THE PROBLEM WITH BUYERS’ AGENTS

The more you lose, the more you pay!

by Neil Jenman

Reading time: Apx 4.5 minutes

A few years ago, they barely existed. Now they are everywhere. Agents who help buyers instead of sellers. They are Buyers’ Agents.

For centuries sellers have had agents to help them get the highest price (supposedly).

And now buyers can have agents to help them get the lowest price (supposedly).

And how do buyers’ agents get paid?

Well, with sellers’ agents, the higher the price they get for the sellers, the higher the commission they get for themselves. That’s obvious. The better the job, the better the reward.

However, with most buyers’ agents, the worse they do for you, the more you pay them.

Maybe you’d like to read that again – expressed differently…

A buyers’ agent is supposed to save money for buyers. Yet, the more buyers pay for a property, the more buyers must pay in commission to the buyers’ agents.

That’s because most buyers’ agents charge a percentage of the price paid for a property. So, the higher the price you pay, the more you must reward the buyers’ agent.

Yes, it’s completely nuts. But the real estate industry is not renowned for its intellect.

How would it be if sellers’ agents adopted the same reward structure. If they sell your home for, say, $4 million, they get $80,000. But if they sell your home for $3.5 million, they get paid $100,000.

Can you imagine it: The lower the price the agent gets when you are selling, the more you pay. It’s nuts, of course. But that’s what happens with most buyers’ agents.

With most buyers’ agents, the more you pay, the more they get.

And if buyers question this ‘nutty’ pay structure, the standard answer is likely to be: “Well, that’s just the way we do it.”

So much of what goes on in the real estate industry doesn’t make sense. Often, it’s so wildly illogical that the most applicable term for it is “nuts”.

HOW TO REWARD BUYERS’ AGENTS.

So, how should you pay a buyers’ agent? How do you give them the incentive to do what they are supposed to do – help you buy more cheaply?

Well, two ways: First, an hourly rate for their time and effort in searching for a suitable property. But be careful, make sure they account for every hour, as happens in the legal world.

Do not pay any upfront fees – as many buyers’ agents demand. Pay $5,000 for them to start – are you nuts? Who else gets paid thousands of dollars in advance? Oh, that’s right, sellers’ agents. But just as you should say no to any advance fee scams with sellers’ agents, so should you say no to advance fees with buyers’ agents.

The second way to pay a buyers’ agent is based on the price. Give them a percentage of the amount they save you. For example, if you’d pay $3 million for a property, you can pay the buyers’ agent a percentage of every dollar you pay below $3 million.

What percentage?

Well, provided the value of the property is correct (meaning it truly is worth around $3 million), then 20 per cent of what you save will be fair. Therefore, if the buyers’ agent negotiates the price to $2.6 million, you’d pay $80,000. Please note, this is more than you’d pay at the flat rate of 2 per cent of the purchase price – which, at $2.6 million, would have been $52,000.

But that extra $28,000 saved you $400,000 from the purchase price. Great deal for you and a great deal for the agent.

Disclosure: My wife and I have bought properties with the assistance of Buyers’ Agents. In our first such purchase, we were willing to pay $900,000 for a property being auctioned. The buyers’ agent bid on our behalf and bought it for $700,000. We happily paid him $40,000. Had we paid the flat 2 per cent, we would have paid $14,000. But the way we rationalised it, we paid $40,000 to save $200,000.

At first glance, buyers may think they are paying more commission which is true. But they are also saving a massive amount when you look at the whole picture. You’ll be much better off when you incentivise a buyers’ agent to do what they should be doing – get you a lower purchase price.

Be careful, while the commission is important, what’s more important is the purchase price and if paying a big commission gets you a lower purchase price, you’ll likely be well in front.

TAKE GREAT CARE

In principle, the concept of buyers’ agents is excellent. Good buyers’ agents can save you a lot of money. Bad ones can destroy your financial future and cause enormous emotional pain.

Be aware that some of the worst of the former sellers’ agents have now become buyers’ agents. And, of course, horror stories have come with them.

In one case, a too-trusting elderly couple bought an apartment in Sydney’s eastern suburbs for $2 million. And how did the agent find this “not-to-be-missed” deal? He saw it on-line. That was it. He pocketed $40,000 for ripping-off this dear couple.

They re-sold the apartment three years later for $1.6 million. A loss of $400,000 (plus costs) in a market that boomed in those years.

In another case, with a different buyers’ agent, several investors lost the best part of their life’s savings when a professed “award-winning buyers’ agent” sold them dud investment properties in the Central Queensland city of Gladstone. Today, this buyers’ agent is listed as “ethical” on the website of a property researcher – despite repeated warnings to the researcher. The world of real estate is chronically and corrosively corrupt.

Be extremely careful using a buyers’ agent to source investment properties. In the case mentioned above, the buyers’ agent was charging both the sellers (developers) and the buyers a hefty commission. Unethical sure. But hey, the Real Estate Institute of NSW has given him awards. And his disgruntled clients have signed non-disclosure agreements. So, few know.

To check the worthiness of any buyers’ agents, ask them to tell you what they know about negotiation. If they have never read a book about negotiation, forget them. Ask them for examples of past clients. Check their Google reviews (not Rate My Agent). Ask them for the names of buyers with whom they are currently working.

And, most important of all, get a professional valuation if you have the slightest doubt about the worth of any property.

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FOOTNOTE: In 2016, I wrote a booklet called, ‘The 42 Rules of Modern Real Estate Negotiation’. You can obtain a copy of this booklet at no charge by clicking here.

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