Getting your agent to be truly on your side

38 Replies

     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.

     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?

hi @Eric Blackford !  I really like your approach. I too listen to Freakonomics and heard the same one. It has put so much doubt into my mind about working with agents. A couple of things, my investors agent in IN im working with is also my PM so he actually would stand to make more money in the long run managing my properties than bidding poorly on a deal for higher commission plus repeat business. He doesn't really care how I acquire a deal, just how he can help me. 

However my commercial RE agent in CA is a total slimy worm and I'm about two clicks of the mouse away from firing him. He wants me to bid $1.2M in a building we have been leasung for the last 5 years when I only want to pay $1M. I think our differences are too much. Besides he never returns my calls or emails. His last excuse is that he was on the phone with his mom. He let it slip up that he and the selling realtor are good friends. I'm having visions of them on the golf course laughing about how they're going to split the commissions!! I would not feel ok about him getting more money than he already is. Well. I'm going to fire him but maybe I'll use that strategy with my next agent. I think I'll post for a new agent now. Thanks Eric!!! Lol! 

Great reasoning. I know it was a disaster working with a realtor ten years ago when we first looked into investing. I will certainly use this approach when I get ready to find an agent to work with. @Eric Blackford did you interview several agents in order to find one you felt was a good fit and what do you feels makes for an investor friendly agent? 

@Julie Doke ,

I found mine through word of mouth from a mentor. We connected well and maybe I got lucky.

 I will use this method of finding houses until my wife/business partner gets her broker's license. I still haven't found a better way to get agents to work really hard for an investor.

Now, to figure out a way to get a property manager to be on your side!

I think this is an interesting approach and I wouldn't mind trying it for my clients. The downside is that buyers never want to pay any of the commission. Which they would have to do if this method was used successfully. The 2-3% that would normally be offered to the selling office, would not cover the buyer's agent's commission if the price went below the anchor. Flat fees cause the same problem, and have a similar effect. While the agent's commission doesn't go up when the price goes down, the percentage of commission goes up. So if you paid an agent a flat fee of $3000 for a $100,000 or less home, and the agent negotiated you a deal at $90,000, their commission would be greater than 3%. The excess commission would be paid by the buyer. The main difference between your method and the flat fee method is that the agent can actually earn more by lowering the price instead of being paid the same. So the agent's incentive is greater, but the buyer is also responsible for more commission than the flat fee method. Even though they will be saving more money than they would have to pony up for the extra commission, it would still be a tough sell to most buyers. If any buyers want to try this in California I can test it out and share the results on this thread.

Interesting idea.  I think the incentives may end up going after properties that are grossly overpriced - since they would have the most room for reductions.

I think a truly "investor friendly agent" will realize that the more money they help you make, the more money they will make.  

If I needed to give the agent an incentive, I would offer something like 2% discount(or flat rate) on an acquisition and a 1% bonus on the exit.  This really can be applied to either a flip or buy and hold.  The flip is simple with offering 7% vs. 6%.

2 months rent on a rental should make it competitive in the agents attention with their sale listings.

@Scott R. ,

The buyer's agent already gets the 3% commission from the seller's office... this will not change. I'm talking about implementing a bonus plan paid for by the buyer, if he so chooses. Of course, not all buyers would want to do this, and it is up to their discretion to do this but I do because I want an even lower price than my desired price

Flat Fee

The problem with the flat fee is that again the agent doesn't care about getting the lower price for the investor, she just cares about closing the deal (given that she is already going to receive the 3% from the seller's office). Under the flat fee, there is still no incentive to get the price lower. My bonus plan is just that, a bonus, or a tip - not commission to be split between the agent and her office. Even if it had to be split with her office, her incentive to reduce the price is still there.

@Jesse T.  

 If the investor is wise, the agent will do the opposite of spending time chasing overpriced houses. Neither the anchor I set, nor my offer is ever based on the asking price of the home, it is based on the CoC return, Cap rate, and a few other metrics (neighborhood, demand, etc..)

Using the example above, I said that my desired cap rate of 12 and CoC return was 20% if I could get the house at $100k but the asking price was $112,000. No matter what that asking price is, my deal only works at $100,000. So if that home was even more overpriced, at say $130k, that agent would have to work way to hard to get below $100k and into bonus. In fact, if she has to talk the seller down $31k just to get herself into bonus, she won't chase that overpriced deal.

