Hey there, time traveller!
This article was published 10/2/2012 (1993 days ago), so information in it may no longer be current.
A house is your biggest investment, yet people spend more time shopping for a colour TV than on how they buy or sell a home.
Just as a financial adviser can have a tremendous impact on your financial well-being, so can a real estate agent. And yet, most people choose them based on who they know. They might be a cousin, a friend of a friend or some vague acquaintance.
Given these people influence the price of your biggest asset, that's just dumb.
A friend of mine told me she was selling her house in Calgary. I suggested an agent who charges less than the going rate -- two per cent as opposed to seven per cent on the first $100,000 and three per cent on the rest. But she told me her husband's good friend was going to take care of it. I told she should really consider calling my agent, whom I knew to be hard-working and less expensive. But she said she couldn't say no to her husband's friend; it was too embarrassing.
About a week later, she told me the agent had sold her house in two days, and I was wrong to suggest she could have done better. Of course, what she didn't understand was that selling in two days was a red flag: The market was slow, so it suggested the agent priced it too low. Sure enough, it sold below asking, and when I asked my agent friend to show me recent transactions for her neighbourhood, I learned it was also priced too low.
The "agent hazard" arises for two reasons: First, emotions are involved. You don't want to say no to a friend. Second, arithmetic is involved also, and as I've said in this space many times, most people are just not good at math.
They think small percentages mean small numbers. But they don't.
To return to my friend, she sold her house -- well, the agent did -- for $440,000, charging $17,200 in commission (which was shared with the buyer's agent unless he represented both, in which case he got it all).
That was, as far as I could tell, a minimum of $15,000 less than similar homes had sold for in her immediate area around the same time. Had she used a discount agent, and had he got her a market price, she'd have pocketed an extra $23,100 -- after everything.
Am I saying she should have hired a discount agent? Not necessarily. Full-price agents despise discounters and will always say "you get what you pay for," implying that paying, say, two per cent means you get much less service and, by extension, a lower selling price.
But that's clearly not true. House prices have done well over the past decade or so, and commissions earned by agents have also gone up a lot. Are they really working harder today? Of course not. In fact, I'd argue, and many agents have confirmed this to me, their work is easier thanks to technology such as MLS, iPads and BlackBerrys.
What I am saying is my friend paid full price and got what I would consider discount service. Her agent could have worked harder. The trouble with the traditional agent pricing is there's little incentive for an agent to fight hard for an extra $15,000. I sold my house once in a bidding war on a Saturday night. The bidding was exciting and kept pushing the price up. Then, all of a sudden, my agent accepted an offer without giving the other party a chance to counter. I insisted he do so, and they came back $10,000 higher.
So why would my agent not try to get another bid? "It's a good enough offer. Let's not be greedy," is what he said, which is absurd. The fact is, of that extra $10,000, he'd only earn $150 (three per cent shared with the buyer's agent). He'd already earned thousands, so an extra $150 wasn't worth another half-hour of time on a Saturday night.
It's true to a point you get what you pay for. Never hire an agent based solely on price. An agent who charges half the regular commission would have saved my friend $8,600 -- provided he got the same price as a full-price realtor. But if that full-service realtor gets only a five per cent better price, my friend would be almost $13,000 richer using him after everything.
When you hire an agent, leave emotions and friendship out of it. Stick to math and track record. Ask the agent to prove to you he'll get you the best price, after commissions. In other words, do some work.
Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at: