The Role of a Real Estate Agent

Shopping for a new home is fun, and most first-time buyers enjoy their search for a new home. Regardless of whether you plan to buy a newly built home or a resale, a real estate agent can prove to be very worthwhile.

Before you start looking, create your "wish list" of everything you want in your new home. Decide what you want in the way of:

  • price range;
  • location: either for a particular part of town or proximity to work, schools, shopping, recreation, medical/rescue facilities, or family and friends;
  • structure: condo, townhouse, single-family, or farm;
  • style: ranch, Cape Cod, Tudor, Colonial, split-level, traditional, or contemporary;
  • features: number of bedrooms, baths, first-floor master bedroom, washer/dryer, and other layout specifications; and
  • amenities: circular driveway, side-load garage, deck, fireplace, security system, and other items.

Once you develop your wish list, you have a choice: You can spend months visiting every home listed, or you can let a real estate agent do all the legwork for you. The vast majority of home sellers work with agents, and consequently, their homes are listed in the Multiple Listing Service, an electronic showplace of every home for sale in your area. Through the MLS, your agent can quickly identify homes that meet your criteria and arrange convenient times with the sellers for you to visit and inspect the properties. Your agent can also send pictures and other details about properties that match your criteria, which you can review before deciding to visit the property.

In addition to identifying specific homes, real estate agents are a great source of information on the community and comparable prices. But the most important service they provide, once you find a home you want to buy, is presenting your offer to the seller.

As you'll soon discover, home buyers find themselves involved with a great many people, including lawyers, appraisers, mortgage companies, settlement companies, termite inspectors, home inspectors, and others, and your agent can refer you to qualified individuals and companies to help you through the entire process.

Who Does the Real Estate Agent Represent?

When working with a real estate agent to help you buy a home, be aware of one critical point: In many states, the agent you hire works for the seller and anything you say to the real estate agent will be communicated to the seller. This is true even if you found the real estate agent, even if the agent shows you dozens of houses, gives you lots of advice, and spends lots of time with you — even if the agent has never met the seller before. Real estate agents in such states always legally represent the seller, and saying something to the real estate agent is the same as saying it to the seller.

Most home buyers do not realize real estate agents legally represent sellers, and consequently, hundreds of thousands of home buyers pay more than they should for their homes because they lack representation in the negotiation process. In fact, not only do they lack representation, the person they think is on their side actually is a spy for the other team!

Think about it: You find and retain a real estate agent, as does the home's seller. Once negotiations begin, your real estate agent and the seller's real estate agent start negotiating. You think your real estate agent is negotiating with your best interests in mind, but the truth is your real estate agent doesn't work for you — he or she works for the seller! So, both real estate agents are teaming up against you, trying to figure out how much they can get you to pay for the benefit of their mutual client, the seller!

Too often, buyers fail to understand this legal relationship.

Working with a Buyer-Broker

You can avoid this problem by hiring a "buyer-broker." Under this arrangement, you and your real estate agent sign an agreement stating that your real estate agent legally represents you, the buyer. Many agents will agree to such an arrangement, and I strongly recommend it when you are on the buy-side of the transaction.

Some agents, depending on who their client is, sometimes will represent the buyer, and at other times, the seller. Working with such agents is fine provided you know what team each player is on at the time.

Who Pays the Real Estate Agent?

Whether you work with a traditional agent or a buyer-broker, real estate commissions — typically 6% of the sales price — are paid by the seller.

I mean, buyer.

Uh, let's try that again.

While it's true that the seller pays the agent's commission, let's face it: The seller would pay nothing to the agent if there's no buyer. Further, the amount of the commission is directly related to the sales price of the home: The higher the sales price, the higher the agent's commission. Since sellers know they are going to pay 6% to the selling agent (who will share it with the buying agent), sellers simply inflate their asking price by 6% to cover this cost. Thus, while agents get their commissions from sellers, it's really the buyers who pay for it.