@Mark Gallagher ,

As an agent, tell me if you have ever been in this situation.

An investor comes to you and says, "These are my numbers, the ROI, cap rate, and the numbers tell me that this house is worth 50% less than the asking price on the property. Therefore, I will offer that amount and no more".

What did you say?

Did you ever say, "I think that offer is too low."?

You may be the wrong agent for that investor, and me.

We shouldn't succumb to the anchoring heuristic that plagues the transactions and negotiations among the agents and their investor clients in this industry. An investment property's value should never be based on what the seller lists it for... In fact, I prefer not to know the asking price when doing my analysis.

My numbers are aggressive, and the bonus plan is to award the agent for working so hard to get me the right deal. While my offers are based on fair ROIs and cap rates for the market in my area, they are sometimes very far below asking price of many of the properties.

I stand my ground and say that these small voluntary bonus plans over time will establish good working relationships with agents and give them incentives to work harder than even a good investor friendly agent.

@Mark Gallagher @Eric Blackford   I like your systematic approach and I completely agree that when your interests diverge from the agents, the majority of agents look after themselves at your expense.  I too have offered and paid my agent extra commission, out of pocket, when they have negotiated better prices.  Most agents wont negotiate for crap if they think it's going to put their sales commission at at rick.  Most agents want you to overbid on property so they get paid at your expense.  Most agents upsell you homes at the top of your investment range and try to add urgency to the deal.  Most agents would rather loose $500 extra commission on a $3000 commission deal to close it as soon as possible than risk waiting two weeks for a better offer. 

The only flaw I see with your design on first glace is that your commission bonus structure is too generous.  Giving the agent an extra $1,300 for negotiating $4,000 off the price is over-incentivizing.

@Mark Gallagher  you are academically correct and realistically wrong.  The vast majority of agents are horrible, especially whilst dealing with investors.  A lot of their incompetence and insouciance can be excused because they are used to dealing with ignorant and clueless emotional buyers and sellers - but the fact remains extant.  Just ask the last 7/8 agents I've dumpped due to incompetence, dishonesty, or both.  Now I'm sure this doesn't apply to any agents here on BP.  Actually I would be impressed if any agent I worked with was actually on BP, well one of them is at least and that's a good sign.

@Eric Blackford

Someone texted me at 2:57 that they wanted to submit an offer on something (without seeing it). I had it signed by the buyer and submitted to the seller's agent within 10 minutes.

It's been on the market 6 days and the buyer offered 77% of list price. 

I can almost do it with my eyes closed. It's 2015 and there's technology available to make it very easy. 

That being said, If you wanted me to submit 50% of list price offers all day on every listing, I would tell you that you're wasting my time and I don't care how much you're paying me. 

In order for what you're proposing, (at least in PA) you'd have to draw up a buyer agency contract for every single deal the agent puts an offer in on. 

If things are overpriced by 50% that would mean you're seeing deals that are being advertised at ~3-4% cap rates. In my market, and I would bet most others, it's not common place. 

If I went through the MLS, I bet I wouldn't find 1 out of 1000 properties that sold at 50% of list price when sold.

I think you should spend more time finding off market deals if you're not satisfied with what's on market. 

@Steve B.

Perhaps the plan is too generous. How does 20% sound? 15% for $150 per $1k under? I think that number sounds good. What number would you use?

Remember, my anchor is set at the price that I want and know I can make the desired cash flow and cap rate, so at any level below that anchor is bonus for me too. Why not share it with the agent that worked her butt off and got denied 20 deals before this one closed?

@Eric Blackford

I forgot to note that I DO agree that we have opposite interests when I'm negotiating. Higher price = more commission. HOWEVER, we're talking such marginal movement in commission that it never comes into play. I prefer repeat business, not $10 more in commission one time.

@Steve B.

I agree. Most Realtors don't have any idea of how investing works. However, I do know realtors who don't know how investing works, and will happily make whatever offer the investor would like. 

Didn't watch your video, but have to agree with @Mark Gallagher , find another agent.  I recently had my buyer under contract on a home, at a price lower than what they were happy with.  In fact, after inspections they told to Not do anything to jeopardize the sale.  I still got them a $20k reduction, totally unexpected by them.  Yes it lowered my commission by a whopping $600, but ask me if I care.  I'd probably pass on your "anchor" pricing incentive, as it's probably unrealistic anyway, for the market.

