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Why You Can’t Trust Real Estate Agents When Buying A House

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?

588 replies on “Why You Can’t Trust Real Estate Agents When Buying A House”

Good article, but you might as well change the title to “Why You Can’t Trust Any Salesperson When Buying Anything,” because most of the main points you have stated can apply to almost all sales positions.

I have worked as a restaurant server and a retail salesperson, and in both situations the main tactic was to “upsell” as much as possible. As a server, that meant recommending alcoholic beverages, praising the more expensive meals, suggesting desserts, etc. because the bigger the bill, the larger the tip I got.

In the sales position, everything was commission-based. I had to meet a “quota” of sales each month to maintain my monthly salary, while any extra sales were bonus money. Coupled with my competitive co-workers who were also struggling to meet quota, we were always subtly rushing our customers to make sure they made a sale under our names, and not someone else’s.

Of course I wanted to help my customers as much as possible, but I also had to keep in mind that my salary depended on the sales. It is a conflict of interest just like that of brokers.

That’s just my two cents. While I understand that the broker situation is different because the amount of money involved is much greater, they are still unfairly prejudiced against as being one of the only careers (next to car salespeople) that do this. If you’re not going to trust one, you might as well not trust them all.

I’m a Realtor in Los Angeles. I read the post above and the comments. my conclusion; you haven’t found the right agent.

My philosophy is; provide the client with all the information available and let them make a decision, don’t give them your opinion unless they demand it, maybe not even then.

Many times my clients make the wrong call and lose the house they want. I let them because I don’t have a crystal ball. I tell them later what I would have done. I gain their trust that way. I am their agent, therefore, I carryout their instructions and ensure that their offer(s) are written up as they want. That’s my job. My job is not to try and talk them into or out of anything. As an agent, my commission is my last consideration. My client’s needs and desires come first. My client is my boss. If I make my clients happy, the money will follow. Experienced agents know that, the others are, well, your agents!

Good luck with that!

K: One of the points I made about real estate agents is that they often are not interested in upselling but rather in selling more houses.

Other commission based jobs might have the same motivation (if there are lots of potential new customers) or the upselling strategy might be more profitable.

Robert – sounds like you are a pretty good agent but it’s hard to believe that your commission is your last consideration.

I think the “perfect” agent is one who is independently wealthy and doesn’t need the money – they are the only ones who won’t have as much of a conflict of interest.

Mike

By Post Author

It’s hard to believe you are objective. You want a large readership, and use the pretense that your column provides information of value to your readers, but your main objective is to increase your readership. That is a conflict of interest.

As before, good luck with that….

Robert – there are conflicts of interest everywhere you look – even blogs that are supposedly “objective” can have them as well, and many do.

We write about topics that interest us – if they provide value to the readers then I’m happy – if not, then hopefully a different topic will be of interest to them.

Mike

By Post Author

Mike, hot topic – eh? The crazy part of this dialogue is the following. Agents whine and whine about the bad rap they all get. Well why not reduce the number of agents so we the public can judge those that actually know what the hell they are doing. How can you allow anyone with a heart beat into the business then expect the public to think you?re all a bunch of rocket scientists? Waite because your adds suggest that you?re smarter that the average Joe?give me a break. C?mon use your heads and understand the point. In Canada we’ve got over 88,000 agents and in the U.S about one million agents. If you don’t want to be painted with the same brush as the 80% of people who give agents a bad name?then do something about it. But no ? that can?t be the problem?
If you are going to pretend that all agents deserve respect from the public just because they wear the “R” then you are totally out of touch with reality – plain and simple. So here?s my advice – clean up your own back yard. Oh wait a minute, don?t even bother -the sad thing is that the damage is already done. Too many monkeys have already been let loose ? damage is done ? look at the mess they?ve made. And shame on you for watching it happen. You have no one to blame but yourselves and your broker?s greed for continuously opening the flood gates for every Tom, Dick and Harry to get in the business and ruin it for everyone. So there?

Not to continue the ?whining?, which I would call an argument supported by facts and logic, but I have a couple things I?d like to respond to. While I value the responses and civilized discourse of Mike and others, I think you?re missing the big picture. We as brokers don?t get paid till you find the right home and close. I?m sure that if we were paid a flat fee, as some have suggested, people would be complaining that they had to pay someone and they didn?t even buy anything. The commission system is designed to keep brokers in check not the other way around.

As far as getting paid goes; I?m sure that everyone would expect to get paid when they work for someone else. This is one of the few jobs I know where you can work for someone for 3 ? 4 months, sometimes longer, and not make a dime if something goes wrong.

