The New York Times gives Silicon Valley real estate agents reason for a brimming sense of professional pride with their article Agents of Angst. It leads off with a set of horror stories about agents then goes into a Harris poll ranking the prestige of real estate brokers at the bottom of 23 professions.
These horror stories aren't surprising for people in the industry but they can have very serious financial consequences for consumers. Educated consumers can look out for many of the common games real estate agents play with home buyers and ask pertinent questions when interviewing agents and keep from being "played."
1. Showing You Properties Based on the Commission
Real estate agents are often influenced by the commission being offered by the seller when they decide what houses to show you. If you had two identical houses that each cost $700,000, and one seller offered a 3% commission while the other offered only 1%, which one would a rational agent prefer to show you?
You, as a client, want to see available properties that meet your buying criteria while the agent compensation structure actually penalizes a diligent agent for showing you properties regardless of the commission offered. In addition, this system also encourages agents to show you properties with higher asking prices because, given the same percentages, they pay more.
A good real estate agent will ensure that you get the right property for your needs regardless of the initial reward because repeat business and referrals are very important, but buyers often want an extra, upfront sense of assurance. If so, continue to the epilogue where an alternative fee structure is discussed.
2. Rolling Back the Odometer
The number of days a property has been on the market (days-on-market, or DOM) is like the odometer on a car. The perception is that properties which have been on the market a long time are either less desirable or have a major defect of some sort, like a car with 100,000 miles on it.
While this isn't always the case, the fact remains that having a lot of miles on your DOM number hurts an agent's ability to sell that property. In fact, it hurts so much so that agents often relist a property on the MLS so that the DOM number rolls back to zero.
Fortunately, MLS systems keep a running record of when a property has been listed and the changes made to those listings. More progressive MLS systems provide not only a DOM number for that listing, but a CDOM number listing the cumulative number of days that property has been on the market.
In Silicon Valley, you can take a property off the market (e.g. by cancellation, withdrawl, or expiration) and if you relist it within 30 days, the DOM number will be reset but the CDOM number will reflect the total number of days since in the initial listing. Therefore, asking for the CDOM number provides much more insight than the DOM number does.
More clever manipulators of these numbers will often subtly change the address of the property (from, say, 100 Webster St. to 100 Webster Rd.) in a way that's meaningless to people but very different to the MLS databases reporting this information. This effectively starts a new listing with DOM and CDOM numbers at zero. A broader search of the MLS incorporating more wildcards will most likely expose this type of manipulation.
3. Playing Double Agent With Pocket Listings
Pocket listings are houses for sale that are not listed on the MLS. One reason why agents do this is to keep a property's odometer fresh during slow holiday months. It doesn't do a lot of good for a seller to have a property, particularly an expensive one, on the market when no one's looking. After all, the DOM and CDOM numbers increase with every passing day even if no one paid attention to the property.
Another reason why agents use pocket listings is to try and complete both sides of the transaction and take both halves of the commission. After all, if no one else knows about the property for sale, no one else can encroach on the deal.
But representing both the buyer and the seller creates conflicts of interest, and when you use a double agent (called a dual agent), you may have given up your right to have someone who only represents you.
Would you go to court and use your opponent's lawyer? Of course not. Protecting yourself with your own buyers agent is the most effective way to ensure that your needs are represented during the home search and negotiation.
4. Getting People to Confuse Liking Them for Trusting Them
Most people have a tendency to trust who they like, but being jovial or gregarious doesn't necessarily mean that the details of the transaction are going to turn out correctly or that your home search will be painless. After all, is your goal to make a new business acquaintance or find the right home within your budget?
While no one likes a sourpuss and many shady people are also unlikable, choosing the person you're entrusting with your money (and possibly a great deal of debt) should be based on more than how much you like their personalities. Instead, choosing someone who augments your strengths can save considerable money in the short and long term.
5. Being a Yesman When You Need a Devil's Advocate
Why don't people trust real estate agents even though they need them? Well, the way real estate compensation is structured means that the easiest way to earn money is to simplify completion of the deal. Providing too much information to or disagreeing with a client makes the process more difficult and sometimes puts up major roadblocks between a salesperson and their commission.
So they don't.
Look for an agent who knows that, sometimes, pointing out things that may impede a sale but advance a client's goals is simply part of the job. Many heavily advertised agents are great "closers" but do you need that or a person who will guide you through the process? Finding an agent with the courage needed to be a good consultant and Devil's Advocate could save you from making a very expensive and hard-to-reverse mistake.
Epilogue: Establishing a Mutually Advantageous Fee Structure
The Motley Fool offers an innovative solution to this dilemma which changes the rules of the game to help meet your goals as the client. I've adapted it for use in California.
Buyers agents are paid by the seller from the sale price of the house. The commission offered is controlled by the seller which means that the seller now has great influence over the agent who represents you.
To overcome this influence, first, establish what your price target is for buying a house. You and your agent will be able to figure out a reasonable target based on your requirements and a survey of properties in the areas you're looking at.
Then take half the standard commission rate of 5-6% in Silicon Valley and guarantee that your agent will be paid that percentage of the target price, no matter what the seller offers as commission. The flip side is that any commission above that rate is refunded to you after taxes.
This ensures that any property that meets your criteria will be appropriately represented to you and shifts any influence from the seller to you, the buyer.
Second, because you want to ensure good values are presented enthusiastically, offer a $100 bonus for every $1,500 below your target price. This combination will provide an incentive for bargain hunting while ensuring your properties are in the established price range.