You can pay $24,000 in commissions to sell a $400,000 home. For that kind of money, the advice better be good.
A few years ago, a friend of mine decided to take the plunge and buy her first condo. She asked me to accompany her to what looked like the perfect find. It was just $324,000, and it seemed to have it all: it was big and beautiful, close to transit, and it had a remarkable view—until you looked down. That’s when I saw the pair of train tracks. “Doesn’t it get loud when trains pass by?” I asked. Without missing a beat the realtor retorted: “It’ll be fine—just don’t open the windows.”
That’s not the answer you want to hear from the person you just hired to help you make the largest financial decision of your life, and it points to a larger problem: there are a lot of really bad realtors out there. Sure, there are a lot of good ones too. But how can you tell the difference?
A bad agent can cost you big time—either in lost opportunity, by overpaying for your new house, or because you aren’t given the information you need to make an informed decision. There are a lot of signs that the Canadian market could be heading for a bit of turbulence—sales have dropped by a dramatic 30% this July over last—so getting expert help you can trust is more important than ever. Here’s how to ensure the next realtor you hire is a good one:
Is your agent competent? My dad was once burned by a terrible realtor. Determined never to be had again, he has developed a fool-proof method for testing your agent. Do lots of homework on the area you’re interested in before you set foot on a property, then ask your realtor a series of questions that you know the answer to, and they should know the answer to. Three strikes, and they’re out.
For instance, when planning a move from Calgary to Toronto, my father had the realtor send him some potential listings. He analyzed the comparables, investigated surrounding neighbourhoods, checked building permits and even consulted zoning bylaws. Armed with this information, he would ask the realtor questions; if the realtor couldn’t answer, he terminated the relationship. That’s how he avoided buying a beautiful detached brick home—that would eventually back on to a landfill site. It’s also how my father ended up with a realtor whose aggressive negotiations shaved $35,000 off the asking price of the home he eventually bought.
Is your agent honest? Knowledge is one thing. Honesty’s another. You want a realtor with both. To make sure your agent will disclose all the relevant information you need to make an informed decision, verify that he or she will adhere to a basic obligation to disclose all known latent and hidden defects, such as whether or not there was a fire, or if a home was used as a grow-op. Your agent can’t replace a home inspector—the only qualified expert to determine major problems—but realtors can and should alert you to pertinent facts that could sway your decision.
A good honesty test is to ask your realtor about an inherent conflict of interest in the business. Many realtors will tell you that, as a buyer, you are not responsible for paying their commission—as they get paid by the seller. This is true. The buyer’s agent generally gets half of the 6% commission that the seller pays to his or her agent, less brokerage fees.
What many agents won’t mention, though, is the conflict of interest this leads to: the more the buyer pays for the house, the more money the buyer’s agent will get. Agents often care more about closing the deal fast then making a few extra bucks, so this is not necessarily a strong incentive. But if your agent is up front about the conflict, that’s good. If he or she starts talking circles and won’t meet your eyes, not so good.
Do they really offer value? From a strictly dollars-and-cents perspective, it’s only worth hiring realtors to help you sell if they can get enough of a premium on the selling price to cover their commission. So do they? According to a recent study by two Northwestern University economists, people who used a realtor typically didn’t get a higher sale price; when the agent’s commission was factored in, the for-sale-by-owner people came out ahead—with an extra $19,800 in their pocket, based on the average $330,000 cost of a Canadian home in 2010.
Still, before you go it alone, ask yourself: how confident are you setting a reasonable selling price in today’s housing market? And how comfortable are you advertising your home? A few missteps can cost you 5% of the sale price, according to Paul Anglin, a real-estate economist in Guelph, Ont. So there are advantages to hiring an agent—as long as you get what you pay for.
That’s a lesson my friend learned the hard way. After three years in a home she hated, she sold her one-bedroom bungalow—a “condo alternative” as her realtor put it—to buy a smaller, more urban-centric place. Despite soaring housing prices she lost money (after factoring in legal and realty fees). I am convinced that if her agent had provided competent, honest advice, based solely on her needs, she would have at least broken even on her $300,000 investment. Remember, that big commission you’re paying is for advice—so make sure the advice you get is good.
Originally published in MoneySense Magazine in September/October 2010