How to Review a Real Estate Agent?
When buying by private sale, find out how good the estate agent you are dealing with is as a negotiator. No one likes negotiating blind and it is good to know what some sort of form the agent has. Try to glean some information from other agents in the area, to see whether this agent is worthy of your trust. Contact a local solicitor and see whether they can tell you anything about the agent’s ethics.
Here is how review a real estate agent:
- Family companies
- Selling systems
- The agent’s commission
- Listing and selling agents
- Advertising dollars
- Do you have a house for sale?
- Market share
- Office bonuses
- Listing agent versus selling agent
If you are not happy with what you learn, find somebody else in the office who has a better reputation. Be careful, too, with agencies who seem too good to be true. A court case in Victoria involved an agency that seemed to be going places. In fact they were not relaying true offers to the vendors and were going back for a second bite of the cherry with their commission.
A high-profile auctioneer got himself into a lot of hot water at an auction for being greedy. He was using his father as the dummy bidder against a buyer who just had to have the property. He had his father on the phone at the half-time interval and renegotiated his commission, through the property had reached the reserve price. He asked the owners if he got them an extra $40,000 would he get another $10,000 onto his commission. He then used his father via the telephone to keep bidding for another $35,000. He ultimately got the extra sale price and therefor claimed his extra commission payment. However, the vendor had a change of heart and reneged on his agreement for the extra commission payment. Consequently it became known in the industry that this event had occurred and the auctioneer in question had to argue to keep his licence.
Here is how review a real estate agent:
1. Family companies
Don’t put your faith in a real estate company just because it is a ‘family’ company. Sometimes family companies that trade on family tradition rest on their laurels, and where sons and daughters replace the original dynamo or owner you may find a younger generation who are either spoilt or lack work ethic, are simply not intelligent or outright lazy. Real estate agents who are any good don’t need to rely on family names or brands- they’ll have an established track record that will speak for itself. A real estate agent is only as good as his or her last transaction. Many family companies end up as part of a franchise arrangement or are involved in selling systems to help them generate listings, which the children of the original owner are incapable of doing themselves.
2. Selling systems
Selling systems are part of the evolution of the private sale and you should be wary of agents who use them. They are connected by so-called successful real estate ‘gurus’ as a simple sure-fire method for selling property on behalf of agents who are incapable of doing things for themselves. Selling systems are designed so that agents can list more property; more importantly, agents use selling systems to try and gain a bigger market share in an area over their opposition and ultimately improve their profit share.
Selling systems, such as ‘the buyer range’, ‘the set scale’, the Pilling system and the Jenman system, are carefully organised to manipulate you into paying much more than you need to. For example, the ‘buyer range’ proposes to vendors to eliminate the problems associated with fixing a selling price by using a price range instead. This is based on the theory that a vendor will always ask for 10 per cent more than the market price and buyers will start by offering 15 per cent below it. This often deceives buyers into inspecting properties they can’t afford. From the agent’s point of view, offering buyers the carrot that they will get their home below the dream price the vendor wants means they get new customers on their data base. It supposedly puts the vendor in a better position of negotiation, but often draws out negotiations because the buyers were not in a position to buy anyway. It is to agents. Needless to say, it costs consumers millions of dollars in wasted time and expenses.
How do you beat the systems? Go directly to the vendor and explain the facts of life as they usually have no idea that the system is effectively stopping the sale process.
3. The agent’s commission
One sure way of putting yourself in a fairer position is to find out how the agent’s commission is structured. Agent commissions often vary dramatically. The structure is worked out on a set percentage of the purchase price or on a performance basis. It is becoming commonplace for estate agents to look for ‘kickers’ in their commission structure, allowing them to gain more financially out of the transaction. For example, they will often incorporate both, i.e. 1.5 per cent up to $300,000 and 20 per cent more of anything above a $300,000 purchase price. Therefore, when you are buying, the real estate agent has vested personal interest in you paying more. However, if you find out what the commission structure is, you may find that the vendor would probably sell for $300,000 because he doesn’t think it is worth any more, otherwise he would not have offered such an obscene bonus to the agent to get it.
