Buying a home is often the biggest purchase people ever make. That is why most people hire a real estate agent to make the process go smoothly.
As a home buyer, you hire an agent to represent you in the home buying process. You expect your agent to do what is right for you.
But is your real estate agent really looking out for your best interest?
I am going to show you why your real estate agent’s incentives are not aligned with your own. I will also tell you how to protect your own interests throughout the home buying process.
I am cynical by nature. This article is going to tell you why you cannot fully trust your own real estate agent why buying or selling a home. The incentives are not aligned properly.
Despite what I am about to tell you, I still use a real estate agent every time.
This article is just one perspective. Not everyone is self-serving. There are good people out there who want to do their job well and do not want to take advantage of anyone.
I hope this article is a reminder that you cannot let down your guard too much. You need to be looking out for your own best interest when buying a home.
Keeping your wits about you and knowing a little bit about home buying before you get started will go a long way to ensuring you are not taken advantage of when buying a home.
How do Real Estate Agents get Paid?
In order to trust someone you need to understand their incentives and motivations.
6% of the sale price of the home goes to the real estate agents involved. Typically it is 3% for the buyer’s agent and 3% for the seller’s agent.
As a home buyer your real estate agent gets paid 3% of the sale price so it is in their best interest that you pay more.
For example, imagine you tell your agent that your budget is $150,000 to $170,000. Guest what? Your agent is going to try get you to spend $170,000.
3% commission on $150k is $4,500. On $170k, commission is $5,100. That is $600 extra in their pocket.
Real estate agents rely on referrals from past clients and repeat business. So real estate agents think long term. They have a reputation to build and protect.
But agent are always going to be motivated to push you towards your highest price.
As a seller, your real estate agent’s incentives are aligned with yours. Right?
Not so fast.
Of course the seller’s agent wants the highest sale price. But really, the agent just wants the property to sell.
Imagine you are selling a home and you get two offers: a $190k cash offer and a $195k traditional offer.
Going with the higher offer means you get $5,000 more. But your agent would only get 3% of that which is $150.
The real estate agent would rather close quickly than earn an extra $150. The agent just wants to get the deal done.
Also, it is usually not in the seller agent’s interest to tell you to negotiate very much. Negotiating risks the deal falling through. All the agent really wants is for the deal to close.
Negotiating to get you a few thousand dollars more only means a couple hundred dollars for them.
Be clear about your needs
The real estate agent works for you. But are not mind readers.
There are all kinds of trade-offs when buying or selling a home.
Maybe you need your home sold fast. In that case, maybe it is in your best interest to accept an offer that will close quickly rather than taking the absolute highest offer.
The same is true for home buyers. Tell your agent if price is the most important factor. They will respect that.
But you should also tell your agent if you are willing to pay a little more for the home of your dreams.
Your real estate agent can not get you the best deal if they do not know your priorities.
Can I Trust my Lender?
Choosing a lender is tricky too.
Different lenders have different rates and some offer different services.
Your real estate agent will probably recommend a specific lender. Be sure to shop around on your own for the best rates.
Years ago, I talking to a lender about financing options on a duplex. I was considering a conventional mortgage or an FHA Loan.
The lender told me why an FHA loan was a bad idea. Later I found out that that lender did not do FHA loans. That was why he was trying to dissuade me.
Remember: No one is looking out for your best interests but you! Stay vigilant.
It is important to know the basics of buying a home before getting started. Find books on real estate
Here are a few real-life examples I have encountered where real estate agents did not do the right thing.
My Brother’s First House
My brother and his wife were buying a house a few years ago. They were very excited and trusted their real estate agent.
After looking at a few houses they decided to make an offer. They told their agent they would like to offer $155,000 but would be willing to go up to $158,000.
Then the seller sent back a counter offer for $158,000 — exactly their highest price.
They accepted the offer and now live in the house with their two daughters. They are very happy.
But, they are also suspicious. Suspicious that their real estate agent told the seller agent what they should counter in order to the highest possible price.
When I was buying my first house I made an offer on a home that was listed by my real estate agent. That means the agent represented both me (the buyer) and the seller. This is called Dual Agency.
Dual Agency is legal and the agent is required to tell you. But I had already spoken candidly with my agent about how much money I had to spend. I felt I was at a real disadvantage.
Agents love being dual agents because then they get the full 6% commission (3% as the buyer’s agent and 3% as the seller’s agent).
This frustrated me enough that I ended up not using an agent at all. I ended up buying my first house in an upset tax sale instead. This is when the local government auctions a property because the owner did not pay property taxes.
Wrapping it up
No one is ever going to care as much as you do. It is your money.
You need to know your options and protect your best interest. To do that, you need to be informed and alert.
There are laws designed to protect home buyers but they are often in the realtor’s favor. Real estate agents have strong lobbying efforts in order to maintain the status quo in the industry.
For now, the norm is still to hire a real estate agent and pay a total of 6% commission.
That is not necessarily a bad thing. Real estate agents offer a very useful service. They help guide you through the complicated home-buying process.
But you need to be alert to protect your own interested or you could be take advantage of.
Arthur has has been in real estate for over 15 years. He started his career as a real estate agent and then started investing himself. Arthur has experience navigating many different financing options, multi-family and single-family rentals, commercial real estate, and restoration projects.
March 16, 2020 (Updated March 18, 2020)