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The main profit in real estate may be the transaction costs. Avoid them.

Posted by John T. Reed on

WSJ article yesterday about tech companies buying home and flipping them.
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They call these companies IBuyers. They include Zillow Group. Opendoor Technologies, and Offerpad.
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I generally did not understand the article. But I only have 52 years in the business and have only written 21 books on real estate investment and thousands of articles about it.
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One part I DID understand: “IBuyers have been clear that their businesses are built mostly to make money off ancillary services such as mortgage, title insurance, and escrow, rather than on home transactions themselves.”
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When I recently wrote my principal residence as your only real estate investment book, I was advocating that you sell your old home and buy a new one more often than most homeowners do. That triggers transaction costs and possibly taxes when your gains go above $250,000 per spouse.
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So I included a chapter on transaction-cost avoidance and recommended that readers work in title insurance briefly and seek seller finance and be for sale by owners and other ways to reduce those costs. I have noted in various writings that the best way to make money on real estate might be to get into one of the transaction costs businesses rather than actually buy real estate. The IBuyers figured that out.
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I did deliberately work in brokerage and property management more to learn than earn. I should have also worked in title insurance and gotten training in air-conditioning condenser repair and gotten training in building inspections. I DID get training in appraisal and real-estate-related law.
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But having said that the best way to make money off real estate may be to be in one of the transaction-cost businesses, I must add that I generally consider those businesses to be fundamentally immoral and corrupt. Commissions in real estate sales are way too high and everybody knows it.
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The DOJ is currently pursuing yet another action trying to knock home commissions down. They have been doing that my whole life. The commissions HAVE gone down about 1% from 6% to 5%. But they need to be a flat fee rather than a percentage of the price. Selling a property requires about the same effort regardless of the price.
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Realtors® rage against lowering the commissions. You cannot have an intelligent conversation with a commissioned sales person about whatever business they are in. When you spend all day every day telling people that you deserve the commission, you have deadened the portion of your brain that lets you be objective.
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If commissions were finally lowered to the flat fees they should be, Realtors® would make about the same, but there would be a lot fewer of them. They would be like lawyers or plumbers. No more free pumpkins at Halloween or free newsletters about your neighborhood. Do lawyers or plumbers give you free pumpkins? No, because they do not get 5% of the value of your house
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Forbes magazine said title insurance is the biggest racket in the real estate business. No, it’s second to the commissions. But it is a racket.
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You can spot immoral industries by the amount of money they give politicians. Real estate agents and title companies give tons of money to politicians. We writers, for example, give next to nothing to them.
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It is well known that title “insurers” rarely pay any insurance claims.
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“Based on reports provided by the insurance industry, title insurance claims payment only amounted to 4 to 5 percent, as compared to the 60 - 75 percent of claims paid for home insurance or auto insurance.” insuranceqna-com
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Title insurance is really just a title search. You could and should learn how to do those yourself. The title companies employ relatively low-paid high school grads.
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There is a whole segment of the real estate investing industry—foreclosure auction buying—where the buyers do NOT get title insurance. They do their own searches. To save money? Yes, but mainly because they operate on a short fuse and title companies do not work fast enough.
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Auctions are typically 9:15 AM on the court house steps. The search needs to be done that same day around 9:14 AM. I exaggerate, but the auction buyers generally do their searches themselves the afternoon before the auction.
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I would probably treat it as a two-person job and have a partner searcher at the recorders office while I was at the auction with both of us having mobile phones. They would call me if a new lien on the property in question were filed at the last minute.
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Foreclosure auctions are also sometimes sleazy, namely, bid chilling.
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