What is that service? I'm not being snarky; I'm genuinely curious, as the structure of the industry (and fee level) is significantly different than where I'm from. I don't get why you need a real estate agent to help you buy.
- Tours of homes; seeing something online and seeing something in person is an impressive difference. Some houses look amazing online and terrible in person, or vice versa. Cannot possibly overstate the value of this.
- Negotiation; he's a professional negotiator, and he has years of experience negotiating in the exact market that we're buying in.
- Documentation; there's a RIDICULOUS amount of paperwork to file, and all I have to do is read/sign it.
- Inspections; he has handymen and inspectors on file, and knows that they're trustworthy.
- Knowledge; he's done this dozens/hundreds of times. He knows about how long things take, he has reasonable estimates of how much things will cost, and he has the patience to answer all of my questions.
Tours vs images is definitely an issue. Some people are just bad photographers, some only have 6 images (Houston MLS requires 6 images for a posting). Some are good photographers, that make things look bigger than in person.
Experience is hugely variable though. I called 2 agent offices, and got stuck with their most inexperienced Buyer's Agent. The more experienced people are doing sales of homes or commercial, and getting a cut of the commissions of the people under them. Some Googling led me to roughly a 60/40 split between agent & office, along with the agent paying a desk fee (~$50/monthly). Since the principal is still getting paid, you can involve them if needed for second opinions or more nuanced explanations. Agents are getting roughly 3% of the sales price.
Still read all your documents. I've caught things that slipped past my realtor, and also brought up questions for her to answer.
Inspections are a mixed bag. They have a preferred list, and should also provide you a legal document stating their incentives for any recommended providers (including home warranty companies). I ended up going with one of my realtor's preferred inspectors, but only after calling all 5 on their list, and several more listed on Yelp.
Knowledge goes back to experience. My agent was basically bowled over by 2 of the new home builders in the area. It was so bad I considered buying the Realtor's Residential Construction Certification program (1 day course, ~$300, they'll sell to anyone) and going through it myself if I went with new construction.
Another point about knowledge is that even with experience, you can come up with stuff they don't know. Neither my agent or the broker (my agent's boss) had worked with anyone that negotiated their lender origination fees. I got $500 off one lender and $1000 off another.
In the US, agents get roughly 6% of the sales price. The sellers's agent gets 3%, and the buyer's agent gets 3%.
In the UK, agents get roughly 1.6% of the sales price. The seller's agent gets 1%-2.5%, and there is no buyer's agent. There are other costs (survey and lawyer fees) but these are not large either, and aren't related to the price of the property.
The moral hazard is removed by them not taking a fee on the buy side, they're aiming on you continuing to use their services for all future legal matters.
You definitely need an agent to sell a house. Because no other agents will show your house if you do a fsbo (for sale by owner). In fact, agents will actively discourage their customers from buying your house, even if they offer to pay the agent their half of the commission.
If you are buying a house. The main thing is they can open the doors of other agent listed houses and show them to you.
They have a tightly closed network, and it's held in place by laws. The NRA (national association of realtors) has a strong political lobby.
Here is a good run down of the situation on 60 minutes. It's old (2007 before bust) but not much has changed.
http://www.cbsnews.com/news/chipping-away-at-realtors-six-pe...
Real estate agents can help in a number of ways (chaossphere2112 outlines a number of them), but one of the easiest ways to think about it is that this is a very large, complex transaction that happens rarely. That means that, while you could learn all the ins and outs of: - contracts (often regulated by the state) - negotiation (in whatever kind of market you are in--one favoring buyers or sellers - house value (both use and resale) - what can be changed about a house easily (finishes) and what is hard (layout) and what is nearly impossible (location) - neighborhood characteristics - typical home uses for people in your shoes now and in two years and five years, which might impact your purchase - the minutiae of a purchase (deadlines, appraisals, inspections, etc)
you might want to consider paying someone who does this as their job to help you out.
