How to Reduce the Conflicts of Interest in the Real Estate Industry

Whether you are a home buyer or a home seller, when you work with a residential real estate agent, you are subjected to two conflicts of interest. One of these is inherent in the relationship itself, while the other is borne out of the customs and traditions in the real estate industry. And if you are not aware of them, and you do not know how to deal with them, it could cost you thousands of dollars.

Conflict

The first of these conflicts of interest, which is inherent in any relationship where you rely on a professional for advice, is called the Principal-Agent Problem. This problem is just as prevalent with medical doctors and plumbers as it is with real estate agents. The conflict basically comes down to this: when an expert (i.e., the agent) gives you advice, is it in your best interest or their best interest? When a doctor tells you to take a prescription, is it the best course of action for you or is it helping them meet their quota for that drug? When a plumber tells you that you need to have you main line cleaned, is that really true, or does it just pad their bill? And when a real estate agent tells you to lower your home price or take the first offer, is it sage advice, or are they just looking to get a quick commission?

How do you combat the Principal-Agent Problem? There is only one way: education. You have to be (almost) as smart as the agent giving you the advice. And while becoming an expert in any field is unfeasible, the wealth of information available today certainly makes it easier to close the gap. For some issues, like medical and plumbing, you can also seek a second opinion. But this is not really feasible with real estate. That is why, when it comes to buying or selling a home, you must get your own education—especially with regards to home prices—and not rely completely on your agent. It is not that your agent is bad and will intentionally mislead you, it is that they are human and very susceptible to the Principal-Agent Problem.

The other conflict of interest, which is the real estate industry’s own doing, is the all-or-nothing lottery structure of real estate compensation. If your home does not sell as a seller (or you fail to buy a home as a buyer), the agent makes nothing, regardless of how much money they have spent and how much work they have done. But if your home does sell (or you do buy), then they get compensated with a lottery-size payout, which is disproportionately large for the work they have actually done on that particular deal. Of course the agents do need these lottery-size payouts to compensate them for all the work they have done for free with buyers that didn’t buy and sellers that didn’t sell. It does seem unfair that serious, motivated home buyers and sellers end up subsidizing those buyers and sellers that were not really committed.

How do you combat the all-or-nothing conflict of interest? Make it all-or-something. When an agent does work for you as a buyer or seller, they should get paid something whether you go through with the deal or not. Not only does it reduce the conflict of interest, but it is also fair. Nobody should have to work for free.

How would this all-or-something compensation work? Home sellers could offer to pay a non-refundable portion of the commission (perhaps 25%) after the home has been on the market for one week. This would be money the agent keeps whether the home sells or not. If the home ultimately sells, this approach costs the home seller nothing, as it was just a portion of the commission they agreed to pay anyway. But if the home does not sell, then at least the agent made something for their time and money (most of which is spent in the first week).

Home buyers could offer to pay a nominal, refundable payment (perhaps $1000) to buyers agents to show them homes. If they ultimately buy a home through the agent, it costs them nothing as they will get this money back at closing. But if they fail to buy a home, the agent keeps the money (and the buyer is out the money), and in so doing avoids working for free.

The all-or-something approach to agent compensation is not only fair, but it actually reduces the Principal-Agent Problem by getting the agent’s goals more in line with the those of the buyer or seller that has already paid them some money.

Will this all-or-something technique ever take hold? Not if it is left up to the real estate industry. The industry makes too much money the way things are. The only ones who can make this happen are the buyers and the sellers. And that will not happen until they see the benefit in doing it.

To see how ReaListing saves home sellers thousands using the all-or-something technique, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

The One Thing That Would Put and End to “For Sale By Owner”

No home owner sells their own home because they enjoy the process. It is energy draining, time-consuming and can even be dangerous. Letting strangers into your home unvetted and unescorted (by a real estate agent) is not always the smartest idea.

FSBO

To make matters worse, For Sale By Owner (FSBO) is not an ideal way to sell a home. For starters, buyers do not like looking at homes when the seller is there. It can make them feel uncomfortable “kicking the tires.” And, buyers are not dumb. They understand that the seller is saving the real estate commission by selling their own home and they want a share of that savings. Depending on the market conditions, it is not uncommon for buyers of FSBO properties to offer 3-6% less than fair market value, potentially wiping out the financial benefit of doing FSBO.

Nobody sells their own home because they want to. They do it for one reason: because they feel the commission paid to a real estate agent is too high for the service they provide. They do it because 6% of their home’s sale price might be 50% of their home’s equity. And they do it because 6% of their home’s sale price just might put their sale “under water.” And nobody wants to come up with cash to sell their home that goes right into the real estate agent’s pocket.

