difficult if not impossible.

The solution is to offer buyers a rental guarantee of $220 per week over two years and market the units at $165,000. Although this price is $15,000 above true market level, they can then offer the units at 7% yield (based on $220 per week guarantee) which makes them look attractive.

The developer pays the unit buyer the guaranteed $220 per week and rents them out himself at $150 per week, which is the going market rate, This means he has a $70 per week shortfall costing him $7,280 over two years - but he has sold the unit for $15,000 more than its true market value so he's almost $8,000 in front and he has made a sale he wouldn't have made otherwise.

At the expiration of the rental guarantee period (in this example two years), the buyers have to lease the property on the open market. They have no hope of getting $220 because $150 is the true market level for rents in that area.

Having paid $165,000 they are now achieving a return of only 4.7% ($150 per week) assuming it is let 52 weeks of the year - and, on that basis, they would never achieve a price of $165,000 if they tried to sell. Because investors expect a return of 6% on residential property, the townhouse would fetch only $130,000 on the open market (at $150 per week or $7,800 per year, a 6% return dictates a price of only $130,000).

The investor has made a quick capital loss of $35,000. And if they borrowed the full purchase price of $165,000 at 8% interest, the investment would be costing them $13,200 in interest alone each year, whereas the rental return is now only $7,800, a loss of $5,400 per year."

Real estate agents are supposed to work on buyers trying to secure the best price for the seller, however this is not what happens in real life. Agents play both sides in the negotiations, while the agent can't divulge confidential information to the buyers when a seller gives some sign of willingness to negotiate a lower price, this information is used nonetheless. The agent will apply pressure, subtle or otherwise on the seller to suggest that they offer a lower price.

At the same time any sort of comment from the buyer that they may go lower is likely to go straight to the ears of the seller (this is supposed to happen actually, they officially represent the buyer, not the seller, the agent is being perfectly ethical when he reports to the seller every little piece of info told to him by the buyers "in confidence").

The agent is not trying to secure the best price for anyone, the agent is merely trying to make a sale. Seldom will an agent suggest that a seller hold out for a higher price, if an offer is made the agent will do his very best to "help" the seller accept it. An agent's commission is based on the total sale price of the house so of course he wants to secure the highest price, but in practice when the agent sees a chance to take $1500 right now or $1700 somewhere down the track - unless someone else sells the house, the agent will always try to get the deal done. There is no faster worker than a real estate agent in preparing sale contracts, you'll have a piece of paper in your hands waiting for your tag almost as soon as you have suggested to your spouse that this place has promise.

Another thing that you have to be wary of is in accepting any kind of advice from an agent related to valuations or investments. A real estate agent is not a financial advisor, nor is he a valuer. Now some might have extra diplomas in those other fields but it should be remembered that a real estate agent is a salesman, and is not qualified to give advice. Valuation is a profession by itself, some valuers may be agents but generally valuers work for valuation firms and they spend their time researching sales histories and doing calculations on market value of improvements, and replacement costs. Agents might know a thing or two about valuation but they are not qualified to give such advice. Inevitably when courting your business as a seller they will give flattering valuations to gain your listing, this valuation may or may not have anything to do with the actual price your home will fetch, but be assured that unless the agent has a separate qualification in valuation then his market value that he quotes is not recognised by any professional or legal standard, and suing him will be pointless. A valuer has indemnity insurance if he under-values a home, but an agent has no such facility. Many agents in fact do not gain valuation qualifications on purpose, because if they were qualified and gave such meaningless valuations they would open themselves up for litigation.

The other thing which real estate agents are not is investment advisers. Many real estate agents do not even invest in real estate themselves, contrary to what they would have you believe, and again do not have the academic and professional qualifications to give any form of investment advice. Real estate agents like to push schemes like rent guarantees and off-the-plan investment units. Remember, if you take one thing away with you after reading this page, a real estate agent wants to secure a sale, and has little interest in pointing out any sort of investment risks or otherwise. Real estate agents are always very happy to hold investment seminars on negative gearing and such, but they are doing this purely to get more business.