Tag: conflict of interest

That’s right – after completing two posts on why you should not trust your real estate agent when you are buying a house and when you are selling a house, several more reasons have surfaced from various sources and I felt it was worth another post on the topic.

Underestimate potential costs for renovations and repairs

This is pretty common – a buyer looks at a house but is concerned with the potential costs of renovations and maintenance items like a new furnace. Most real estate agents are only too happy to give the buyer an idea of what the items will cost. The problem is that it’s in the best interest of the agent to downplay the costs since that will encourage the buyer to make the purchase and the commission will be paid. This happened to both Mr. Cheap and myself on previous real estate deals so we’ve learned this lesson the hard way.

The fact is that estimating renovation costs (not an simple skill) doesn’t necessarily have anything to do with buying and selling real estate. Your real estate agent might be a former contractor or might have a lot of experience with renovations…or they might have absolutely zero experience with renovations and are just taking numbers from something they might have read in the past.

Push for maximum purchase

In the case where someone is looking to buy a house but isn’t using anywhere near their maximum available credit, it’s possible for the agent to push the buyer to raise their price level which will increase the potential commission for the agent. For a price difference of $10k or $20k it’s not going to make a big difference to the agent but if they can get the buyer to increase their limit by $100,000 or more then it will significantly increase their payday.

Pinyo from Moolanomy left a comment indicating how his agent told him that he could afford $4,000 per month in payments when in actual fact he finds that a $1400 mortgage payment is more than enough.

The lesson here if you are a buyer is to know your own budget and don’t let anyone else tell you what you can or can’t afford.

Agent is probably getting paid for referrals

Most agents make extra money by referring their clients to various people who will give them referral fees. Mortgage brokers, contractors, tradesmen, home stagers, lawyers – you name it and your agent can probably give you a name.

This isn’t to say that a person referred to you buy your real estate agent isn’t going to be competent – it’s just important to know that they might be getting a fee for doing the referral.

Round number – odd number trick

As mentioned in the comments of the previous post, agents will often try to get you to lower your selling price or raise your bid by telling you to “make it a round number” or “make it an odd” number depending on the situation. If your bid is an odd number ie $250,500 they might suggest that $251,000 is a better bid because it’s an even number. As the Financial Blogger suggested – in this case $250,000 is also a round number which might work better for the buyer.

Over estimating the value of your house

Typically if you are selling a house then an agent wants to you to list with them. They are often very tempted to exaggerate the value of your house so that you will hire them as your agent. Once you sign with them and the house doesn’t sell, then they will start working on you to lower the house.

The inflated value doesn’t always originate from the agent, most sellers have an inflated estimation of their house worth so an agent might ‘go along’ to get the listing.

“Free” real estate evaluation

Most home owners have received material in their mail box offering a “free” house evaluation by a real estate agent. These are just marketing, plain and simple. If the home owner has no idea what the house is worth then it might not hurt to find out what the rough estimated value is but keep in mind the previous point about agents giving exaggerated house estimations.

Take a look at another perspective on real estate agents that Mr. Cheap wrote.

Most prospective house hunters or sellers think they have a “good” agent. Either it’s someone who they previously worked with or perhaps a referral from a friend or a co-worker. One of the big reasons for having confidence in their agent is a belief that the agent is “on their side” and “honest” etc etc. I would suggest however that by a certain point in the process, your agent is your enemy and you are negotiating against them more than the other party. This post deals with the buy side of the house buying game. The next post will deal with the sell side.

In the beginning: happy friends

When a house buyer first signs up with an agent, things are usually pretty rosy, the agent assures the person that they can find an appropriate house for a price you can afford and everything will be great. The agent has “lots” of experience and knows the area inside out. At this stage of the game, you and your agent are mostly on the same page. You want to buy a house and they want you to buy a house. Your agent will most certainly want to get the process over with sooner rather than later, but that’s usually the case with the buyer as well.

During the search: uneasy allies

Agents know that they need to spend a fair bit of time with a buyer, especially ones who want to look at a lot of houses. After a while however it’s not worth it for an agent to continue a long search especially if their contract is running out. This is the time when the agent will start trying to convince the buyer to lower their standards and raise their prices. Sometimes this is educational if the buyer has unrealistic expectation, but mainly this is to speed up the process so the agent can get paid. I should point out however that real agents are normally quite useful during the search since they often know more than you do about the general real estate and can get you access to private showings. The other big benefit is their access to sale price information for similar houses.