In fact, "avoiding the commission" is the only reason people cite for wanting to avoid real estate agents. By skipping the agent, people think a given house will cost 6% less. Indeed, on a $200,000 house, that's $12,000 — a lot of money!

But it's unlikely you'll ever see the savings. Why? Because the seller already has an agent and their agreement entitles the agent to a 6% commission. If as a buyer you fail to retain your own agent, the selling agent's commission isn't cut to 3% — they just keep the entire 6% for themselves! So don't think you (the buyer) will save money by not hiring an agent. The commission is built into the price of the home whether you have an agent or not.

And I'll bet hiring a real estate agent — a good one — actually will save you money. They'll apply all their years of experience, salesmanship, and negotiating skills to convince the seller to lower the sales price, perhaps even more than the 6% you were trying to save on your own. A good real estate agent, for example, even may be able to convince the seller to pay some of the points and settlement costs for you.

If you are serious about buying a house, don't worry about wasting an agent's time. Most buyers inspect 20 to 30 homes before they buy, but can see only 6–10 in a day. That means you're going to spend at least two or three days with your real estate agent. Don't worry about all the time you're taking, for that's why agents get paid.

By the same token, if you're not serious about buying a house, please be considerate of the agent's time; if he's spending Saturday with you, he's not spending it with someone else — and time is money. Spend as much of the agent's time as you need to find the place you want, but only if you're serious.

Should You Hire A Real Estate Agent to Sell Your Home?

I know a great real estate agent you should hire. He's very enthusiastic and well-intentioned. He's also completely honest and trustworthy, and he really wants to do a great job for you.

On the other hand, he has never sold a house before. He has never taken a real estate course, does not hold a real estate license, and knows nothing about real estate law. He has no background in sales or marketing and doesn't know anyone in the real estate business. He does not know how to find prospective buyers (although he's confident that won't be a problem), and he admits to being completely unfamiliar with the elements of negotiating a real estate contract — in fact, he's never even drafted a real estate contract. He does not have access to the Multiple Listing Service (he's not even sure what that is or what it offers) and he knows nobody in the mortgage, title settlement, or related fields, nor does he know anything about those businesses.

But like I said, this guy is honest, motivated, and wants to do a great job for you. Oh, and best of all, he's free.

Would you hire him?

No, of course not. It's obvious why such a person is willing to work for free: Nobody would ever think of paying him! Yet, if you're planning to sell your home on your own, without the benefits of a real estate agent, this is exactly who you are hiring: You're hiring yourself.

No other person would hire you to sell their home, so why are you hiring yourself to sell yours? Admit it: The only reason is because you want to save the 6% commission that real estate agents charge. Get over it. Hire the real estate agent and move on.

Even if you were paying the commission (rather than the buyer), I can give you three reasons that make the cost worthwhile:

  • A real estate agent is likely to get a higher price for your home than you will on your own because the sales price is determined by negotiation, and real estate agents are experts at contract negotiation;
  • Buyers will say things to a real estate agent that they won't say to the seller, and the agent can use this information to your advantage; and
  • The buyer is likely to be represented by a real estate agent. Do you want to negotiate alone?

Online Brokerage Firms

One way people try to avoid paying a full commission is by using online real estate brokerage firms to buy or sell a home.

Online brokers can do everything from providing a few services a la carte, for instance conducting negotiations or handling paperwork, to providing more comprehensive services similar to a full-service agent. The difference is that instead of face-to-face meetings, these transactions are conducted mostly over the phone and the Internet, and you often end up doing more of the work yourself. For instance, as a home buyer, you might look for properties yourself; your online agent might then arrange for you to see properties, but would not go with you. On the seller side, you might choose to do your own marketing or host your own open houses.

The benefit of this arrangement is a lower cost. Some sites charge a flat-rate fee while others offer a portion of their commission as a rebate (or a combination of both). However, some states require that agents provide certain minimum levels of service and others prohibit rebates.

Due to the extra work involved, and because you don't know what you don't know, this choice is not ideal for most people.

Originally published in The Truth About Money

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