If you’re buying or selling a home, you need to know how the professionals who will be helping you earn their living. What functions do they perform (or fail to perform)? How do they get paid?
If you don’t know how the real estate industry works — at least at a basic level — you could end up wasting money and time.
I’m not going to get too deep into nitty-gritty here. I am, however, going to give you the foundational knowledge you need to leverage your relationship with your real estate agent, focusing particular attention on buyer’s agents.
How a Real Estate Agent Gets Paid
Let’s start with a hypothetical. Say you own a house. You want to sell the house and don’t know how to do that. You’ve heard you need a real estate agent.[note]Most people call all real estate agents “realtors.” That’s incorrect. Every state licenses people as real estate agents (or real estate “salespersons” or “real estate brokers”). But to be a REALTOR® (notice the all caps and the little circle R thing?), an agent has to pay money to join a private organization, the National Association of REALTORS®. So it’s a state-issued license vs. a private organization thing. Except that most agents who buy and sell houses do in fact join NAR. (No, I don’t know why REALTOR® is in all caps and, no, people don’t always capitalize it.)[/note]
So now you face the daunting task of selecting your agent. Since real estate agents are about as plentiful as air molecules, you will naturally know about ten of them really well. What most people do is decide which of their real estate agent friends would be the most personally insulted and/or heartbroken if they didn’t use him to sell their house, and they’ll hire that one. Don’t be that way. (More on this later.) But you do need to hire an agent.[note]Ok, technically you don’t have to hire an agent. However, every time an acquaintance says to me something like, “What’s the point of an agent? You guys don’t do anything,” I ask him to consider — hypothetically — selling his own house. We talk about listing it, marketing it, working open houses, networking with other agents, understanding the purchase contract, evaluating and countering offers, the escrow process and its myriad regulations, title insurance, and several other factors. “Do you plan on doing all that yourself?” I ask. Invariably, the answer is, “Oh no, I don’t have time for all that.” So, yeah, you need an agent.[/note]
The agent you hire to sell your home is known variously as a “list agent”, “listing agent”, or “seller’s agent.”
When your agent comes to your home to do a walk-through, he’ll bring some paperwork for you to sign where you promise to pay him 6% of your sale price when you transfer ownership of your home to the buyer. It doesn’t have to be 6%, but that’s pretty standard.
Your agent will then put your house and some details about it into the MLS system.[note]”MLS” stands for Multiple Listing Service. This is a database created locally by REALTORS®. MLSs are limited to a certain geographic scope and can be operated as for-profit or as nonprofit entities. They also vary in their data points collected, their policies for sharing data, and their reliability.
Pretty much all internet sites like Zillow and Realtor.com pull from hundreds of local MLSs in order to present what appears to be a uniform set of data about homes for sale. However, because interfacing with so many different entities presents some real challenges, you’ll see some misleading or wonky info on these sites sometimes. I get strange calls from Zillow leads quite often.[/note]
The MLS will have a least two different sets of info, one for the public and one for agents only. In the agents-only section, your agent will offer compensation to buyers’ agents for bringing a buyer to the deal. Usually, your agent will offer half of his 6% — so 3% — to the buyer’s agent. Notice something important here for buyers:
Buyers do not pay their agents directly.
Buyer agents are paid, indirectly, by the seller and only when the transaction closes.[note]Also note that some agents work in a dual agent capacity. This happens when the list agent also brings in the buyer and then represents both parties. When an agent does that, it’s fine, so long as you recognize a few things. First, the agent can only facilitate the transaction and cannot further advise either party on strategy or pricing. This diminishes the advisor role that an agent typically has. Second, just because an agent is a dual agent doesn’t mean the parties don’t get as much value. Oftentimes, the speed and efficiency gained delivers substantial value to both parties. Third, the agent is now getting the whole commission, which is great for the agent. But you should be aware that this also could skew the agent’s motivations and the quality of his guidance. See below for more about how to find the right agent.[/note] This has major implications for buyers. Failing to understand its importance is the single most value-destroying mistake I see buyers make, and they do it all the time.
Implication 1: Hire your buyer’s agent early.
A buyer’s agent is supposed to help you discover your own preferences, find the right property, negotiate and prepare your purchase contract, coordinate the (usually) months-long transaction, and generally quarterback the whole schmear.
If you decide you want to spend hours online researching homes, and then spend weeks going to open houses, and then, when you’re ready to buy a home, hire an agent just to write the offer, that’s fine. You can do that. But there’s no reason to.
Why not have your agent help you narrow your search and save you time and effort? That’s what a buyer’s agent does.
Implication 2: Your buyer’s agents interests may diverge from yours.
Agents aren’t really supposed to talk about this one. A buyer’s agent gets paid only when a deal closes. In most cases this works in your interest because your agent will be trying to get you into the house that you want.
