When buying a property, is your agent's incentive contrary to yours?

Question

My understanding is that buyers agents are typically paid half the overall commission of a property sale, which itself is some percentage of the sale price.

That means that as the sale price goes up, so does the commission the seller's agent. This makes sense, and aligns their incentives to find the highest price for the sellers.

But the buyer has the opposite desire, to get the lowest sale price. I would have expected for the buyer's agent's commission to work in a way that rewards good negotiation and getting a low sale price, but it appears to be the exact opposite. The higher the sale price, the more they get paid, just like the seller's agent.

Is my analysis correct?

Answer 1

You're correct, but it's actually bad on both ends with the commonly accepted approach. The incentive for both agents to get the highest possible price is outweighed by the incentive to do as little work as possible to sell houses quickly. Doing extra work to sell a house for an extra $10k means a paltry $300 extra commission (standard 3% for each agent). For the average realtor it's far more lucrative on both sides to be involved in more transactions each year.

A potential exception could be in the case of high-end real estate. For example, some high net worth individuals would have no issue buying a $25M house instead of a $15M house, so a buyer's agent's efforts to push clients to a more expensive house could be worthwhile. For sellers it can be hard to determine fair-market value on very expensive houses since they aren't easy to compare and don't sell often, so perhaps a seller's agent could put in more work and have it be worthwhile.

Convincing sellers to list below market to get lots of offers can mean selling houses faster with less work. Likewise buyers agents can cut time spent by encouraging high offers/escalation clauses and trying to convince people a home is right for them. Many people want to sell/buy quickly, so they aren't necessarily being done a disservice.

Realtors have a responsibility to look out for their client's best interest to some extent. Most that I've worked with seem to take that seriously, but there's still awkward incentives in the standard commission model.

Answer 2

The main incentive of the buyer's agent is to get you to buy something as quickly as possible.

They do not have much incentive to help you buy a property that meets your needs or to get you a low price.

In my experience, a buyer's agent does not add much value, and your best option is to use an agent that shares the commission with you (like RedFin).

Answer 3

One comment I have not seen posted yet -- I would argue that as a buyer's agent, among the most valuable things is remaining on your good side so that in the future when you are moving, you will choose them again to act as your seller's agent. Thusly, it is worth taking a little longer to work with you as a buyer to remain on your good side so that they not only get the buyer's commission today, but a seller's commission some future date.

Answer 4

Assuming you're not interested in (or able to afford) a wide range of prices above what you're looking for, this conflict of interest is minimized. This is because the buyer's agent (your agent) is not trying to sell a particular property and looking for the highest commission they can get for it. They're trying to arrange for a particular buyer to buy something, and don't get paid until that happens. Sabotaging your attempts to negotiate a price down would likely just result in you not buying the property at all (either because you're unhappy with the outcome, or because you can't) rather than getting them a commission on a higher sale price. It would also hurt their reputation (and in my experience, buyer agents get a lot of business by word of mouth from people who were happy with the outcome).

Answer 5

No... But you have to know the code, song, and dance. They want to help you but they are not looking at you long-term, they are looking at their service to you.

I have worked in real estate, sold houses, and owned multiple homes.

Some advice to handle agents:

• Do what you want. Do your research and set the price where you want it.
• If selling do not let an agent under-value your house unless they are willing to risk their time. What do I mean? If they think they can get a bidding war for your house and think they can get 600k but list it at 550k... Be really clear about your lowest price. Tell "Dan the agent" - that's fine but if I don't get 590k I am pulling it and not accepting anything less. So if you want to list it, de-list and do all of that work know what you are in for.
• Understand the main goal of a buyer's agent. The guys that make the big bucks are negotiators. Not just with the seller but you. So you find a house that is listed at 400k. You think it is worth 365k. You better not for the life of you tell your agent, "Hey Dan, I think its worth 365k but I might go to 380k." That info will get to the sellers agent. They will send a counter of 390k and stick right at 380k even if you don't budge. If you think something is worth 365k, then you tell your agent that's your high even if in your head you will pay more. In this particular case I would say "Dan I would buy this house today for 350k and might go as high as 365k if inspection looks really good. We get that pricing it's a done deal."

If you don't know how to play the game as a buyer or seller you will lose. You have to understand that agent's working with each other are trying to figure out how they can get a deal done and they will use info that you thought was confidential - for sure.

If an agent waivers when I am selling and wants me to negotiate lower... "Dan, let's just move on to another person." "Don't even worry about talking to that person if they are 15k off" "They want it at 580k and I am at 590k, I will go to 589k." Remember if a deal isn't going to get done pull the band-aid. Either the other side concedes or you move on faster and your agent's head clears to selling instead of negotiating.

If an agent waivers when I am buying... Well this is easy. I want something and Dan thinks I should pay more. Right in the middle of negotiation I give Dan 5 new houses I want to go see.

Answer 6

In my experience, many realtors will refuse to deal with your property if you're trying to sell it significantly above the price estimation they give. Quite obviously, they are not trying to maximize their commission from a single deal, because they know such a sale will last forever. They will keep losing money while organizing visits of the property, and having lots of too expensive offers in their listings will hurt their business.

Trying to get a higher commission by increasing the property price is simply not worth it.

Answer 7

In many cases, the commission is split evenly between the buyers and sellers agent. That's not always the case, and there are many transactions where the commission is a set dollar amount. In the Southern California area, the average commission is 4.92%, typically at about 2.5% for each agent.

The buyer's agent has a difficult task. Get the home for the client, at the lowest price. They have to be able to negotiate with both parties figuring out the right dollar amount that will get the buyer the home while not overpaying. The difference in commission is minimal at best.

Take for example a home that's going for 400k. Typically commission breakdown is 2.5% of 400k = $10,000. Take 20% off that goes to the broker (average) and $500 for hard costs (many buyers agents end up spending something out of pocket to help close a deal). That leaves them with $7500. Let's say that house sold for $420k. They'd walk with about $7900. We're talking a few hundred bucks for a $20k difference in home price. I'm not even including the cost of actually doing business, taxes and insurance which knocks about 30-40% off that commission.

The buyer's agent isn't trying to squeeze a few hundred bucks of commission by getting a higher price, they're trying to get you into a home or they don't get paid at all. They're also trying to make sure you are happy, and will refer you to others. Something like 75% of a real estate agents business will typically come from referrals and word of mouth.

The real issue, is when you use the same person for buying and selling. Dual agency is legal in many places, but it's an ethical gray area for sure. You are basically negotiating with yourself and have all the information.

Answer 8

You would think that an estate agent would try to maximise their commission. But they don’t actually, they try to maximise their commission they get per week. If they can spend two days to get commission on a $300,000 sale or three days on a $325,000 sale, the two day sale is much better for them. It’s in their interest to do the sale with the least effort, while keeping their client happy so they will get recommended to the next client.

Answer 9

The agent is paid a commission, based on the final sale price of the property. Negotiation of that price and the terms of the sale is between the seller and buyer and any financing organization involved. The incentive that exists for the agent is in getting a higher price for the seller; hence a higher commission. However, there are laws in place to protect the buyer from being taken by an agent and the buyer doesn't have to buy if the seller's asking price is too high. There are also appraisals and fair market value guidelines; so the agents motivation is a relatively moot point.