Last week we discussed the major players in a real estate transaction and their motivations. By understanding how someone gets paid, we can understand the person’s ideal outcome and how we can all win. In this article, I am going to discuss real estate agents. In any transaction, these are the professionals that buyers and sellers put most of their trust in.
Real estate agents have a time-consuming job. Seller’s agents spend time and money listing the property. Buyer’s agents spend time showing houses, analyzing comparable houses etc. Real estate agents get paid ONLY when a property gets bought or sold. Like all workers, an agent is trading their time for money. If they are trying to optimize the amount of money they make, an agent’s goal (on both sides) is for the transaction to close in the least amount of time. The seller’s agent is incentivized to get their client to take the lowest bid and the buyer’s agent is incentivized to get their client to pay as much as possible to close the transaction. It’s even worse for the buyer. The buyer’s agent 3% commission is higher when their client pays a higher price. The buyer’s agent incentive is the exact opposite of the buyers.
But wait Ben! A 3% commission is so small compared to the price of a purchase, that a buyer’s agent wouldn’t ask their buyer to pay more for such a small amount in higher commissions. If the commission is so small that is even more reason for the buyer’s agent to get the transaction completed quickly to move on to the next transaction. For both agents, a $25,000 change in the purchase price only changes their commission by $750. That means by changing the price by the equivalent of six month’s salary changes the agent’s commission by less than $1000. Studies have shown that real estate agents make more money selling their own houses than for clients.
Real estate agents would counter my argument by saying they only advise on the transaction and that ultimately the appraiser is responsible for valuing the property. Even if agents aren’t responsible for setting the price, they are motivated for the transaction to close no matter the price which is against the interest of their clients.
Look on your social media friend list. You probably know more people who work as agents than in any other profession. Would you trust them when making the largest financial decision of your life? The worst part is that if your agent makes a mistake and tells you the home is a great buy, YOU are stuck. There are no returns or exchanges when you buy a house. I use real estate agents in my transactions but would not trust most of the agents I know. In the next article we will discuss using the appraisal methodology to value your property yourself without an agent.
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