I would concede that a Realtor could be more concerned with the deal happening than any small negotiations of price since in the end it doesn?t really make a difference to their payment. However, I would argue that this is beneficial to the buyer. If you know how much you?re truly willing to spend for what you want, we can help you get it through negotiation. The logic is that if it?s more than that, you don?t want it. No harm done since there would be no deal anyway. You can count on us to remind you exactly what is needed to make the deal happen. Don?t blame us if we?re telling you that offering half the asking price is not going to work. Please realize that on the other end of the negotiation is another person, just like you, trying to get the exact opposite thing you want. The bottom line is that if you?re honest with us about what you?re willing to spend to get something you want then we can get it for you or it wouldn?t have happened anyway. Why would we waste our and your time trying to negotiate something that?s not going to happen? Too many people feel they need to lie to their own agent because they feel this is going to get them a better price. It?s not up to us. The seller sets the price. Don?t lie; it only makes things more complicated.

To cover Garth?s ?points?, here in New York not everyone with a heartbeat is allowed to conduct real estate deals. Not only is there mandatory schooling before you get a license, there is a state exam and then you must return for more classes every two years until you?ve gained sufficient experience in the business (usually 15 years and a certain amount of deals). I don?t see many other professions requiring education even after you get a job. I wish more people I came across where required to continue their education. (No finger pointing, of course.)

Mark – thanks for the interesting comment. I [edit] don’t [end edit] dispute the fact that RE agents can give a lot of value to a buyer or seller, but I think it’s important for the buyer/seller to know where the RE agent is coming from.

As for the agent working for a client and not getting paid if there is no deal – that’s just not right. That is another major problem in the compensation structure which I will put in my followup post on the topic.

Mike

By Post Author

So you’ve shown a couple around for four months. They don’t want to paint, or landscape, or do anything; they just want a perfect, large, newly-renovated-to-their-tastes house in a good area. They almost make an offer on a house for $600k, but keep looking. They’ve fallen in love with a house. They say it’s perfect, and it’s listed at $540k.

You make an offer, the sellers sign back. It goes back and forth a few times. On the fifth signback (you offered $533, it came back at $535) the buyers are upset and frustrated. You say:

A) are you willing to lose this house for $2k?
B) let’s keep looking for another four months, because endless searching is what life is about, isn’t it?

Incidentally, the market value of the house, which you know because you’re a realtor, is between $540k and $550k. It’s in an improving area and you expect it to be worth $100k more in five years.

It’s all about the forest and the trees.

Agent taking no prisoners…

Great name and great comment!

This is the exact comment I’ve been waiting for – an agent in the trenches reporting on what it’s really like and what is really going on.

Thanks for the comment.

Mike

By Post Author

[…] 5. I didn’t negotiate with my Realtor for a better commission rate. You don’t have to pay the listed rates, you know. Especially in today’s market, Realtors and home builders are desperately seeking buyers. Under these circumstances, you call more of the shot than you realize. Did I mention Secrets of Power Negotiating? And I also forgot the rule that you can’t trust real estate agents when buying a house. […]

Real estate agents only make money when something sells. In addition, they represent the seller and not the buyer unless you specifically signed a buyer’s representative agreement. A real estate is just like a mediator in a dispute – they just want to get to an agreement. They are not looking out for your best interests as a buyer. Read a good book on negotiation prior to buying and always be prepared to walk away.

Terry

A agree with the comments on the common lines that agents try to use.
Our agent used the “don’t bid too low or you will insult the selling agent and clients” line this weekend. He also used the meet them halfway concerning the opening bid. He also used the “there is interest in the property” line. That was all this weekend. I said to the wife that we have a limit financially. If our 1st offer isn’t accepted, thats OK. The house will be there a month from now when we return with another offer.

I would appreciate some advice as far as asking price and renovations.
We are currently looking at purchasing an older home that will require 80K. THe current owners did nothing (and I mean nothing) to the house and have lived there for 12 yrs. Needs roof, furnace (currently 40 yrs old), all windows, floors need reinforcement, Siding. And this is just the outside. Contractors have qutoed roughly 45K to do these items. The rest we would do over time. How should we adjust the asking price?

Dave: Lower the price FAR more than the renos will cost. First of all, estimates are hard (and usually renos cost more then you expect),

Secondly, you deserve to be compensated for overseeing / doing the reno work for the house. Its a pain in the butt to live in the middle of a construction project (which is probably part of the reason the sellers didn’t fix it up before selling), which should equate a better price.

