Ethics of using a buyer's agent in home purchases?

October 9, 2006 6:49 PM

I have a couple of questions about buyer's agents. My wife and I are interested in selling our current home and buying a new one. We don't have an agent yet, but we swore, after buying our current home and realizing that "our" agent didn't really represent us, that we would never again buy a home without a buyer's agent on our side.

After seeing a home we liked while driving through a local neighborhood, my wife called the listing agent and asked him if we could tour the home. He was very nice, but when my wife told him we'd probably get an agent, he said something like, "If I show it to you when you're unrepresented by an agent, how can I be expected to give half of the commission to your agent, if that agent didn't find you the house if you end up buying it?" Maybe it was a faux-pas for us to even ask to see it while we were unrepresented, but he showed us the home (and, actually, he was very nice) and we like it.

(1) Does the fact that we discovered the home ourselves, without an agent, mean that any agent we may ultimately get would not have a claim to part of the 6% commission on houses we discovered ourselves? (I ask, not so much because we're planning to buy this particular house, but because the same agent has sent us a bunch of other listings. He does not advertise himself as a buyer's agent, and we're determined to have a buyer's agent before buying.)

(2) What provides a buyer's agent with an incentive to get you the best deal, when they presumably are paid just like any other agent -- with a percentage of the ultimate sale price? Seems like they would have a stake in you paying more, rather than less, for the property you choose.

posted by jayder to home & garden (13 comments total)

(2) is exactly correct -- even a "buyer's agent" does not really represent the buyer. You have to make the tough decisions and decide what an appropriate price is yourself, sorry.

I think the best course of action would be to ask the first guy to represent both sides, for a reduced commission.

Keep in mind that in many areas of the country, buyers are VERY scarce right now, and homes can sell for as much as 30% less than the asking price.
posted by trevyn at 6:56 PM on October 9, 2006

When you hire a buyer's agent, you are right in thinking that you have to structure things with them so they have incentives to save you money. Typically, you would give them X number of dollars up front, then X percentage of every 1000 dollars that you get the house below list price, or something along those lines. The Motley Fool message baords could probably provide more details, as the information I'm giving you came from one of their financial self-help books.

Remember, unless you have a signed contract saying this, they are NOT working for you, regardless of what they say. See the chapter in Freakonomics if you need more info about this. IMO, many real estate agents are untrustworthy and slimy, worse than car dealers and even lawyers. At least in court you have the option of representing yourself. Houses listed with agents are off-limits to those without agents, as you seem to have found out. This sucks when you buy, but sucks even worse when you sell.

Is it worth it to get a buyer's agent? Maybe, depending on the market you are looking in. Remember housing prices are falling right now, so you might not need a buyer's agent at all.
posted by jtfowl0 at 7:10 PM on October 9, 2006

Ironically, this paper was just added to the Brooking's Institute working papers section recently. It has some relevant info regarding buyer's agents.
posted by jtfowl0 at 7:20 PM on October 9, 2006

Recently asked.

Real estate agents do not do a good job representing you. Buyer's agents want you to bid high, so the deal will close and they'll get their money. Seller's agents want you to price your house low, so the deal will close and they'll get their money. You may note that this is the opposite of what you want in each case.

(There has been research done; real estate agents, when they put their own houses on the market, ask for more money than what they would advise their clients to ask for. If your agent says your house is worth $300K, you should put it on the market for more.)

The only use for an agent is to pre-filter properties for you (which they generally do poorly) and give you prices for comparable houses in the area (which may not be easily available to you).

On preview: while AEI is typically a terrible source of information, in this case, they happen to be correct. A stopped clock is correct twice a day.
posted by jellicle at 7:26 PM on October 9, 2006

Answers:

1. No. (Finding you a house you like is the smallest part of an agent's job. And if a seller's agent gives you the bullshit line in your example, just lie and tell them you have an agent. You should always do this when looking at a house -- it throws them off the scent.)

2. Repeat business. (An agent's reputation is the only tangible mark of quality -- since a relatively intelligent 6th-grader could do their job.)

And never, never, NEVER use the seller's agent as your own! It is a stupid fucking amateur move that will guarantee you get reamed with a golden ice-pick.

In most cases, agents are a necessary evil. But better to have the devil on your side. Please don't listen to the geniuses who tell you you can do it all yourself. They won't be helping you pay your mortgage.
posted by turducken at 7:48 PM on October 9, 2006

My experience is within CA, and I understand that real estate terms vary from state to state, so this may or may not be relevant to you.

The first thing you should know is that some of the rules around realtor duties and commissions are set by the Board of Realtors, and thus are non-negotiable. (Google your state's BOR for specifics.)

In California, the law states that the seller's agent must split the commission with the buyer's agent if the buyer has an agent.

One implication is that the total commission is built into the listing price of the home -- both the seller's agent's part and the buyer's agent's part. The amount of the commission is a percentage of the sale, and it's one of the terms in the contract signed by the seller and their agent.

So in the scenario you mentioned above, where you don't have an agent, the seller's agent would collect the entire commission, and there is no room for you to negotiate a reduced commission, because the agreement has already been signed and the terms aren't up to you.

For those who weren't paying attention, this also means you don't directly pay your buyer's agent. Their fee is worked into the price you agree to pay on the home.

So it's not necessarily true that working with a buyer's agent will get you the best deal on any given home. There's a conflict of interest built into any agent's job description because the more you pay, the higher their commission. (This is probably why you're not required to be represented by an agent.)

They can advise you about what they think a given home is worth, and they can show you research and comparables to back up their advice, but you are ultimately the one who will come up with the dollar figure quoted in the offer.

So what is a buyer's agent for, if not to negotiate the best price for you?