However, it can result in some glossing over of problems or — sometimes — some fudging on the part of your agent. This is why it is critical that you pay close attention to Implication 1, above, and hire your agent early. By hiring him early, you’ll have time to gauge your agent’s attitude and personality to see whether he’s pressuring you to BUY NOW! or whether he’s working on your time-table and in your interest.
And that leads us to…
Implication 3: Find your agent before you look for homes.
If you focus your homebuying efforts on finding the right agent, you’ll be able to discover whether your agent will put your interests above his own. My personal experience as a homebuyer who has hired several agents, later as a lawyer who worked with several agents, and now as an agent myself, is that this is often the trickiest part of a real estate transaction.
Some agents take a pushy sales-y approach with their clients. Some don’t really understand what they are doing.[note]This happens. It can be scary. And frustrating. And very costly.[/note] Some are cheesy.
But some conduct themselves as close advisors to their clients should. They listen to their clients, guide them to a property that fits them, and protects their interests all the way through a transaction.
How to Hire a Real Estate Agent
Rule number 1 for retaining the right real estate agent:
Do not hire Aunty or Uncle!
Ok, if Aunty or Uncle knows what they’re doing and meets all of the criteria we’re about to discuss (and some do), then that’s one thing. But if you’re hiring Aunty as your agent simply because she’s your aunty, you’re doing her a favor but not doing one for yourself.
So what should you do?
Decide Your Criteria Upfront
Before going online to search for homes — which is where most people start — sit down and think about how you’re going to buy whatever home you find. In almost all cases, you will need two main people to help you right from the beginning: a buyer’s agent and a loan officer.
Start with a buyer’s agent because he can evaluate your situation and guide you to the most fitting loan officer. Here are some of the qualities to look for in your buyer’s agent:
This breaks down into a couple of subcategories. Numbers, for example. Your agent should be able to get hold of and analyze the market numbers: houses sold, average (or median) price in the area, the price of a particular home relative to the comparables, etc. More importantly, he should be able to tell you what those numbers mean.
Your agent should understand Contracts. Few real estate agents are lawyers,[note]…and in Hawaii, your real estate agent probably should not also be your lawyer on the same transaction.[/note] but they need to have a basic understanding of what the purchase contract says and means. An agent needs to know the implications of submitting a counter offer a day after the expiration of the previous offer, for example. He should be able to protect you from costly mistakes and, importantly, should be able to write an offer in such a way that a seller sees it favorably when compared to other offers.
A good agent should understand and be able to explain to you the Process of buying a home. What does escrow mean? What is title insurance and why do I need it? What are CC&Rs and bylaws and deeds and disclosures?
A proper agent will actively develop an extensive network of loan officers (lenders), escrow officers, home inspectors, surveyors, contractors, attorneys, and of course other real estate agents. Not every agent is going to know everyone else, but a good agent will know enough people that he’ll be able to help you find other professionals as you need them.
Most people buy homes infrequently. Some — especially first time homebuyers — may not really understand what they want in a home. For almost all buyers, the home will end up being their biggest investment.
Because of these realities, your buyer’s agent should act as a close advisor to you during the home-buying process. Sometimes this means that your agent will help you to discover your own preferences. Sometimes it will mean talking you down from buying that extra big place to one that will be more affordable and fits with your financial goals.
Other times it means working fast and furious when that ideal home hits the market to get you in there ahead of others and making sure you submit the most competitive bid.
Most of all, your buyer’s agent should put your interests first.
Find the Right Agent
Very often first-time buyers find their agent on the internet. There’s nothing wrong with this. However, at the very least, make sure the agent has a few positive reviews on Zillow, Trulia, Realtor.com, or another real estate site. Take time to read the reviews. Look for specifics. For example, a review that reads “My agent was great!” isn’t all that informative. One that reads, “My agent educated me, guided me based on my own preferences (not his), was punctual, was knowledgeable, and saved me money,” tells you quite a lot about the agent’s qualities.
Experienced home buyers tend to find their agent via their personal referral network. They’ll ask their friends who they used. I encourage you to go beyond the usual, however. Again, look for specifics. How did the agent add value? Was the agent knowledgeable? Did the agent demonstrate negotiating skill? How frequently did the agent communicate with the client? How many agents did the client evaluate prior to hiring? What criteria did they use?
By putting in some due diligence during your agent search, you’ll find out whether the particular agents tend to tick some boxes and call it a day or work hard and deliver value in a professional manner.
When you’ve read a few agent reviews or gotten a few personal referrals, call the agents on your list. Ask them loads of questions. Get to know them to see whether (a) they meet all or most of your criteria and (b) their personality fits with yours.
Buyer’s agents know that they need to be able to build trust very quickly in order to turn a prospect into a client. Give a couple of them the chance to do so, and you’ll rapidly realize that there’s quite a broad range of personalities, competencies, and styles among agents.
Pick the one that’s right for you, and put him to work!