Ironically, real estate agents hate FSBOs almost as much as home sellers do. Every FSBO home that actually gets sold—for a fair price or not—is one commission the real estate industry will never collect. I do, however, find it interesting that real estate agents often disparage FSBOs, but do not see the role they—and their commission structure—play in their existence.

The good news is there is a way to make the FSBO go by way of the dinosaur: fair, fixed-priced commission. A fair, fixed-price commission is one that is representative of the time spent and value added by the real estate agent to sell the home. It is also reflective of a competitive market for their services and does not depend on the home’s sale price. This is what will put and end to the FSBO: a commission so reasonable nobody would ever consider selling their own home.

To lean how ReaListing is make the FSBO obsolete, click here.

 

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Why You Should Never do a Home Inspection Before You Sell Your Home

Ask one hundred home inspectors if you should get a home inspection before selling your home and one hundred will say yes. Of course their answer does not come without a conflict of interest: they make money if you do one, otherwise they don’t.

Ask one hundred real estate agents if you should get a home inspection before selling your home and fifty (a total guess) will say yes. Their motivation is that if you do the pre-listing home inspection and you fix the items that are potential deal killers, it will make their prospects for selling your home better. What real estate agent doesn’t want to list a flawless home?

tape measure

We are not talking about visually obvious problems with a home. That is not why someone hires a home inspector. If you have a hole in the middle of your living room floor, you do not need an inspector to tell you to fix it. You hire an inspector to find problems that lay people, like most buyers and sellers, could not find just by walking through a home.

Now you see how the inspector benefits from a pre-listing home inspection and you see how the agent benefits. But what’s in it for the seller? Turns out, not much. Actually there are three exceptionally good reasons for a home seller to not do a pre-listing home inspection, all three of which can, unintentionally, cost the home seller thousands of dollars.

It can only scare home buyers away. I recently paid for an inspection of a home I was getting ready to buy. (I strongly recommend buyers get a home inspection.) Other than one or two minor things, the inspector told me it was one of the “cleanest” homes he had ever seen. There was almost nothing wrong with it. So, you can imagine my surprise when I actually went through the home inspection report in fine detail and found fourteen items reported as Deficient. Fourteen! In a problem-free home.

What I have come to learn is that even with a home in really good condition, there are a lot of inspection deficiencies. Many of them are no big deal, just areas where the home does not meet the code. The problem comes when the seller shows this inspection report to a potential buyer. The buyer is not going to look at the report to see what is right with the home, they are going to look for deficiencies. And no matter how perfect the home, there are going to be deficiencies. And each deficiency is just one more reason for the buyer to lower their offer (or not make one  at all).

It is much better to wait until an offer has been made, and the buyer is emotionally attached to the home, before they see it “warts and all.” Plus the buyer has to pay the (approximately) $400 for the inspection.

You must disclose deficiencies to buyers. Real estate law stipulates that you have to disclose, to any potential buyer, problems you know about your home. If the neighbors have an annoying, barking dog, technically you have to disclose that. What you do not have to disclose are problems you know nothing about. By performing a pre-listing home inspection, not only do you now know all the problems in your home, but you are required to tell potential buyers about them. In other words, if you conduct an inspection, you have to turn it over to them for review.

There is nothing wrong with buyers finding out the problems with your home. As I have already mentioned, I strongly suggest home buyers get a home inspection. I just do not see any reason why the home seller should pay for it, especially when they are most vulnerable: before they have an offer in hand.

It can never cost you less, only more. The most important reason of all to never do a pre-listing home inspection is that it can never save you money. It can only cost you money.

Imagine you perform a pre-listing home inspection and find a $10,000 problem with your home. To make your home more sellable you decide to go ahead and spend the money to fix the problem. You are now out $10,400 (don’t forget the inspection fee). How do you get this money back?

Now imagine you do not perform the inspection, what are the possible outcomes?

a)      One possibility is that the buyer waives the inspection contingency. This is not typical, but in a seller’s market like we have today, it does happen. In this case you saved $10,400 by not doing the pre-listing inspection and fixing it.

b)      Another possibility is that the buyer does the inspection, but wants the home so bad, they choose to not make it part of the negotiation, for fear of getting rebuffed. Once again you saved $10,400.

c)      A final possibility is that the buyer does the inspection and insists that you fix it. As the seller, you can choose to say yes, no or let’s split the difference. Even in the worst case scenario, where you agree to pay the full cost of the repair, you will save $400 (the inspection fee).

Could the buyer walk away after they see the $10,000 problem? They could, but if they are willing to walk away when they are already under contract, there is not much chance they would have even made an offer before hand had they known about the problem.

I cannot see any scenario where the home seller benefits from a pre-listing home inspection. If a Realtor or home inspector knows of one, I am all ears. In the meantime, save yourself the trouble and let the buyer pay for the inspection.