We were asked to bid on a warehouse where the agent was quoting $550,000 plus. The property was worth a minimum of $800,000, however the reserve was $650,000 and the agent was on 2 per cent up to $650,000 and 25 per cent of anything over. The owner, trusting his agent’s judgement, agreed to the structure in the belief that $650,000 was a good price. The property was sold at auction for $900,000 and the agent’s commission was $75,000!
On the other hand, if you ascertain that it is a set fee, you can probably assume that you have relatively informed owners who haven’t a set figure in mind as to what they would sell for and are testing the market, or very good negotiators who don’t listen to estate agents’ rhetoric.
At certain times of the year, particularly at the start, real estate agents will often discount commissions in order to gain market share or exposure. For example, the commission on the first ten properties they list in an area will probably be discounted to 1 per cent. If this is the case, many of these properties will be overpriced and will be used as a lighthouse to attract other buyers and sellers to that real estate agency. If it was a really good property, they would not list it for 1 per cent. If a property is only listed on the Internet or in the office window, it is overpriced. More importantly, there is no financial incentive for the agents to sell it; they would prefer to sell another property at 2.5 per cent to a genuine buyer than get 1 per cent for a particular property.
4. Listing and selling agents
Another key point is to establish who is the listing agent in the real estate office. The listing agent is the real estate agent who obtains the property for sale. The selling agent is the one who actually sells the property to the buyer. Depending on the size of the agency or franchise, in some cases it can be both. Most real estate agencies operate on a percentage of commission to the selling agent and to the listing agent, and it’s usually around 20 per cent of the total fee for each one, with an extra incentive to both list and sell.
The listing agent is the person the vendor listens to, not the salesperson who takes you around to three or four properties to inspect. The vendor is more likely to take advice from the person they have entrusted to sell their property, rather than from a salesperson they’ve only just met as they escorted a potential buyer through. The listing agent is usually the smarter of the two and that is why he or she obtained the listing in the first place. The salesperson can traditionally be a little bit loose with the truth and will say anything to a vendor to enhance the prospect of their client’s offer being accepted. The listing agent is usually someone who has ‘been around the traps’ and knows how to get the most out of vendor management when submitting offers.
Each real estate agency has its own internal politics which will drive how the property is to be sold, by whom and for how much. This can come down to five key issues, all focussed on maximising financial gain for the agency, not the vendor:
5. Advertising dollars
Agents receive a substantial rebate for the advertisements they place in papers. The longer the property is on the market, the more likely they will pick up extra funds.
6. Do you have a house for sale?
At all sales meetings in the agency, potential buyers are discussed with this domino theory in mind.
7. Market share
If an agent has an advertising budget for four weeks, they will be very keen to see that their column listing properties for sale is larger than that of their competitors. Rarely will they want to reduce the advertising budget for future business by selling something that they have been given a large budget to advertise. Agents use these ads as a beacon to attract more business.
8. Office bonuses
If an agent can get more bonuses in one month than the next by way of commission ratchet points – the total amount of commission that that real estate agent salesperson earns for the month, e.g. $10,000, $15,000, etc. – they will probably want to make the sale in one month or the next to establish their monthly bonus plan. If they can move a big sale to a good month’s earnings from a poor month’s earnings, they will receive a bonus. For example, anything over $15,000 per month in individual earnings is split between the agency and the agent. Therefore, if they can squeeze everything into a big month they gain more financially for themselves. The real estate agent is only motivated by commission.
9. Listing agent versus selling agent
If you are dealing with the listing agent and selling agent in one, your offer is more likely to be accepted or passed on to the vendor. If someone else in the office sells the listing agent’s property, the listing agent loses their commission. It is common for listing agents not to pass the full amount of offers from other salespeople on to the vendor, because then they won’t be the one closing the sale. The standard response is that the offer has been refused.
– David Morrell