@Mark Gallagher

interesting, I appreciate your input that commission difference is marginal. So lets keep in mind that @Steve B. says that my bonus plan is over incentivizing. What incentive would make you, as a buyer's agent go back to the seller's agent during negotiations and initiate a tactful argument that the buyer's offer is fair value for the property and he should sell it at that price point? (Assuming that if there was no incentive, you would go to the buyer and convince him to just give up or offer a higher amount). 

And yes, I am talking about sellers listing their properties at 3-4% cap prices in markets trading at 10-12% caps.

@Eric Blackford

Just go buy properties where you can easily get 10-12% cap. Problem solved. Ha.

There's no amount of money that would entice me. If you have a property listed at $100K, and you want to offer $50K - as long as I know you have the money and can close immediately, I'll make the offer. If the seller says $95K and you say $50K, I'm just going to keep saying $50K. There's no reason to justify your offer of $50K. All that does is 1) show that you REALLY want the place and 2) you'll never convince someone their property listed at $100K is worth $50K. Why wouldn't they just leave it on the market and reduce it by $10K every month. If your numbers are out-of-the-park at $50K, someone will certainly take it at $60K+. So unless the taxes are $1K a month, it makes more sense to leave the property ON the market and take $60K+ than take your $50K and run. 

Furthermore, if the seller were DESPERATE for cash and wanted out ASAP to the point of them willing to take $50K, I don't see any reason they would have it listed at $100K to begin with.

Originally posted by @Wayne Brooks :

Sort of proves my point:

"properties listed at 4% CAP's...", and you want a 12% CAP. That means you need to offer 1/3 of list price....

 What would make anyone think that someone asking $500,000 for a property worth $167,000 is interested in selling?  And why would any investor or Realtor waste their time with these people?  

@Bob Bowling @Mark Gallagher ,

I see this in my area, albeit at much lower prices Mr. Honolulu, when duplex and triplex owners are trying to sell their property to people that may want to live in one side and rent the other side(s) out. So they try to sell the place as a 6 bed 2 bath house and comp it that way when really it needs to be treated as an investment property.

What you get is duplexes listed at $180k that bring in $1,000 in gross rent. I want the agent to attempt to bring these sellers down to earth after they are listed for 365 days and scratch their heads.

Eric I was only referring to providing extra monetary incentive for your agent to reasonably negotiate, I cant speak to making offers at 50% of list, most agents rightfully find that a waste of their time and their reputations. 

Really the best solution would be to find an agent like @Wayne Brooks who is one of the most knowledgeable an intelligent posters on this website.  However your about twenty times more likely to get a hole in one at Augusta then stumble across an agent with that skill level and integrity.  As I said most RE agents handle clients by throwing a bowl of  canned sales routines and self-serving gimmick spaghetti against a wall and seeing what sticks.

@Eric Blackford

The problem with stats like these is that they only hold true is the underlying assumptions hold true. True investor agents like the better people on this site that are still agents do work on commission but its a different ballgame because investors invest many times where as most homeowners do not by often. For this reason its a one and done transaction and unlike investors most homeowners are not likely to really know values so they probably did not know their agent shorted them on the price to get it sold quicker and more a little more money. Homeowners also probably do not meet someone every day looking to use an agent like investors do.  The vast majority of agents deal with and are trained to deal with homeowners  so overall stats are not a great indicator when looking at investor agents. 

So besides just the fact that any really good agent will have enough integrity not to do this, I think most investor agents I met that are true investors know that the long game is much more profitable than the short game.

Lastly, why wouldn't you just use your strategy on FSBO?

Originally posted by @Eric Blackford :

@Bob Bowling @Mark Gallagher ,

I see this in my area, albeit at much lower prices Mr. Honolulu, when duplex and triplex owners are trying to sell their property to people that may want to live in one side and rent the other side(s) out. So they try to sell the place as a 6 bed 2 bath house and comp it that way when really it needs to be treated as an investment property.

What you get is duplexes listed at $180k that bring in $1,000 in gross rent. I want the agent to attempt to bring these sellers down to earth after they are listed for 365 days and scratch their heads.

 Well, then make a FULL price offer subject to financing and when the actual appraisal comes in at 50% of asking renegotiate with the appraisal as evidence of value.  Easier, cheaper and more fact based than your plan.