As for the 'pumping up the price' to get paid more, or 'making me hurry up' to get paid faster, there may be some agents that do this, but good ones are more concerned about the lifetime value of a consumer, which can easily run into mid five figures (if you move every 7 years starting at 28 and ending at 70, and buy the median house price (~200k) and use the same agent every time at 3% commission, that is 36k in commission).
It's dumb to burn a customer for a few hundred bucks when their LTV is ~40k (if you pay 210k for a house when it is really worth 200k, the agent earns 6300 instead of 6000).
Most people don't do anything like this, especially not in the same geographic region.
In any case, this only gives the realtor an incentive to make you feel like you got a good deal. For products where my experience in the objective (e.g. going to a restaurant) or where I have adequate skills to judge, this would be find. But the realtor in selling his skills as judging deals, among other things. He tells me "this is a great deal for this neighborhood".
I can see that a real estate agent for the buyer gives value, but I wouldn't personally pay much for it. Not 3% at least, that seems like a huge waste of money to me.
I'm always curious how other markets work (and aware that the USA is one of the few RE markets with buyer's agents). Is there an inspection period? Are most homes bought outright, or are loans taken out to purchase them? Does the seller's agent do any marketing (newspaper ads, open houses, etc)? What does the seller's agent usually get in terms of compensation (a percent of the sales price, a fixed fee)?
No. However, the seller is responsible for 'hidden problems' for five years after the sale. I would guess that most of these cases go to court, and are only for serious problems like mold.
> Are most homes bought outright, or are loans taken out to purchase them?
Loans are typically taken.
>Does the seller's agent do any marketing (newspaper ads, open houses, etc)?
Yes, the seller's agent typically does all the marketing. Mostly newspaper ads, online real estate listings and open houses.
>What does the seller's agent usually get in terms of compensation (a percent of the sales price, a fixed fee)?
It's usually a percent of the sales price, and around 2-4%. In recent years fixed feeds have become popular (€3-4k).
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The one thing that sucks most about the Finnish real estate market is the 'transaction tax'. It's 2%-4%, paid by the buyer (but first-time buyers are exempt), which means that moving often is discouraged.
I like the idea of the seller being responsible after the sale--that would make most sellers more honest.
That tax is interesting--what does it support (national government? city government? schools?)?
On a practical level, they can generally guide you through the very intense process of lining everything up to buy a property (this process takes months, and a whole lot of phone calls and paperwork). They know prices, and can tell you what something is worth. They can spot problems with the property before you get a (very expensive) inspector on site. They help you negotiate and buffer you from the seller and the seller's agent. This is particularly valuable since a good deal can go bad because personalities clash. They help you find professionals to work with (attorney, bank, inspector, etc.) if you want them to (all of these are up to you, but if it's all the same to you, then they generally have good suggestions).
Where I'm from (the UK), people don't try to write giant enterprise software without any experience as a developer. They _do_ buy houses without a buyer's agent, and have done so for a long time, without problems.
There _are_ special functions which require the help of professionals:
- Conveyancing: actually executing the sale and ensuring ownership is transferred. This is dealt with between two lawyers, one on each side.
- Surveying: checking that the property is in sound condition and, if the property will be financed by a loan, appraising the value to ensure it's suitable security given the size of the loan.
Each of these services are provided by regulated professionals (solicitors in the first case, chartered surveyors in the second). Each are subject to a flat fee (i.e. not related to the sale price) which is the hundreds of pounds (not thousands).
I don't see how the US market is so structurally different (vs. the UK) that (i) the buyer needs an agent, and (ii) fees are so high.
- If you tell your agent "I'm looking for a good investment property" they'll be able to tell you why this house on this side of the street is a good investment, and why the house 2 blocks away isn't.
- They can use this data during negotiations. You don't really know what price a home can be bought or sold for, but they can work off of a more educated guess. Should I try to sell my home for $x? or $x*1.25? They'll know how much and why. Should I try to negotiate down when buying or do I need to make a stronger offer? They'll know market conditions and can help you.