They can easily locate -- and schedule viewings of -- all the homes on the market that fit your criteria. (This used to be harder for non-realtors to do, before MLS listings were available online.) They still may find out about new listings before they become available.

They pay close attention to the real estate market over time, and can offer insights into trends you might not pick up on. "I think this neighborhood is on its way up."

The good ones know things like "houses on this block tend to sell for a bit more than the ones in that block because the school district cut-off line is right here" or "most of the roofs in this neighborhood still have asbestos, so look closely for water spots".

They the can help negotiate the (non-financial) terms of the sale, advise on vendors for inspections, and basically guide you through the excruciating escrow process.

Keep in mind that when someone becomes a licensed real estate agent (at least in California) they can act as both a seller's agent and a buyer's. It's the same profession, the same job.

IMO, the biggest reason for the average home-buyer to use a buyer's agent would be to help them find the right home.

So I definitely understand the seller's agent's point about not wanting to share the commission when you found the home yourself, and he showed it to you. The faux pas isn't that you saw a place while you were unrepresented; it's that you want to change the situation after (in his eyes) the selling process is already under way.

FWIW, I didn't use a buyer's agent, and it ended up being a good thing. There were multiple offers (for the same $$) on the home I bought, and the seller's agent guided the seller to accept mine because he stood to get both sides of the commission.
posted by nadise at 7:57 PM on October 9, 2006

Thanks for all these helpful answers.

The AEI-Heritage article is very interesting. It's really eye-opening about how bizarre the real estate broker/agent system is in the U.S. It makes me wonder whether it's even worth bothering getting an agent who advertises him/herself as "buyer's agent."

On the other hand, I do lean toward the view that an agent of some kind is a necessary evil.
posted by jayder at 6:39 AM on October 10, 2006

There is a difference between buyer agents who work both with sellers and buyers and those who work with buyers exclusively. If you want a real buyer's agent, one who takes their fiduciary duty to you seriously, look for an Exclusive Buyer's Agent. Otherwise, your agent may say she's a buyer's agent, but not really know what it means to protect you and you may end up experiencing a lot of the shenanigans expressed in this thread. The National Association of Exclusive Buyer's Agents is a good place to look for one. EBAs take their duties to buyers very seriously and will work hard to save you money, not just on the purchase, but on mortgages and insurance and so forth.

I am an exclusive buyer's agent, and I have seen a lot of shady stuff from traditional agents calling themselves buyer's agents. They generally just do all the sneaky stuff they used to do with buyers - they just call themselves "buyer's agents" now to make the buyers feel better. There is also the problem of dual agency and conflicts of interest when you work with a non-exclusive buyer's agent. They may be bound to keep certain information about properties from you because they have to protect other seller clients. With an EBA, you never have that problem - they're always on the buyer's side.

A contract with a non-exclusive buyer's agent protects you somewhat - at least you can sue them if they act improperly, but if you really want someone in your corner, find an exclusive buyer's agent.
posted by agentmitten at 6:43 AM on October 10, 2006

I'm curious about what it is you think a buyer's agent will do for you that a good real estate attorney (which you need anyway) won't do.

What happened last time?
posted by Caviar at 7:19 AM on October 10, 2006

agentmitten --

That's exactly what I want, an exclusive buyer's agent. When I said, in my question, that we want a buyer's agent, that's really what I meant, though I wasn't sure of the terminology.

Caviar --

My perception, perhaps wrong, is that a real-estate attorney's role would be more limited than we need. We need someone who knows the neighborhoods around here, what's a good value compared to other available properties, and who is willing to negotiate a good price. That's all.

You ask what happened last time. We had just a regular real estate agent, without a contract for her to represent us exclusively, and it appeared that she was trying to shove the sale through no matter what. For example, she discouraged us from getting the home inspected. When I insisted upon getting a home inspection, she recommended the home be inspected by the listing agent's husband! The inspector we ended up hiring, on our own, found some stuff wrong with the house, and he took us aside later and said that the agent hinted to him --- prior to my wife and I arriving at the house to tour it with the inspector while the agent was there --- that he was in danger of making the sale fall through. For financial reasons it's not important to go through here, my wife and I were in a hurry to buy the house, it was our first home purchase, and we were not very savvy the first time through.

The thing that is so puzzling, for an inexperienced home-buyer, is that you can call up an agent (as we did with the lady we bought our first house with) and tell them you want to buy a house, and they will act like they represent you throughout the sale--conveying offers to the other side, "negotiating," etc. But if my research is correct, unless you have a contract with them for exclusive representation, even an agent who acts like they represent you really has a fiduciary duty to the property seller, not to you. Am I correct?
posted by jayder at 10:24 AM on October 10, 2006

agentmitten --

As an Exclusive Buyer's Agent, how are you compensated? Is it still a percentage of the sale price? Or some other agreed compensation?
posted by jayder at 10:33 AM on October 10, 2006

(1) Does the fact that we discovered the home ourselves, without an agent, mean that any agent we may ultimately get would not have a claim to part of the 6% commission on houses we discovered ourselves?

Nope. He still gets the half. it will be quite worth it for the contract writing, inspection wrangling, closing negotiations, etc.

(2) What provides a buyer's agent with an incentive to get you the best deal, when they presumably are paid just like any other agent

Repeat business only. You can (in many states) offer to give bonuses, but those are hard to do in a way that really benefits you either.

--Michael
posted by gte910h at 3:08 PM on October 10, 2006

If you're not necessarily sold on that one house and want to look around a bit, then a good buyer's agent can make that happen a lot more easily than you can on your own. We saw 32 (!) houses before we picked the one we did. We never could have managed it without our agent setting up the appointments. She also referred us to a top-notch home inspector and a moving company.

Good luck!
posted by CoffeeCake at 7:39 PM on October 16, 2006