How to Win a Home Purchase Negotiation By Firing Your Real Estate Agent

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).

Are you...

  1. An experienced home buyer?
  2. A real estate professional (broker, appraiser, real estate banker, etc.)?
  3. 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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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2013, at 3:15 PM, yourmom3urmom21 wrote:

    The truth is having the listing agent represent both seller and buyer is like letting your ex's lawyer represent you in a divorce, who's side will he or she be on? Sellers are the one's paying the commission so if there's a dispute between buyer and seller chances are that the seller will get what they want not the buyer. Any buyer's agent worth their salt will know how to negotiate and win the sellers agent's confidence and negotiate effectively for you as a buyer.

  • Report this Comment On December 28, 2013, at 4:23 PM, nancyfromme wrote:

    uh.....I don't know about you, but I would prefer to have someone interested in me than the sale. The buyers rep is there to represent the buyer and anyone who thinks the sellers rep will help them needs to go to a padded cell. I personally to not handle "both" sides and feel anyone wanting to forego an agent because they feel the sellers agent can get them the best price needs to rethink the whole equation. Buyers and sellers agents are there to get the best deal for their client and for a buyer to think that a selling agent will help them get the best price is someone who does not understand what fiduciary duty is. In Texas this could be a whole lawsuit waiting to happen if it is not clearly pointed out as to WHOM the agent represents.

  • Report this Comment On December 29, 2013, at 12:45 AM, Silverlining wrote:

    "..., the contracts between the seller, buyer, and agent(s) determine exactly what fee the agent(s) will receive... If it's not in writing, it doesn't exist" It is in writing, the Seller's agent has a written agreement with the Seller, the Buyer's agent has a written agreement with the Buyer and the Seller's agent lists the amount he is willing to pay from his commission in the property advertisement supplied to all Agents. Unless you are an Agent or you can become an insta-expert, get an agent.

  • Report this Comment On December 29, 2013, at 2:07 PM, Pcrrealtor wrote:

    Great article Jay but it is obvious to us real estate professionals that you are not in the business of real estate and may not have ever purchased a home yourself. First of all, a buyers agent does a whole lot more than negotiate on behalf of the buyer... Your article missed the entire subject of protecting the buyer from risk, helping the buyer secure a mortgage or requiring the seller to "disclose" problems with the house or better yet... Ensuring the buyer hires a licensed home inspector to evaluate the house during the due diligence period. Do you even know what a due diligence period is Jay? Perhaps you could put sub headline your article with "let the buyer beware.

  • Report this Comment On December 30, 2013, at 12:04 AM, khess wrote:

    Real estate agents are wolves in sheeps clothing! We sold our home by owner and had no problems what so ever! Just hired a real estate attorney to help with the closing... everything was smoothe sailing - and we saved ourselves over 14,000 dollars by doing it ourselves and still was able to let the buyers knock some money off the asking price since we didnt have to pay any agents! win win for both parties involved!!

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