Related – How to win a house bidding war

Thinking about putting in an offer?  Trust no one!

The point when the buyer submits a offer on a house is a time when a lot of house buyers, particularly first timers feel out of their element and defer to their agent for advice. This is the worst thing you can do. Your agent gets paid when the deal gets done and only when it gets done.

This is a time when knowledge of the real estate market should be a big help in determining how much negotiation should be done. As well, if the buyer is not in a hurry to buy then that sets up a great negotiation opportunity. However if there is one thing that real estate agents don’t like it’s clients who negotiate hard – why? Because the only way to negotiate properly in a deal is to be able to walk away if the price you want isn’t met. The way an agent sees this type of situation is that if a deal falls through, they have to spend a lot more time looking at houses with you before they get paid.

Things that your agent might say (and you should ignore) when you are about to put in a bid are:

• “Don’t bid too low or you will offend the sellers”. This is garbage – if the sellers can’t handle a low ball bid then they are unrealistic. And what exactly is a bid that is “too low”? I’m not saying put in an unrealistic bid, but don’t be afraid to start low and work your way up.  It’s important to know the market so that you don’t have to rely on the asking price or your agent to tell you the proper market value of the house.
• “Don’t bid too low or you might offend the selling agent and might I have to work with them in the future”. This stunning example of gall and self-interest was actually told to Mr. Cheap. I don’t think this one needs any further comments. 🙂
• “You should get a bid in quickly before someone else puts a bid in”. This is a favourite of my agent – create a sense of false urgency, get the deal in motion and get it done ASAP. Sometimes this is good advice, but other times – such as when the house has been sitting on the market for a month or longer then it’s just not appropriate.
• “Someone else is looking at the house later today and they are really interested”. This lie usually originates with the selling agent, but smart buying agents are usually more than willing to play along because it will increase the chances of their buyer putting in an offer in that day.

Negotiation – don’t listen to a word your agent has to say.

At this point you are potentially pretty close to buying a house. You want to buy the house at the lowest price, the seller wants to sell the house to you at the highest price and your agent wants you to buy the house and doesn’t care at all what price you pay because they just want the deal done right now. Since paying a higher price will get the deal done quicker, a lot of agents will encourage you to bid higher which basically means that you are negotiating against them as well as the seller.

Things that your agent might say (and you should ignore) when you are negotiating are:

• “Meet them halfway or in the middle”. This sounds quite reasonable at first- if the asking price of a house is $500,000 and you bid $460,000 and they come back with $490,000 then isn’t splitting the difference at $475,000 quite reasonable? Not if you can get the house for $470,000 or $465k,000 The fact is that the asking price of the house and your first bid are very arbitrary numbers and splitting the difference between the two might end up in a price that is not market value.
• “Are you willing to lose this house for $2,000?” (or $5,000, $8,000) This is a tough one – on the one hand it seems silly to not buy a house and be only a half of a percent away from a deal, but on the other hand shouldn’t your agent be asking this question to the seller? Ie – “We are going to walk, do you really want to lose this deal for $2,000?”
• “Are you willing to lose this house for $12 a month?”  This is part two of the previous point which is applied if you don’t bite on the first attempt. It’s also a more useful gambit if the “separation” is a bit greater. If you and the seller are $12,000 apart, that sounds pretty significant, but what if you are only $75 a month apart (for 25 years) or even better what if you are only $63/month apart (over 40 years). That doesn’t sound like much (even if it is).

Conclusion

The more you educate yourself about the real estate market you are looking in and how real estate agents operate, the better off you will be when buying a house. Real estate agents are quite useful because they can get you access to houses for sale and will often drive you around to look at them plus they have access to the sale price of other houses. Whatever you do, never forget that they get paid when the deal gets done and only then. They don’t get paid for showing you more houses or walking away from close deals.

Tune in tomorrow when we take a look at the trustworthiness of real estate agents when selling a house.

Take a look at another perspective on real estate agents that Mr. Cheap wrote.

Do you have any good “lines” that you were told when buying a house?