Buying with a realtor questions

[NewJeffCT]

I have a question on buying a home that I was thinking about today. Maybe 3 years ago, my wife & I were referred to a local real estate agent. She told us that would work as the buyer's agent and represent our side of things... of course, the agent also hoped to get involved with selling our then current home when the time came for that.

But, my wife had this question at the time & it came up today in passing conversation. I didn't have a great answer back then and can't really think of one now, either.

My wife's question at the time was: What incentive does the buyer's agent/representative have to keep down the price of the home we buy when her commission is based on the selling price? As an example, say we found a home for $500,000, and negotiated the price down to $490,000. How do we really know that was the best price? Our agent would get paid more if the house sells for $490,000 than she would if it sold for $480,000 or lower. How would I know if I got the true best price? There is usually not direct contact between a buyer & a seller, so we would have had no way of knowing if the seller was really willing to go down to $480,000 or even lower.

As a follow-up, are there any states, or areas of states, that address this issue?

[taterguy]

1. If only Steve Dubner read this board n/t

[NewJeffCT]

3. who is that?

just wondering

[taterguy]

4. Co-author of Freakonomics

A very entertaining book that deals with questions like this

[NewJeffCT]

8. Interesting

I will have to look it up & see what he said.

[kay1864]

14. The book is excellent!

And here's an excerpt from the chapter on realtors, including "Terms Correlated to a Lower Sales Price"
http://www.freakonomics.com/ch2.php

[eyesroll]

2. Isn't this the way every negotiation works?

You really don't know what the "best price" is. Just like when you're negotiating salary -- you really have no idea whether the $50,000 you accepted is really the best salary you could have gotten. The company, likewise, has no way of knowing whether you would have been willing to accept $45,000.

You can educate yourself (via your agent) about comparable properties in the area, and about how houses in that area are typically priced relative to what the "best deal" is -- but ultimately, you take a risk and bid.


Also, retaining a buyer-only agent, and paying them a flat rate, is the only way (that I know of) to ensure the agent is working for your interest only. That said -- the difference in comission between $500K and $490K isn't enough for the Realtor to lose the sale altogether by pushing you too hard.

[NewJeffCT]

5. The difference is...

when you are personally negotiating, you at least know your bottom line.

I could have told the agent, while we bid $500,000 for this home, we hope to pay between $470,000 and $490,000. I have no way of knowing if my agent went in there & struck a deal with the other agent to sell the house for $490,000 and to split the extra commission when the other agent was willing to come down to $480,000.

While 3% of $10,000 is not a huge number, it is also not small. And, what if the difference is greater than $10,000? What if it is $30,000 or more? The agent can say that it's higher than the comparable home that sold last month due to the neighborhood, or proximity to a local shopping center or school.

[kay1864]

7. "Strike a deal"? No.

Not if either one is with a recognized firm--you can lose your license that way. Plus, how would the other agent enforce such a deal? No, forget the "split the commission" idea.

OTOH, the buyer's agent is in fact working for the seller (in most states they disclose this to you when you sign with them). Like another poster said, the only way around it is a fixed fee.

However, you don't have to disclose to your realtor how high you're willing to go. You can start as low as you like, and tell him/her that's all you want to offer, and see what happens. Most sellers (or their realtors) will always counter-offer.

[NewJeffCT]

9. Yes, I know the buyer's agent...

is really working for the seller. I thought that was how it worked in all 50 states unless something has changed?

And, how does one determine a fixed fee? There is a big difference in an $80,000 condo & an $800,000 McMansion.

[kay1864]

10. Oh, I don't know if a fixed fee is even viable

I guess you could take the midpoint or lower-midpoint of your price range, and peg the fee at 3% of that. But I don't know if any realtor is willing to work that way. I'm just agreeing with the above poster that it's the only way to ensure they're not biased.

But you *can* take the other approach, that of keeping your cards close to your chest, as if you were negotiating with your own realtor.

[NewJeffCT]

11. That is true

But, that can only go so far. If a realtor needs your "best price", is it really your best, or not?

[kay1864]

12. Well that's just it

They don't really need your best price. Just tell him/her that you want to make $X offer. They don't need further details, or that you're willing to go higher. Then you get a counter-offer from the seller.

Then you go back and forth, until you reach your max, or they reach their min, OR you reach a deal.

[MissMillie]

6. Often one can only make an educated guess at their counterpart's

walk-away, however, I can understand why the OP is worried that the buyer's agent has no incentive to keep the sale price down, unless you're dealing with an agent that is getting a flat rate.

[seemunkee]

13. Trust

I've sold 2 houses and bought 2 with the same realtor team and have a great deal of trust in using them. When I sold my mother's house I ended up making nearly 30K over what I thought I could get. When we moved they gave us a break on the sales commission since we were using them to sell one house and buy another. I've referred a lot of people to them and what little they would have gained from cutting a deal would have been easily lost by not getting the referrals.

[NewJeffCT]

15. Not always easy to do

If you move to another state, or even another part of your home state.

[NewJeffCT]

16. kick

just seeing if I can get more input.

[radwriter0555]

17. Your agent is required (in CA) to show proof of presenting your offer to

the seller.

It has to be in writing on an approved form.

All correspondence is in writing, on approved forms and VERY well documented.

The incentive is the money they earn. A percentage of a few grand isn't enough for them to worry about if it costs them the actual sale.

The Sale is their incentive. Their ethics and honesty is one reason to hire them. Check their ethics, track record and honesty.

If you don't trust them, don't hire them.

The key is to hire someone with experience and a good reputation, not just a fancy car and lots of publicity. Check them out before you hire them. Ask them for references and CALL those references. You are hiring them, and it's up to you to do your homework first.

You should be able to absolutely TRUST your RE agent. You should be very confident your RE is looking out first for you, long before their commission check is an issue.

If you don't trust them IMPLICITELY, don't hire them, and find someone else.