The cost of a free ride - why not to use a buyer's agent
Recently, my wife and I were house shopping and we decided to make an offer on a condo. It was advertised for $345,000, but we thought we could get a better deal by contacting the seller's agent first. It wasn't the first time we tried this trick — we had previously bought our house in Fresno with only one real estate agent, and it worked out great. So we threw out a low-ball offer of $325,000 and, to our surprise, the seller's agent was very eager to work with us. He negotiated on our behalf with the seller, and basically came back and said that if we could raise our offer to $327,000, we could have the deal. There was a pending offer of $335,000, but if we wanted it at $327,000, he would convince the seller to give it to us. Why would the seller's agent go so far for us? Why would he bend over backwards to try to make the deal happen, when we were offering a lower price? Was this a breach of his fiduciary duty?
It's called dual agency. That means the seller's agent can represent you (the buyer), and your adversary (the seller). It's completely nonsensical, but, so long as this system exists, you might as well use it.
There is a 6% commission in a real estate broker contract that is split 50/50 if two real estate agents are involved (buyer and seller's agents). If only the seller's agent is involved (that is, he or she finds the buyer and represents the seller), then such an agent gets 100% of the 6% pot. In my case, if the condo was sold for $335,000 in a two-agent deal, the seller would receive $314,900 in cash (after 6% reduction for commission) afterwards and the seller's agent would pocket $10,050 in cash (3% of sales price). However, if the condo was sold for $327,000 in a one-agent deal and the seller's agent was smart enough to reduce his or her commission (say, to 3.5%) to make the deal happen, everyone wins. The seller would receive $315,555 cash (after a 3.5% reduction for commission), the seller's agent would receive $11,445 cash (3.5% of sales price), and the buyers would receive an $8000 discount on the house.
If you haven't figured out the trick by now, I'm trying to say that you should call the seller's agent when looking at a house. To recap, here are the reasons why you should use only the seller's agent:
1. Reduce Commissions
They can reduce their commissions from 6% to 3% and still have it worth their while to do the deal with you. A 3% reduction in their commission represents thousands in savings!
2. They'll Persuade on Your Behalf
There is a huge incentive for the seller's agent to persuade the seller that you are the right person to close and that your offer is the best (sellers don't always look at the highest offer, they also care about which buyer is actually going to close the deal).
3. No Buyer's Agent Pressure
Buyer's agents are especially evil, not because of their moral character, but because of the incentive system. They don't make money unless you actually get your offer accepted. So there is incredible pressure on them to persuade you to overbid in you offer. If you overbid, there is a greater chance that your offer will be accepted. You don't need that kind of pressure when committing yourself to the most expensive purchase of your life.
4. Seller's Inside Info
The seller's agent actually has a lot of useful information that is helpful in the home-buying process. They know if the seller is motivated, whether other offers are pending, what complaints have been made about the house by other potential buyers, etc. Since the seller's agent also becomes your agent in the deal, they have a duty to advise you (and possibly even reveal this juicy info to you). However, if you use a buyer's agent, you have absolutely no access to the good information.
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