The 'Real' Deal Behind Real Estate Agents
By Jeff Brown
This spring the housing market is in despair – everyone knows that.
Still, millions of homes will change hands, most with the services of a real estate agent. So, whether you are a buyer or seller, it’s best to be clear about whose interests the agent represents; the buyer’s, the seller’s, or the agent’s.
Traditionally, agents have represented the seller. It’s easy for the buyer to forget that, after spending weeks or months touring homes with an agent, talking about plans for the future and sharing intimate details about family finances. But in the end, the traditional agent is obligated to help the seller get the highest price possible.
In recent years, many brokers have become buyer’s agents, sometimes called exclusive buyer’s agents. They are legally obligated to put the buyer’s interests first, helping to negotiate the lowest possible price, for example.
Each type of broker is typically paid at closing, usually a percentage of the sales price. A customary commission of 6 percent might be split evenly between the buyer’s and broker’s agents. Since pay arrangements can vary, it’s important for buyers and sellers to get written compensation disclosures up front.
The key point: Neither type of agent gets paid until the sale is final, and the financial incentives to get the deal done can put the agent’s interests at odds with the client’s.
Suppose you were selling a $200,000 home. If you got full price, a 6 percent commission would be $12,000 -- $6,000 for each party’s agent. Each agent might have to split the commission with his or her employer, leaving $3,000 each.
As the seller, you want the highest price you can get, and you may be willing to hold out for months. But your agent might prefer to get the deal done as fast as possible to leave time to sell other homes.
By convincing you to drop the price to $180,000, the agent would trim the commission only slightly, from $3,000 to $2,700, though you would be out $20,000.
In some ways, the conflicts of interest are even worse for the buyer’s agent. Getting the buyer to pay more not only speeds the sale but earns the agent a bigger commission.
Honorable agents do put their clients’ interests first, and the real estate industry has ethical standards to encourage this. But buyers and sellers are wise to get their own sense of what a property is worth. Major mortgage lenders like Bank of America (Stock Quote: BAC) and JPMorgan Chase (Stock Quote: JPM) all have tools for estimating home values and there’s a useful one available at Zillow.com.
It’s easy for a seller to see the damage done by a price cut. But the cost of raising the offer price is not always as clear to the buyer. With 30-year fixed-rate mortgages averaging about 5 percent, according to the BankingMyWay.com survey, every $10,000 borrowed will cost only $54 per month. Use the BankingMyWay.com Mortgage Loan Calculator to see for yourself. An agent may emphasize the low borrowing cost to encourage you to raise your offer.
But remember, if you ever sell the home, your gain will be the difference between the sales price and purchase price. Paying $10,000 more today means $10,000 less in your pocket after you sell. In fact, it’s even worse, considering the thousands of dollars in interest you may have paid on that $10,000.
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