Thirdly, you aren’t going to have much competition. Buyers see a run down property and just see all the headaches it’ll bring. Paying top dollar for a run-down property is foolish, and other people won’t do it, so the seller will have a hard time selling (which should eventually equate a better price).

Fourthly, we’re in a changing market (in my opinion) shifting into a buyers market from a sellers (in many areas). Remind the agent / sellers that if they don’t sell soon, the property may be worth less in a couple of months.

If you estimate that it needs 80K of renos, I’d offer $120K less than what it would be worth after it was fixed up. I certainly wouldn’t pay anything close to its value – 80K (just buy a house in good condition instead and avoid the headache).

Good luck!

The problem here is not the commission rate for the buyer agent (if they bring the buyer then more power to them), it is the rate for the seller agent that is at issue. The seller agent has the same incentives as the buyer agent: GET THE SALE DONE regardless of what is best for the client.

As someone said above, there is no incentive for the seller to get the best price for the house because the differential in the commissions is not that great between a $400K sale and a $380K sale.

I have worked with several agents over the years in selling (and I have sold some homes FSBO) and the big gripe I have is that the seller agent keeps telling you to lower the price to get an offer (rather than do what a salesman should do an GO OUT AND SELL THE DAMN HOUSE!). Anyone can sell anything if the price is below market value for goodness sake. But this is what the seller agents will do; get their “client” to lower the price so far that they don’t have to do anything but collect an easy commission check.

Let’s do the math on this one…

1. Let’s say you have a $525K home (appraised value). If you list it for $525K you will get offers lower than that and let’s say you settle for a $500K offer. Now you pay the 6% commission and you have just sold your house for $30K below the appraised value ($470K.)

One has to ask why would one retain an agent to sell a house for below market value?

2. Or go flat rate and simply reflect the fact that you don’t have to pay a commission in the sale price and START OUT by listing it below appraised value, let’s say for $495K and settle for $490 ($10K less than what the agent managed to get for you). You just made $20K plus eliminate the hassle of dealing with a smarmy agent who won’t work for their commission.

3. Even if you sell to someone with a buyer’s agent and you have to pay them 2 or 3 percent, you still make more money than if you retained a buyer’s agent.

This is the reason that flat rate listings are getting popular. They reflect the realization by the public that seller agents are not worth the money. I predict that the next thing we may see is lower commission structures being offered by listing agents.

Dave – I’ll echo Cheap and suggest that you over-estimate the reno costs. I think I may do a post based on your comment since you raise some excellent points.

I don’t agree with just subtracting the reno costs from the asking price. The asking price may or may not include some or all of the needed renos – the ideal method would be to know the market very well and try to value the house yourself based on it’s current condition and use that as a guideline.

By Post Author

Dave & Mike: After I left my last comment I thought to myself “did I clarify that I thought the renos should be subtracted from the FAIR MARKET VALUE of the house in good condition, and not the asking price?”.

Clearly I didn’t. I agree with Mike, use the market price as a base, not the asking.

I put a little more faith in seller’s agents, especially (as you said in your example) if you get them off referral. Agents in the business for the long-haul know the possibility of a referral trumps any benefit from an unnecessarily hasty close, so it is in their best interest to work for your best interest. Also, you didn’t even mention comps. Buying agents determine a fair offer by looking at the selling price of comparable properties in the neighborhood and they share this information with you. This means they don’t just draw a number out of a hat in order to try to make a quick close.

Lo. Price: The whole “we value referrals above all else” is a common line in the RE Agent world. I don’t buy it. I think they realize they can milk people and still get referrals. I’ve met people who have been screwed by their agents and don’t even realize it.

I’m two months into my search for my first home and I really appreciated this article. There’s a house I really like right now that I feel is substantially overpriced, and when I told my realtor that she disagreed with me…..until I pointed out a couple of the comps (she had sent me the last years worth of sales for that area). She did the math herself and came up with the exact number I had been thinking . I didn’t make an offer though because she talked to their agent who said she didn’t think they’d take what I was looking at.

Now I think I’ll give it a try.

First timer: Definitely give it a try! I can’t for the life of me understand any reluctance to make an offer (unless you’re not sure if you want to own the property or not). If you like the property but you’re going to walk away because the price is too high, make a low offer and see what they say.

Nothing to lose, right?

I should have read this post before buying the house. “Things that your agent might say …”, my agent said them all 🙂

Your post assumes all realtors are unethical. What about good realtors? Those that actually do their job and do their job well? I’m a broker in central Austin, where houses move very quickly and the sales price averages 97% of the list price. Wheeling and dealing is fine for some houses. On others, it is just dumb and the buyer ends up heartsick when they are rejected flat out by the seller. No generic rules apply to real estate. That is why a good realtor is like gold.

