Where Realtors Add Value
While I've sought to educate people on the common myths often perpetuated by agents/realtors (see "The Agent 'Conspiracy'" below), I am at the same time not advocating that one forego this resource and "go it alone" when buying/selling a home. So, to provide a more balanced perspective, I want to also highlight a few key areas where a realtor can add tangible value.
1. Detailed knowledge of a specific area - Real estate is all about location. So having detailed knowledge of specific areas is particularly valuable for buyers, especially those who are relocating into an area where they don't have first hand knowledge of the neighborhood "vibe" or an understanding of the school and community dynamics. If you've done your due diligence in selecting your agent, s/he should be able to help you understand everything from what streets are least busy yet accessible to what specific local schools are most desirable for your children. They will also be able to describe the demographics of the neighborhood, in terms of whether you'll find people with similar life stages and the stability/mobility of the community. Even in today's wired world where much is available online in the form of blogs, social networks, and tweets, a personal perspective from someone you know can be an invaluable complement to help you filter the deluge of information online.
2. Understanding of construction/related issues - I've worked with some agents (for both buying and selling) in the past that have been contractors/builders themselves and as a result are people with very good direct knowledge of the physical aspects of a home. In buying a property, this can be a valuable perspective to inform you on what you may need to inspect, what parameters to be aware of for your remodeling needs, and any general assessments of construction quality that may not be readily obvious to the untrained eye. If you are selling, an agent with this type of expertise can also advise you on the cost/benefits related to different types of work that you may be contemplating before you sell your home.
3. Network of vendors/resources - Invariably, in the purchase/sale process you will need to engage the services of other third-party vendors. These could be movers, painters, carpenters, inspectors, appraisers, or even mortgage brokers and contractors. An experienced agent can help reduce the hassles with pre-qualified vendors and may also be able to pull favors to get things done in much shorter time than you could secure on your own.
4. Tap the "hidden market" - This can be a big value to buyers in bull markets and to sellers in bear markets. In highly sought after neighborhoods during boom times (which we will likely not see for a while), a good agent with a strong local network may be able to help buyers identify potential sellers before they formally list their homes, hence giving you an exclusive preview of a soon to be available property. A caveat here is that you may end up paying more than market price but you'll at least be assured of getting the best set of choices to pick from. For sellers, especially in today's depressed markets, selling or even renting a property can be difficult, especially if you don't have the luxury of being able to "wait it out". So an agent with a strong network can add value by tapping the potential buyers on the sidelines that they know to help you possibly get a quicker sale than through a typical listing process.
5. Contract negotiations - Agents who have experience will know what to look for in the sale or lease contract and can help you negotiate terms most favorable to you as a seller/buyer. The caveat here is to not confuse your agent/realtor with true legal representation, so you may ultimately still need to engage the services of a lawyer if need be. However, the point here is that they will at least be familiar with the types of common sense/practice items that you may want to ensure is included in the contract so that you are protected. Another caveat that I will point out here is that I do not rely on the agent for determining pricing (see Agent Conspiracy article for more on this). While your agent can be helpful in giving you all the factual data on comparables and general market statistics, given the conflicting interests they have, it's frankly your job to do your home work and decide for yourself the right price to sell or buy your home.
The bottom line is this - as with anything, the more you are able to engage an agent for your real estate needs with your eyes wide open to both the value they can bring and to their diverging interests, the better off you will be in ensuring that you are making decisions with the best information/resources available.
The Agent "Conspiracy"
Over the years, I've worked with many well-intentioned real estate agents to buy and sell homes and I also have friends and family members who work as real estate agents.
So I would like to share some insights I've gained into how the system works and debunk a few common myths perpetuated by agents to help you be a more educated and successful buyer.
Myth #1 - The buyers agent is on your side
No matter how nice or well-intentioned your real estate agent may seem, the reality is that when it comes to buying (or selling) a house, the agent is not your friend - this is business for them, so it only stands to reason that they will act in their own best interest.
For buyers in particular, you need to understand that the incentives of agents are diametrically opposed to your goals. That's simply how the system works. Your agent will want a higher price since s/he will earn a percentage based on that price, whereas you obviously want the lowest price possible and certainly don't want to overpay. They will want a fast transaction with minimal contingencies to reduce risk so they can move on to the next deal quickly, but as a buyer, this is the only deal that matters so you of course want to take as much time as you need and should build in contingencies to protect yourself.
Understanding this core dynamic enables you to put any "advice" you get from agents in the proper context so that you don't just blindly assume that they are always acting in your interest. And in general, any pressure to raise your bid to be more "inline with the market or potential competitors" or to hurry your offer so that you don't miss a "window of opportunity" should be viewed with skepticism.
Myth #2 - Buying a home is an emotional decision.
Many agents like to dispense some version of this advice: "this will be your home, so find the house that you can fall in love with." The essence of this statement, even if meant well, is to have you make decisions based on emotion as opposed to reason.
In contrast, while I certainly realize that purchasing a home is an emotional decision for many, I don't believe buyers need any more encouragement on this. If anything, given that this is likely the largest financial decision most people will make in their lifetime, you should keep your emotions at bay so that you can think through each issue rationally and carefully!
Myth #3 - Agent services are free to buyers
Agents often like to point out that their services are free to the buyer, especially to first time buyers.
To me, that's just utter nonsense. Sure, it's true that buyers do not hand agents a check to engage their services, but at the end of the day, the last time I checked, the only party who is shelling out money in the entire transaction is the buyer.
More specifically, the selling and buying agents typically split 4-6% commission on the sale which is paid out of the transaction settlement by the seller. However, since the buyer is funding the purchase, this cost is ultimately borne by the buyer given that most sellers will mark up their listings to reflect the net price they'd like to receive after accounting for commissions.
There are two key implications of this. The first is that since you are ultimately paying for an agent's services, I would treat the relationship like any employer-employee relationship and "interview" potential agents [include guide]. When you think the service is free, you will tend to be thankful for any attention they give you since you are not paying for it and be reluctant to overly inconvenience your agent with requests. In contrast, once you realize the real nature of the relationship, you'll be a more discerning consumer and require your "employee" to do their duties (e.g. provide you with comprehensive market analysis of relevant comps on a price/sq ft basis or price/acre basis) without viewing them as a favor.
A second critical implication is the fact that commissions are negotiable even for buyers (though more common for sellers). That is, in many cases there are buyer's agents who will refund/rebate back to you part of what they earn for the sale if you simply make the effort to negotiate the terms you prefer. These rebates can be as much as 2/3 of the 3% agent commissions they receive (though it may depend on the price of your home and the seniority of your agent since they have to split commissions with their agency and more senior agents tend to have a greater share that they can work with). Even with a discount, most agents will do quite well on an hourly basis given the amount of time truly required to help you source and purchase a property.
I've done both of what I am suggesting above, having fired incompetent agents who thought they were doing me a favor by "helping" me with even the smallest requests and also negotiate concessions from agents who are more than happy for the opportunity to make good money for little effort despite taking a lower than typical commission.