Your Agent's Commission

by Osman Parvez

The other day, I posted an article I found on buyers who don't want an agent. Written by a consumer advocate, it was a look at some of the benefits of a having a buyers agent. It also looked at common misconceptions.

The comments I received have been great. Given the length of my last response, I'm elevating the dialogue to full post status.

Anonymous comment:

"In this region of Colorado, the vast majority of sellers offer 2.8% to the buyer's agent as a matter of course."

Why on earth would anyone listen to an buyer agent that is incentivized to maximize the sale price?

Until there is a defined incentive for the agent to get the lowest price possible, buyers are going to continue to migrate away from agents."

My response:


You're right to look at how your agent is compensated but you've reached a common misconception of how agents work.

The reality is that even the most aggressive negotiation makes a small difference to the overall commission for an agent. If you've worked with buyers for a while, you'd probably realize it doesn't tend to work the way you probably think it does.

Let's say you are getting serious. You're 2-3 months from making a decision, and it's time to start scheduling showings. You ask your agent to start finding you houses in a price range and location that you've specified.

So your agent starts sending you listings. Before setting up showings, your agent should also review homes you like and help you narrow the selections. If they're good, they'll point out homes that are close to busy roads, have undesirable features, or perhaps other flaws that you might not want to live with.

As your agent shows you homes, a good one will also refer you to a handful of select lenders to connect with so you can get a letter of qualification as well as a ball park sense of where you stand financially.

If your agent is trying to steer you towards higher price points, it will be pretty obvious. Just be sure to not confuse that with the reality of the market. Sometimes there simply aren't any homes at a price range that matches the features and location you want. A big part of a what a good agent does is educate the buyer on the market.

Worried you're getting duped? You can always search for listings yourself on the Internet. You can also get a very good sense of prices and inventory by looking at market statistics, such as my regular monthly updates.

If you're still concerned with the commission encouraging your agent in the wrong direction, structure the terms of the contract to minimize the impact. There's an infinite number of ways to do that in a fair way. Stepped commission structures, prepaid services, or even a negotiated flat commission come to mind.

Ultimately, the most important thing you can do is to pick your agent carefully. Find one who puts a priority on integrity, has substantial experience, and who won't compromise on working for you. Picking your agent because they share your ethnic heritage, because you happened to see their number on a park bench, or because it's an acquaintance/friend is the wrong approach. Whether you are buying or selling, you should research and interview several agents before making a decision on who you'll work with. Choosing the wrong agent is one of the biggest mistakes people make in real estate.

If the working relationship doesn't feel right, fire them and get a better agent. If you decide to do it yourself because you can do better on your own, go for it. More power to you. Just keep in mind there's a reason most self made millionaires didn't get there by being "do it themselfers." Specialized professionals in all fields know their business and the only way to do better is to become a professional in that area of expertise yourself. Most people eventually learn it's better to do due diligence on the professional than spend the years necessary to become an expert yourself.

Personally, I think it's better to focus spare time and energy, if you have any, on your own area of professional expertise, pursuing your passions, or with friends and family.

By the way, for a great book the benefits of using other professionals to get ahead, check out The Millionaire Mind. It's not a real estate book, it's an in depth and scientific look at how self made millionaires got that way. The findings might surprise you.

Image: Scoobymoo

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

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This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.