One of the biggest problems with conflicts of interest, apart from their impact, is that we simply dismiss them from our minds – particularly when they’ve been brought to our attention.
Consider the Buyer’s Agent. If you want to buy real estate, a buyer’s agent works for you to get you the property you want. Because of their objectivity and disinterest, they can negotiate without getting emotional or swept up in the moment. Because of their experience they’re able to negotiate great prices and avoid the tricks and traps set by wily real estate agents.
Buyer’s agents often promote the idea they will be able to negotiate a lower price for a property than you could.
But, to what extent is this true?
Are they going to play hard-ball to save you a few grand or are they likely to buckle and settle to get you the property and receive their commission?
A real estate agent recently told me why I shouldn’t buy their line.
“Don’t use a buyer’s agent. If I’m about to get an offer from someone using a buyer’s agent, I know it’s likely to be the highest offer by far.”
In her experience, the offers she receives from people using a buyer’s agent are consistently higher than the other offers.
“I’m really happy when I find out one of the interested parties is using a buyer’s agent because I know I’m likely to get 30 to 40 thousand more for the property.”
“Why do you think that is?” I asked.
“Because they know exactly how much their clients can afford. And they don’t want to risk missing out on a sale when they are not paid until their clients have a successful bid.”
I’m not for one moment ignoring her self-interest in sharing this perspective nor am I oblivious to the fact that it’s only anecdotal evidence, but it did cause me to rethink the conflict. This real estate agent felt there was a tendency for buyer’s agents not to push the negotiation too much to ensure their clients were successful at buying the property.
Honestly, I’d hoped that the real estate agent’s 12 years of negotiating sales on behalf of her clients would have led her to a different conclusion.
I lack the direct experience to confirm or refute her claim, but I understand how conflicts of interest, particularly conflicted remuneration, can work against consumers’ interests (that’s why I don’t accept conflicted remuneration in my advice practice).
Even with the best of intentions, the financial model that underpins their activity means that when it comes to the negotiation stage of a property purchase, your interests are in direct conflict with those of your buyer’s agent.
You are relying on your buyer’s agent to estimate the market price for the property. And, then you rely on them to ensure you don’t over bid. Unfortunately, there’s a compelling financial incentive for them to either inflate your idea of what the property is worth or to rationalise inflated property prices.
Your buyer’s agent’s fee is higher the more you pay for the property.
Think about that fact for a moment. You don’t have to be Einstein to realise that this creates a direct conflict between their interests and yours. Or, at best, a misalignment of interests, caused by incentives.
However, I think the greater conflict lies in the fact that, once you buy your property, the agent can move on to another client and collect another fee (usually around 1-2% of the value of the property).
You might conclude that their time is more profitably spent looking for the next client’s property, rather than delaying your purchase or extending your search.
You might even find yourself being pressured into buying a property.
Buyer’s agents can be helpful in finding a property when you don’t have the time, resources or knowledge to do so on your own. They can also connect you with sellers who have not listed their properties on the open market.
But, you need to do your homework and understand how this conflict can work to your disadvantage. Particularly when it’s time to negotiate your price.