Getting your agent to be truly on your side
If you haven't heard about the Freakonomics bit on real estate agents and how their incentives aren't aligned with yours, watch this 3 minute video here to get some insight into the problem.
https://www.youtube.com/watch?v=17jO_w6f8Ck
The same phenomenon holds true for investors' agents, and the pressure can cost investors that work with agents dearly if they don't pay attention. Further, the manner in which your agent works with the listing agent can determine how hard the listing agent works with the seller to talk him down. I want to propose a theory... an idea.. that I will test with my agent on my next buy and hold deal that will cause my agents incentives to truly align with my own. I think this plan will work until my wife gets her agents license and we don't have to worry about having a listing agent.
First, lets talk about the problem that investors face when using buying agents to make offers on properties.
According to the incentives, buyers agents want to close deals. No close, no money. Second, agents actually prefer that the deal costs the investor a bit more rather than a bit less. Although incremental returns are marginal, they still matter, and I argue they still affect the agent's actions. My agent tells me stories about how she tells some of her investor clients their offers are too low. This gets me worried, because I don't want to feel that pressure from my agent and I don't want her to not try hard to push the listing agent to sell if she thinks the offer is ridiculous.
I have an idea that will get an agent to fight harder than the investor for a lower price.
First, the plan works on a case-by-case basis. The investor must decide the desired cap rate and CoC return and whatever other metric he wants to use to decide the price at which he wants to acquire the property. This is almost always below the listed price. We will call this price point the anchor point.
Lets say I want my next MFP to have a 12% cap and with my type of financing a 22% CoC return. I do my due diligence on an MFP down the street and see that at $100,000 , this MFP will give me a 12 cap and 22% CoC return, but its listed for $112,000. So 100k is the anchor point you want to pay, and anything less is bonus.
I will then go to my agent and say, "OK, the anchor point is $100,000. For any amount lower that we close on this property, I will cut you 33% of the difference. So, you get your 3% from the seller as a buyers agent of course, but within 30 days of closing, I'll cut you a check for $333 for every $1k less than $100k you can get me this house for."
This is the agent's pay scale for this house.
This does a few things:
1. It gets the agent completely on your side. He wants to get below your desired price... Even at 2000 below your anchor, the agent will make more money than if you get the house for the asking price of $112k
2. As long as the anchor point is reasonable, the agent wont get discouraged at your lowball offers. They will really want to push the reasons why property isn't worth near the listing price. The relationship will be far better.
3. This allows you to let the agent do the paperwork and negotiating without you having to micromanage the deal.. In fact, you can just tell the agent, "Offer and negotiate whatever amount you want on the property, but only call me if negotiations approach the anchor.
4. You can do multiple properties at a time and the agent will work the hardest on the property that makes you and him the most money (most often the property where the agent can get the furthest below your desired anchor.
5. This plan opens you up to all of the deals than never make it to the MLS. Established agents that gobble up really good deals before the seller lists them could get kicked to you at wholesale prices.
This is my plan to fully align investors agents with investors. You can change the bonus plan to, say, 20% or 15% below anchor or whatever.
What are your thoughts?