To see how ReaListing helps home sellers make more informed decisions, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Three Ways to Protect Yourself from a Lousy Real Estate Agent

Hang around the real estate industry long enough and you are bound to hear horror stories about lousy real estate agents…from other real estate agents. You will hear about bad advice, laziness and violations of their code of conduct. And for sure, they are out there. Why are there so many lousy real estate agents? The problem can be traced back to a single issue: low barriers to entry. It just does not take very much to be able to call yourself a real estate agent.

Blue Barrier

These low barriers to entry have two major consequences. First, there is no minimum level of experience or internship required for real estate agents, like there are for other home service professionals such as plumbers and electricians. Consequently, there are plenty of real estate agents running around trying to “fake it till the make it.” The other consequence of low barriers to entry is that there are just too many damn real estate agents.

According to the State Federation of Medical Boards there are 878,000 doctors in the US. And according to the National Association of Realtors™, there are 997,000 Realtors in the US.  That means that there are more Realtors than doctors, even though there are a lot more sick people than there are home owners.  This over abundance of agents almost guarantees the existence of some pretty marginal performers.

So, when it comes time to selling your home, how do you guard against a lousy real estate agent? There are three things you can do to protect yourself.

Due Diligence. The first thing you must do, even before you meet a potential agent face to face, is to conduct due diligence on them. At the very least you should head over to the Department of Real Estate (DRE) website for your state and conduct a search based on the agent’s license number. This will tell you if there are any complaints registered against them. Another thing you can do is to view their current listings. How do they look? Would you want to buy any of those homes? If the photos of the home are unappealing, then the agent probably is too.

Interview. The second thing you must before you settle on an agent is to interview them. You should have a list of specific questions to ask them to see how they respond to challenging real estate situations. What is even better is to ask the same questions to multiple agents and compare their answers. If their answers to your questions do not put your mind at ease, it is probably wise to avoid using that agent.

Education. The final line of defense against a lousy agent is for you to learn everything you can about the home sales process. You should know about staging, pricing and marketing. The more you know about these subjects, the less chance there is that you will get railroaded into a bad decision by a lousy agent. Realistically, how can you expect to identify a lousy agent if you are in the dark about real estate?

There you have it: the causes, effects and solutions to lousy real estate agents. Do not leave your choice of agent to chance.

To learn how ReaListing helps home sellers avoid lousy real estate agents, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

How the Hell Does this Agent Stay in Business?

Tom Hallen is a real estate agent in a very nice area of Los Angeles. He undoubtedly represents buyers and sellers of homes that can sell for upwards of a million dollars (or more). There are plenty of real estate agents calling on Tom’s neighborhoods, but to my knowledge he is the only one offering to represent a seller for 1% of the home’s sale price. (If you read between the lines, you will also notice that he is willing to represent a buyer for a mere 1.25% of the sale price.)

What Tom is saying in his advertisement above is that he will sell your $700,000 home for only $7,000. My question is, how the hell does Tom stay in business when all the other real estate agents insist that they must make 3% of a home’s sale price to justify their effort? The poor guy must be destitute.

So, I decided to call Tom to see if he was homeless yet. Turns out, he is doing okay. We spoke for a while and he relayed an interesting anecdote to me. He told me that he got his start in business as a stock investor. He recalls trying to make his first $2,000 trade many years ago (before the Internet). Back then the stockbrokers had a stranglehold on information and they charged Tom $400 to make his $2,000 trade. Of course today, investing information has been liberated and it costs less than ten bucks to make a trade.

The real estate industry has gone through the same evolution as the investing industry with one exception: the commissions have not come down. I asked Tom why he thought that was and I found his answer enlightening.

He observed that investing is a (relatively) small dollar transaction and investors do it frequently, so they feel comfortable doing it. But real estate is just the opposite. It is a large dollar transaction and home owners do it infrequently, so they feel very uncomfortable doing it. So, they tend to take what they perceive to be the safer route. He added that most of his clients are investors, who buy and sell homes more often so they are comfortable with the transaction.

The irony of course is that Tom is a full service agent just like the ones who charge 3%. Home sellers are not getting any less service from him, but they think they are, and that is the key.

The the real estate industry has gone out of its way to hoodwink uninformed home sellers into believing they must pay 6% commission to get full service from a top-notch agent to ensure the best results. Nothing could be further from the truth.

The truth is that you can get full service for much less than 6% (as Tom Hallen demonstrates), but more importantly, paying 6% does not guarantee a top-notch agent or a satisfactory home sales experience. The only way to guarantee great home selling results is for the home seller to take it upon themselves to be educated in the process.

In the mean time, most home sellers will blindly bypass Tom’s unbelievable offer of preserving tens of thousands of dollars of their hard-earned home equity for the vague feeling of comfort offered by paying full price for selling their home.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.