Cynthia: I don’t think it assumes that at all. It just talks about how the various parties in the exchange all have their own interest. The buyer wants the lowest price, the seller wants the highest price, the Realtor wants the easiest/highest commission.

“a good realtor is like gold” – meaning they’re expensive? 😉

I realize this is a fairly old post, but I can’t help but add this absolute gem we heard from our buyer’s agent: “But 50,000 dollars amortized over 3o years isn’t that much!”

And no, this was not for a particularly expensive house.

Hey Terri,

I’m glad you posted here because I had missed this article, but found it because of the recent comments on the right side. In case anyone is still checking on this, I’ll put it out there for the RE agents that it is hard for a buyer (especially a first timer) to know if they have a good agent or not. As such it’s in their best interest to assume that the agent will not necessarily look out for their best interests.

Also, for the good agents out there, if you know that there are some agents in your ranks that have ethical issues, why not do something about it? If you can weed out the bad ones, it will help improve your collective reputation.

Wow. The comments on here are nearly as good as the article. As a buyer half of me wants to use a real estate agent to protect myself and do the process right. However I know what I want, I know where to find it (I run multiple websites and know about trulia and zillow) and am on many realtors email lists, which are great.

I am much more tech saavy than most realtors. Heck, most humans on earth. However access to foreclosures is tough to come by. I did find a realtor who will email the new foreclosure listings to me, so problem solved.

I am living in my parents basement, I have 20% down for the price range I want. Now I just have to wait for someone to sell it. I know where I want to live but theres just not a lot of people moving out of the area.

I found a house I loved in a location I hated. I was very close to making a bed. I slept on it, worked the next day. Thought about my life there and realized I’d rather be closer to a grocery store that wasn’t a complete craphole. I’ve gotta eat every day right? That means I’ve gotta goto the grocer often. So now the new area I am looking at has a very nice grocer, a Wal Mart and a Sams Club within a half mile of it.

Gas is getting expensive and location is becoming even more important *(not that it wasn’t huge beforehand)

A quote from Steven Levitt of Freakonomics fame:

DG: One of the cases that you make is that we hire experts because we want their closely guarded information. With the Internet becoming more of a tool that people use to get information, maybe more so in the future, is this going to change the way we perceive experts, and how we acquire expert information, or will things continue, and will people like real estate agents self-adjust for this incoming threat to their livelihood?

SL: No, I think real estate agents are probably an endangered species. Just like travel agents and full service stockbrokers? the access to the information on the Internet is devastating to real estate agents. In Madison, Wisconsin, ?for sale by owners? are something like 25% of homes? Real estate agents are paid a fixed fee, but if you go to the dentist, you pay by the hour or by the procedure. You don?t pay them a percentage of your income. I think what?s going to happen is in the future is real estate agents will be paid by the hour. They do provide an essential service: they show people your house and help find you clients. But the model will change to choosing from a menu, a la carte real estate.

Also, see titled “Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions” . Interesting read.

Sam: I loved that part of “Freakanomics” (where they talk about realtors’ homes selling for a higher price). I’ve asked a number of real estate agents if they’ve read it, and surprisingly not one of them has (that they’ll admit to).

You are right-a lot of Realtors are not doing their job, and a lot of Realtors are unethical. It is not just Realtors though, this applies to all business people. It is also a regional thing-if you are in a small town, it might be different than if you are in Southern California, where I am.

Here, there are 1,000s of homes for sale in any give person’s area. They need someone on their side to help them sort through those homes, go see those homes, then negotiate a good deal (and by negotiate, I mean do research to find the true value of the home based on comps that are relative to the market and then convince the sellers that the price offered is fair based on concrete evidence.) I don’t believe anyone, sellers or buyers, should be randomly throwing numbers out there.

Furthermore, when it comes to paperwork, it is great to know you have someone taking care of it for you-that is, if they are really taking care of it. Some Realtors, it is true, don’t do their due diligence (say that 5 times fast).

So, Realtors are invaluable people, just as any other business professional is, but only if they are really good at what they do and they really are looking out for you, their client. And the only way to know that is from referrals of other satisfied clients, word of mouth, your gut feeling, and your own research about that Realtor.

Thanks!
-George Hartline
Team Hartline
http://www.teamhartline.com

The true key is finding a real estate agent that actually gives a damn about you. Like it was mentioned above, there are real estate agents who go above and beyond for their clients whom they treat like family. You just need to find one of the good ones.

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