Monday, August 6, 2018

The Real Estate Sales Game (Part 1)

Interestingly, I have over 10 years of experience as a real estate salesperson and attorney and have yet to write a post on the mechanisms of real estate sales. An understanding of real estate sales can be useful in informing the perspective of a real estate investor. Real estate salespeople have an intimate understanding of market activity, market trends and asset valuation that can prove valuable to all real estate investors.

Real Estate Salespeople

Before continuing, it may be necessary for me to provide a working definition for the term “real estate salesperson.” For the purposes of this post, the term real estate salesperson will include all real estate professionals who spend a significant amount of time disposing of real estate assets in the market. This definition includes property salespeople, such as Realtors, but also includes sellers and agents in the real estate capital markets, as well. Such secondary market participants include whole loan sellers, traders of mortgage-backed securities and loan officers of the various types of residential and commercial real estate loans that exist.

It may be tempting to think that such a broad definition of real estate salesperson includes a number of disparate professions that do not have much in common, however, each of the aforementioned professionals engage in real estate sales. Remarkably, real estate asset disposition has certain immutable aspects that transcend asset class distinctions. These aspects are lead generation, asset valuation, asset management, marketing and customer relations. This post will address the first three aspects, which have very specific concerns in the real estate market. A subsequent post will address the final two, which are more uniform across all sales.

Lead Generation

Leads are the bloodline of all sales, but real estate salespeople differ from other sales professionals in that they almost always seek out their customers and clients from the market. This is especially true of properties sales, where product placement is predetermined. In fact, since a real estate purchase is most frequently not seen as an emergency, real estate salespeople are not only required to find their customers and clients, but are also often tasked with having to impart a sense of urgency into their target audience in a way that is not as necessary in other sales professions. Admittedly, the methods of lead generation vary wildly among the different real estate sales professions. Direct marketing and customer engagement is frequent among property salespeople and residential mortgage professionals, whereas more indirect approaches, such as networking and informal referrals, are prevalent among capital market professionals. Despite these differences, leads are essential to all real estate salespeople and must be actively managed.

Asset Valuation

Asset valuation is an integral part of the role of all real estate sales professionals. Real estate assets are price idiosyncratic, in that their prices are determined at arms-length and not by the market. Except in the case of some government mortgage backed securities, which have fixed bid-ask prices, the price of a real estate asset is determined after some bargaining between the buyer and seller. As such, the seller’s asking price is merely an initial offer and not a firm price. It is the responsibility of the real estate salesperson to ensure that the seller’s initial asking price is attractive enough that buyers will bid, while retaining sufficient value that the seller is able to reap an acceptable profit upon the close of the sale. These competing concerns can only be mitigated through an intimate knowledge of the market and a strong sense of the value of the asset sold. The best real estate sales professionals have an uncanny ability to determine an asset’s value and its demand in the market place. They use this ability to price assets accordingly and sell them efficiently.

Asset Management

Asset Management is a key component of real estate sales, because real estate cashflow is neither automatic nor derived solely from market factors. Income property rents and mortgage payments must be collected in order for investors realize cashflow from their real estate holdings. Furthermore, properties require maintenance and mortgages require regular compliance with various lending laws. Real estate securities are also subject to regular reporting requirements, as well. As such, there is no way for a real estate salesperson to escape asset management. Proper management of real estate assets by the salesperson will lead to seamless dispositions, whereas mismanagement of these types of assets can lead to a canceled or substantially delayed sale. Unlike other types of sales, asset management is as much a consideration to sale as timing and value. The competent real estate salesperson understands this requirement and ensures that assets are properly managed.

Lead generation, asset valuation and asset management are aspects of real estate sales that have unique concerns. Real estate sales professionals must master these aspects of sales in order to successfully bring about consistent dispositions. In our next post will deal with the remaining two aspects of real estate sales--marketing and customer relations.