Most agents like to portray themselves as experts at negotiation to impress you and win your business. They want to convince you that they are the only people who can negotiate the highest price for you. A price that would justify their commission. Unfortunately, most people take this at face value without understanding the dynamics behind these claims. There are five compelling reasons why you should never enlist a real estate agent to negotiate on your behalf. Especially if you want to achieve the highest sale price and maximise the amount you pocket.
1. Questionable Negotiation Qualifications
Most people are surprised to discover how easy it is to become a licenced real estate agent. They are also surprised to find out that the short course they must complete in order to become licensed involves no detailed training on negotiation techniques. In other words, they may be no more of an expert at negotiation than anybody else. In an article in the Daily Telegraph on 1 December 2015, Kathryn Welling quoted the president of the Real Estate Institute of NSW, John Cunningham: “You have to do more training to become a barista than you do a real estate agent”. He went further and said “There are stories of agents being trained in a matter of hours online”. In Queensland, it is possible to become a real estate agent within a few days of completing an easy course at a cost of approximately $600. This doesn’t represent a high barrier to entry. Because the bar is set so low, practically anybody can become a real estate agent and claim to be an expert negotiator.
2. The Commission is a Significant Handicap
The other problem with using a traditional real estate agent is that vendors already start with a significant disadvantage of having to pay a commission. If a property is valued at $500,000, a real estate agent needs to negotiate a sale price of $513,750 just to cover their 2.5% commission plus GST. Buyers are unlikely to pay $13,750 more for a property just so that you can pay for your real estate agent. Even if an agent can negotiate a price that is $13,750 above valuation, they are simply covering their astronomical cost for you to just break even. To truly justify using a real estate agent, they would need to negotiate an even higher sale price, otherwise you are only employing them for their benefit, not yours. Real estate commissions are percentage based. This means that the more your home is worth, the higher the sale price the agent has to negotiate in dollar terms to justify their expense. I have written earlier about a much better way to achieve a higher sale price for your home than relying on a real estate agent’s negotiation skills.
3. Dubious ‘Success Stories’
Often agents will boast about how much above the asking price they have sold properties for. This automatically implies that they are fantastic negotiators, which is exactly what we are supposed to believe. In actual fact, the true story is a little different. I have encountered a number of cases where real estate agents promoted properties considerably below their market value using a tactic called ‘bait’ pricing. This tactic involves setting a lower price than what the home is really worth in the hope of generating lots of interest in the property and starting a bidding war among prospective buyers. Negotiating a ‘higher’ price is easy when a home is advertised below its market value. Many agents will brag about the higher price they negotiated, when in fact they simply achieved the actual market value, after starting with an unrealistically low listing price. Bait pricing is illegal, and is an offence under the Australian Consumer Law. If, despite being illegal, bait pricing was not practised widely enough, you would have to wonder why there were recent amendments to the Property Stock and Business Agents Act of 2002 in New South Wales that came into effect in January 2016. These amendments specifically target underquoting by real estate agents. Sadly, bait pricing is still widely utilised by many of Australia’s largest real estate sales firms. Don’t be fooled by the results they boast of when they talk about how much above the asking price they have sold other properties for.
4. Little Incentive to Negotiate The Highest Price
As I wrote in an earlier article, the truth is that real estate agents have very little incentive to negotiate a higher price for your property. For them to work hard to negotiate an extra $10,000 for you, their potential reward is only $250 in additional commission. This is not enough money for them to delay sealing the deal to get paid. On the flipside, an agent will only lose $250 in commissions, by convincing you that you should sell for $10,000 less than what you could possibly receive. This is why real estate commissions are a terrible way to remunerate someone to help you sell your home. Instead of serving as an incentive to achieve a higher sale price, more often than not, it does the exact opposite. Most real estate agents know that they will not successfully sell every house they list for various reasons. One of these reasons is the unrealistic price expectation of some stubborn vendors. For this reason, securing a sale at almost any price is the only real measure of success for an agent, not the sale price they achieve. As I mentioned earlier, a higher sale price does not make much difference to their commission, but the quicker they can sell your home, the quicker they can move onto the next one to keep the numbers game up. There was a study conducted by economist Steven Levitt and Stephen Dubner, made famous in their best-selling book Freakonomics. It provides evidence that real estate agents have little incentive to achieve the highest price for your home. The simple fact that they operate in a system where a sale is more important than the sale price, compromises an agent’s incentive to negotiate the best price for you.
Most people aren’t aware that if another real estate agent finds a buyer for your home, your listing agent will have to share their commission with that agent. The other agent could be somebody from the same office, a competing agency, or it could even be a buyer’s agent. Just imagine a scenario where the agent you are using has found a buyer who is willing to pay a maximum of $500,000 for your property. Without you knowing, another agent introduces another potential buyer to your agent. This buyer is willing to pay no more than $510,000. The difference between these two buyers is that the second buyer is willing to pay you $10,000 more. However, selling to this buyer would mean that your agent would receive $6,125 less, after sharing half of the 2.5% commission with the introducing agent. This is an astounding conflict of interest! Imagine the pressure on your agent to either present you the offer for $500,000, on which they would earn a $12,500 commission, or the offer for $510,000 and receiving only a $6,375 share of the full commission. Most real estate agents don’t want to risk losing half of their commission to another agent and, as a result, they will likely pressure you to sign a contract as soon as possible with a buyer they find. This is another disincentive for them to prolong the sale process by getting involved in protracted negotiations.
The Negotiation Solution
Negotiation is one of the most highly misunderstood steps in the process of marketing and selling a home. Many real estate agents make negotiation out to be a difficult, thrashed out, UN peacekeeping or hostage negotiation style process. Nothing could be further from the truth. If the marketing has been done correctly, often there is very little, if any need at all to negotiate. In cases where the marketing campaign was well conducted and negotiation still takes place, the impact that it has on the final price is often much smaller than the difference made by the campaign itself and the three important steps of the marketing process of Presentation, Pricing and Promotion. I’ve always thought it curious that when buying a home many people are completely comfortable in negotiating, yet when it comes to selling that same home, they feel like they need an ‘expert’ negotiator to do it on their behalf. Having said that, I understand that many people do feel uncomfortable with the thought of negotiation and are completely repelled by it. However, when some people think of negotiating, they think of a high pressure, adversarial situation, where one party can only win if the other loses. This is completely the wrong way to think about the process. The negotiation process we assist our clients with is neither high pressure, nor adversarial. We normally insist that all offers are submitted in writing, on a contract. An offer in writing, especially on a contract, confirms that the buyer is serious and qualified. If the offer is low and requires to be negotiated, we always advise for it to occur in writing. This takes the heat and emotion out of the process. It also buys time to strategise and formulate a well-considered, tactical response with a cool and level head. This helps many people overcome their unfounded fear of the process. In effect, the process we help our clients with redefines the meaning of negotiation and turns it into a series of offers and counter-offers that occur in writing, with sufficient time between them to plan a strategic response. Vendors can benefit greatly from understanding that negotiation is not what real estate agents make it out to be, it doesn’t necessarily form part of every sale, and agents are neither experts in the process, nor incentivised sufficiently to do it well on your behalf. For more information, please visit: www.revolutionaryrealestate.com.au