In dealing with Real Estate, one of the most significant Myths people have is that in reaching out directly to the Listing Agent, they will get a bargain or discount in the price instead of going with their own buying broker. Nothing could be farther from the truth, and let’s discuss in detail why it is paramount for us as a Buyer to have our own representation.
Here is the rationale why when we shop for a home, we ought to have our independent representation:
1) Negotiation Edge – The primary element in a successful negotiation is keeping your motivation to yourself, specially in the purchase of Real Estate where a large amount is involved. When I have my buying broker negotiating the deal on my behalf, they are safeguarding and concealing our motivation level, precisely why and how much I like the property and how much I am willing to pay for it. Even though as a buyer, we might be too invested in buying the subject property, still that motivation will never reach the listing agent or sellers, which will help in bringing the amount down. Whether I am pressed for a short closing date, need a home in that specific neighborhood, etc. will all remain just to our broker. This will help to negotiate a reasonable price for purchase by taking the emotions out of the equation. On the contrary, if as a buyer, I reach out directly to the listing agent, by design, I am telling them my motivation to buy the property, my qualification ceiling from the lenders, my need for specific completion date etc. All this will work against my ability to negotiate on the amount and other closing terms; as my motivations are now visible to the listing agent and to the sellers as the listing agent is already working on behalf of the Sellers. Reaching out the listing agent is like opening our cards to the other player in a card game, and leaving us on backfoot.
As a matter of fact, in Real Estate, the Buyer’s lawyer and Seller’s lawyer cannot be the same due to conflict of interest. By the time accepted Agreement of Purchase and Sale reaches the lawyers, all of the deal terms are already frozen, purchase price, completion date, conditions, deposit amount, warranties, etc., they are decided and put into an agreement of purchase and sale. Now, if the lawyers cannot be the same in a transaction, the realtor cannot be the same by the same token as all these negotiating terms are decided much before the agreement reaches lawyers. When the same agent represents both Sellers and Buyers, it is called the dual agency, and it should be avoided to safeguard our best interests as a Buyer. A buyers agent would want to get a home for the lowest price for his Buyer, and the listing agent would want to get the highest price for the sale; when the same agent is acting for both Seller and Buyer, it is practically impossible to be fair to both sides. The only person who benefits in the dual agency is the listing agent as he gets to retain the compensation for both sides of the transaction.
2) Determination of Fair Market Value – When we purchase a Real Estate as a buyer we need to objectively determine the fair market value of the subject property based on the past sales in recent months of similar property types, similar in age, state of the subject property and current market conditions. A skilled buying broker at our side will be able to do this exercise objectively and utilize this information to get the property at a price that it can command and no more. A listing agent might at times, be influenced by the Sellers and price the property irrationally; however, when you are working with a good agent, they will ensure that you do not overpay for the property in any case.
3) Screening the property for Material Defects – A good buying agent on our side will bring on the table much-needed guidance on the things to look forward to and be careful in a property we are contemplating to purchase. They will ensure our investment goals or primary residence family needs are met, and we review and make sure everything is checked and assist in getting a good inspector to find latent defects, and again negotiate with the listing agent, if any deficiencies are found. A good agent looks at 500-800 homes in a year, and their experience in what to look in the property and which properties to avoid at the very outset is in itself very valuable. When we buy for our living, and when we buy as an investment, the goals are different for selecting a property, neighborhood, type, and age, etc.
4) Not Overpaying for the property – When as a buyer we work with the listing agent directly, the only party benefiting in the transaction is the listing agent who takes compensation for both sides from the Sellers. Often Buyers have a misconception that Seller will save on money as there is no buying broker involved, and they might get the property for less. It is not at all like that, in fact, the Seller ends up giving exactly the same amount if you were to work with a buyer broker as the amount which Seller will pay to the listing brokerage is signed and contracted much earlier when they get into listing agreement.
Let’s understand with an example. Suppose we saw a home listed at $800,000, and we like the property. Let us regard the fair market value of the property is coming at $765,000-$775,000 based on similar comparables sold in recent past in the community, specifications and current state of this home.
Scenario 1: For the property, we approach the listing agent directly, and we like the property, and we express our motivation to buy and do the deal. After discussing with the listing agent who conveyed to you the upgrades the owners did during their occupation, and you agree to offer the sellers at $790,000, and they accepted the offer. You are happy that you got a $10,000 discount. The listing agent here gets all of the compensation agreed by the Seller in the initial listing agreement; they are the only party benefitting from this.
Scenario 2: If we would have worked with a great buying agent, we could have got the same property at $765,000-$775,000 or maybe even less based on how negotiation is carried out on the table. As in this case, your motivation and interests are not known to the Sellers; they do not know how much you would be happy to pay for the property and how invested we are emotionally in the property. This alone will help us as buyers to save on thousands of dollars. The only difference would be that the compensation agreed by Seller to the listing brokerage is now distributed between the listing agent and our buying agent.
In both Scenario 1 and Scenario 2, the Seller ends up paying exactly the same amount to the listing brokerage; the only difference is that when we have our own representation, the listing brokerage will share the compensation with our buying broker. It does not impact us as a buyer in any way or takes away anything from us. We only benefit as a buyer by having our own representation to avoid any conflict of interest during hard negotiations by keeping emotions out of the way.
5) Critical Review – A good buying agent is our insurance to have an experienced set of eyes who is being critical of the property we are trying to evaluate for a buying decision whether as an investment or for our own living. There are many things to keep in mind and be careful before we sign on the dotted line, our buyer broker will be critical as you are working with them and they do not have interest in buying a particular home as there are other options to buy as well so for any deficiency in the layout, specifications or outlook of the property they will point it out to you. When we approach the listing agent directly, it would be very unlikely that they will be critical of the property as their sole aim is to sell, and after all, they are working for the Sellers and not us as a Buyer.
The buying broker compensation is part of the fair market value, as other properties that are sold in the market have that component as well. When you arrive at the fair value, the buying broker compensation is part of that, so as a buyer, we are not getting it any costlier just by having our own representation of a Real Estate Broker. We only get all of the above benefits and someone knowledgeable about the whole process on our side to back us and safeguard our best interest and help us in deciding on the right property and enable us to buy it at the right amount.
Hope you find the above helpful and might have clarified this myth in Real Estate.
Reach out to our dedicated team at ELIXIR for any queries you have in Real Estate and we will do our best to help.
Broker of Record
ELIXIR REAL ESTATE INC.
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