On the other hand, they are consultants. They advise buyers and sellers throughout the deal process, ideally giving their clients advice that is disinterested from their own financial outcome.
Often, these two objectives are aligned and there is no issue. For example, a listing agent makes more money if he is able to sell a house for a higher amount. However, there are many situations where the right advice for a client is not aligned with the agent’s monetary incentives. For example, a buyer’s agent makes more money when his buyers buy a house for a higher amount.
The majority of successful real estate agents are true professionals who take the long view. Their advice is in their clients’ best interests. Some agents go further by being fully transparent when conflicts arise (which they often do) and make certain any conflicts are fully disclosed to their clients.
So how do you know your agent is doing the right thing and giving you the best advice? Here are 11 things that your agent should be telling (or asking) you:
• Stay put: From a purely financial perspective, you want to move in life as few times as possible. Let’s face it, moving is expensive. Once you add up the transaction fees, costs of moving, costs to furnish your new place, etc., it’s a lot of money. Further, in the early years of paying off an amortized mortgage, your monthly payment goes mostly to interest. As you hold the mortgage longer, your payments increasingly go to paying principal. Staying put is a great forced savings tool.
• More house, more problems: As a buyer, you should try to find the most modest home that will make you (and your family) happy. The larger the home you own, the more expenses and headaches you will have. Whether you are looking to buy a two-bedroom, salt-box house or a 6,000-square-foot, five-bedroom home, one key question you should be considering is whether the house is too big for your current and future needs.
• Your home is not an investment: A very common question our buyer clients ask us is whether a particular house is a good investment. We subscribe to the Robert Kiyosaki (author of “Rich Dad, Poor Dad”) way of thinking and tell our buyers not to consider their home an investment. An investment should generate cash flow. A home does the opposite — it sucks up cash. And the larger the home, the more expenses it will generate: more taxes, more maintenance, and more money to furnish it, clean it, etc.
• When buying, think long term: If the time horizon is long enough, almost all real estate will appreciate in value. The problem is, the real estate market is cyclical and no one knows when the peaks and valleys will occur. If your time horizon is too short, the likelihood of your getting caught in a down period increases. The longer you can anticipate living and being happy in the home you are purchasing, the safer it will be.
When you are buying, don’t only think of your needs today; think of how they might change. If you have teenage kids about to go off to college, will you really want the big house with all the bedrooms and the big yard? As a general rule of thumb, if you are going to be in the house less than three years, it’s probably best for you to rent. If you’ll be there more than five years, then you probably should purchase. If it’s 10 or more years, then you certainly should be purchasing. Three to five years is the gray area.
• Selling your home “privately” can be costly: There is a huge financial incentive for a listing agent to sell a home without another agent’s involvement. If the listing agent can pull it off, she stands to make the full commission (instead of sharing it with the buyer agent/broker). There are many techniques that agents have developed that heighten the chance that they sell it themselves.
The most prevalent (and notorious) is the “private exclusive” listing in which the listing agent tells her clients she will market the listing privately (note: “privately market” is an oxymoron) for some period of time. If the listing agent is unsuccessful, then, as the strategy goes, “no harm, no foul;” the agent will then put the property in the multi-listing service and expose it to all buyers and agents. Another form of this is the long “coming soon” listing.
• Why?: Perhaps the most important question an agent can ask a buyer or seller is why? Truly understanding the motivations behind a decision will help make sure that a move is the right course of action. Your agent should want to know if it is a push or pull situation. In other words, is something driving the buyers out of their current living situation (for instance, lease expiring, growing out of current house).
Or is there something that the buyer wants in a different area ( a job transfer, change of commute)? Sometimes, the answer to the why question has nothing at all to do with real estate. For instance, if owners are moving because they are “unhappy” in their current home, the agent should ask if something could be done to the home to solve their issue. If you are moving because you think a new home will fix all your problems, you should reassess. One thing we’ve learned: A great house won’t fix an unhappy marriage.
• A “great deal” and a “great house” are almost always mutually exclusive: One of the key attributes of a buyer agent is his ability to negotiate. Coupled with that is that buyers want to get the best deal they can. The truth of the matter is that the better a home is, the less negotiating leverage buyers will have. Too many buyers pass on a great home because they are not able get the discount they were hoping to get, only to end up purchasing an inferior property later.
• Will this house hold its value? Most buyers ask this question when purchasing a house. It is a great question to ask. First, you want to consider neighborhood catalysts. Are any major employers moving in or out of the area? Are there any other changes happening (new developments, transportation routes, etc.)? Second, with respect to the house itself, if the house appeals to you, then it most likely will appeal to another buyer when it’s your turn to sell. If your needs/wants are more mainstream, then you will likely have a larger pool of buyers. If your needs/wants are more custom, then you should be prepared to have a harder time to sell when it’s your turn.
• The great deal you think you are getting might not be that great: There are two unique things about real estate. One is that the price you pay for a property is public record. The second thing is that the market assumes you paid the fair market value. So even when you think you are getting a great deal in your purchase price, when it’s your turn to sell, your prospective buyer will benchmark the value off what you paid for it. So whatever reason there may have been for you getting such a good deal (e.g., motivated seller, you are a skilled negotiator, etc), your buyer will want to capture that discount in his purchase, too.
• Liquidity: An important factor to consider with any real estate purchase is time. In other words, how long will it take to sell the property when it’s your turn to sell? The more desirable a property is, the more liquid it is. The time to consider liquidity of a home is before you purchase it. If a home has been on the market for a long time in a hot market, it could be almost impossible to sell in a soft one.
• Your kid is ugly: A key requirement of a consultant’s job is to be completely honest with a client. When advising sellers how to prepare their home for sale, it can be a very delicate conversation. Owners are often extremely emotionally attached to their homes and their stuff. It can be extremely difficult to tell an owner that something in the home is a major detractor and will negatively affect the value. Your agent is doing you a disservice by not being fully upfront with you.
Catch up with Steve and Hans’s previous columns: