In general, I'm a huge advocate for hiring a professional, high-integrity real estate agent to help you navigate the home buying process. Why? Well, I've written about that here and here and here and here and... well, you get the picture.
Today though, we'll explore a case where you should forgo real estate agent altogether, and how that can save you thousands of dollars.
Source: Phillip Taylor.
Are you any of these people? If so, this post applies to you.
Before diving in, let's define first who stands to benefit from this strategy (and who doesn't).
- An experienced home buyer?
- A real estate professional (broker, appraiser, real estate banker, etc.)?
- Closely connected with a network of real estate professionals?
If you answered yes to any of these questions, then we're in business.
Who does this eliminate? First-time home buyers, inexperienced buyers, non real estate professionals, and generally anyone who stands to benefit from having a pro in their corner. If you're a newbie, hire a pro. It's worth the money!
Understanding how real estate agents get paid
For real estate agents, paydays only come when a home is sold. It doesn't matter if they're representing a buyer or a seller -- checks only get cut when a home is sold.
Knowing this, sellers entice prospective buyer-side agents to show their home by offering a commission split when the house is sold. In most markets, the full commission will typically run at about 5% of the sales price for a normal transaction. Taking the split into a account, the buyer's agent is in line for 2.5% upon sale, with the other 2.5% left for the seller's agent.
If the buyer doesn't have an agent, that means that the seller's agent keeps the entire 5%. If you fire (or don't even bother to hire) a buyer's agent, then the seller's agent is highly financially incentized for you to buy the house.
Let's do the math
For example, let's assume a seller is listing a $200,000 home for sale. In most cases, the seller's agent will open sell the house for a 2.5% commission (half of the overall 5%). That's $5,000. Not bad.
Of course, if the seller is able to collect the full 5%, that's adds a zero to his commission, now $10,000.
Let's play with the numbers a little here, just to show the real impact of those seemingly small 2.5 percentage points.
If you negotiate the price of the house down from $200,000 to $190,000, the 5% commission is still $9,500.
The agent's contractual obligation to the seller versus the reality of negotiating
The implications of this when negotiating a contract can be huge. The agent is legally obligated to represent the seller's best interest. Real estate agents take this seriously. However, to think the size of their commission check isn't always sitting at the back of their mind is a mistake. These are professionals. They aren't in the business for charity.
As you are negotiating the purchase, it is to your benefit to pit the agent's financial potential against the seller's. For example, isn't the seller's agent likely to advise the seller to accept a lower offer instead of holding out for more when their commission check will be double based on the changed commission structure?
Or, consider a hot market where there are multiple bidders. Could you subtly persuade the seller's agent to back your offer simply because they'll have a bigger payday because you are representing yourself?
Final words of wisdom
At the end of the day, the contracts between the seller, buyer, and agent(s) determine exactly what fee the agent(s) will receive. Never assume anything. If it's not in writing, it doesn't exist.
Buying a home is a huge transaction. For many people and families, it's the largest transaction of their lives. That being said, in the vast majority of cases, it is worth paying the 2.5%, just a penance, for the value a high-integrity agent can offer.
However, nothing in life is black and white, and real estate negotiations can be particularly gray. With this much money at stake, it's worth negotiating for the best offer. Understanding this upfront can help you position yourself to save money, or perhaps win a deal that you'd otherwise miss out on.
The key is to be honest with yourself about your real estate knowledge and experience, act prudently, thoroughly think through your options (and those of the seller), and negotiate from strength.
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