- They're familiar with all the oddball paperwork certain kinds of property deals have to work through. Like, are you buying a deprecated farm unit in an independent but not registered municipality that's been rezoned for mixed-use development but you'd like to rezone back to agricultural use? There's a form for that and they just saved you 6 months of back and forth with the state/county/city getting it sorted out.
- They can dig into property history and find out things that you might not know from looking at the property. Like, the foundation was recently rebuilt, or the property has a history of flooding and needs a sump-pump, so you might be looking at $20k in charges to put one in, or you can use it to negotiate down.
- If you are selling, connecting you into the broker network to find a buyer. It's a lot more than just putting something up on the web, a good agent will spend quite a bit of their time hunting down a good buyer for you.
Here's a longer list
http://ohiorealtors.org/consumers/184-tasks-agents-do-for-yo...
If I am going to move to a new region, first I pick the area I prefer by renting a few months and learning the reality on the ground, then I grab the best agent based on specialization for that area, not a "generic" one for the whole city.
In my experience, the value of the agent is great there. But it lowers drastically if they are just "whole city agents."
Experience: moved to 3 metro areas in past 10 years.
We did structure his fee in a way that he would get more commission if he got a better price for us. We ended up paying him 2x or 3x what he makes on a normal sale, and yet even if we had paid him double from what we did, we still would have made thousands using his services.
(This might seem to be in contrast with my other post in this thread about agents being financially illiterate, but the proposition of 'more money!' was so simple in this case, that it did seem to help. Anything more complex (opportunity cost, time value of money, ...) went over his head.)
I guess the point is, for many people this transaction involves a significant portion of their net worth and and there are plenty of people out there who would happily relieve you of that money. I agree that the incentives are slightly mis-aligned when it comes to final price negotiations, but at the very least, any agent should be concerned enough about their reputation that they will have done the basic due diligence to ensure that you don't get fleeced. That alone would be worth the price.
1) Real-estate agents make money on sales completing. Their primarily financial goal is to complete the sale. Whether this means that you are overpaying (or, for a seller's agent, are under-asking), or are buying a home that isn't right for you...that often matters less than simply closing the deal.
2) Never trust or take a recommendation for a home inspector or other service recommended by the agent. The home inspector has the motive of keeping the agent bringing the recommendations, and this means avoiding having findings that will compromise the deal. Remember, the agent only makes money when the sale completes, so if they spool someone along to buy a house, convince them to overpay to get a sale done, and then bring in the "best" home inspector they know to close the sale, that inspector had better not throw a wrench in it. Always consider conflicts of interest, and there is an enormous one if you use the agents contacts.
3) The legal work -- the bulk of the paperwork, and covering your back legally and so on -- is, in many jurisdictions, done by a lawyer, not a real-estate agent who is only responsible for the most cursory of forms. And that lawyer and his team of paralegals, who do all of the title checks and bank processes and the final close...they get a small fraction of what the real-estate agent gets.
I find real-estate agents to be a profound anachronism. Sure, someone with neighborhood and pricing knowledge is of value, but is that worth tens of thousands of dollars? Is there anyone who would seriously argue that pricing makes sense?
I learned this first hand. I bought my first house in 2009, and used an inspector that my real estate agent recommended. The house was 25 years old at the time and he created a report full of minor issues, but no deal breakers.
I intended to live in that house for a long time, but had to sell it this spring. Got an offer in a month. All the minor things had been fixed and a I also made a lot of improvements. Then the buyers inspection found that a truss had been cut and removed in the attic by a bad HVAC guy. Ended up costing me > $1500 to have it assessed by a structural engineer and repaired, and almost caused the deal to fall through.
Once the missing truss was pointed out to me, it was very obvious, and should have been caught by an inspector on his first day. I'm positive he didn't point it out so as to not sink the deal and keep getting his referrals.