Getting your agent to be truly on your side

38 Replies

Originally posted by @Bob Bowling:
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.

 But if the appraisal comes back at 70% or 80% or even worse 100% the buyer is stuck.  Or if the asking price is grossly overpriced, it may not be possible to qualify at the asking price - which could easily lead to the offer being rejected.

Originally posted by @Mark Gallagher :

@Eric Blackford

Simply put, I think you're working with the wrong agent(s) if you have to come up with this plan. 

 I completely agree :) every agent is different in how they work.....some unfortunately will be bad...but others will be great and talk to you straight with no bull....that's where doing due dillingence comes in and interviewing folks comes in. Make sure that on top of the agent being a hard working honest type.....that your personalities also mesh....

Interesting discussion.  As an agent - I don't think I'd particularly be enticed by this incentive plan.  My job is to negotiate well no matter what side of the transaction I am on, or where the compensation is coming from, period.  I am not focused on a little more or less commission here or there. I'm troubled by the amount of distrust of agents, though I unfortunately have no doubt that much of it is warranted. I encourage new investors to remember is that ultimately, the purchase is theirs, and they need to know their own numbers.  An agent will provide the comps and guidance, get rent roll, etc., but in the end it is the end buyer that needs to crunch the numbers and decide what works for them.  

It's not necessarily over-incentivizing at 33% of every $1,000 under the anchor point because at a price under the anchor you're getting a discount regardless. And 77% of a discount is better than 100% of no discount (i.e. a price not under the anchor). 

Put another way: you can define incentivizing and over-incentivizing however you prefer. I define it as "am I getting more at the end of this and, if yes, what am I willing to forgo to get that higher profit number?" 

This is a great discussion.  I have to agree that there are many agents that are not  familiar with the mindset of an investor thus making it a challenge to work together to meet the investors goals.

The concept that would best help all investors when working with agents is two fold:

1. Define what you expect from your agent.  Take time and write it down - run it past a mentor or other investors.  Just as important as any member of your team, your agent should align with your goals - figure out how they can do this.

2. Communicate - Interview agents and let them know how they can be a positive part of the team to achieve your goals.  Talk with them about how they will fulfill this role.  If they are not a good fit THAT'S OK - keep looking until you find a match.  Many time, investors will do their due diligence on a property but forget to do it on their team members.  It will help you minimize frustrations that an agent can cause.  

     After you find the agent that best fits you and your goals, remember to try them out.  Ask them to do some of the things that you outlined and see if they will actually do it.  Please communicate when you see that they are not performing like you expect.  If they recognize the problem and make corrections you probably found "The One".  If they don't make corrections - keep looking.  Anything of real value takes work.

     Just like your PM, loan agent, contractor or any other part of your team, be clear on what you want so they are truly be an asset not an obstacle.

I'm not a lawyer and I am new to being an agent...but this would most likely be considered a "Net Listing"  and in most states is considered illegal and unethical.  Sorry to burst your bubble.


  But if the appraisal comes back at 70% or 80% or even worse 100% the buyer is stuck.  Or if the asking price is grossly overpriced, it may not be possible to qualify at the asking price - which could easily lead to the offer being rejected.

 The buyer would only be on the hook if the appraisal came back at contract price.  If that happens then Eric Blackford is the delusional buyer.  

@Bob Bowling,

I've seen and heard of appraisers in the area saying "how much do you need the number to be?" Also, they tend base their appraisal off of the negotiated price. Google "anchoring heuristic" for issues in this department. But the point is that in illiquid markets such as the area I am investing in, it seems like agents base the appraised value some number off of the listing price or the negotiated price, as finding comps can be impossible. 

If the property is listed at a 3 cap in a 12 cap non-appreciating market, who is delusional?

@Charles Worth

I'm working in a 15,000 population town and FSBO investment properties are rare. MFP sellers in the area like to list the property with an agent on the MLS to potentially attract absent investors... even still, properties may not sell for a year.

@Joshua Springer

A net listing is on the seller's end, not the buyers end. Interesting thought though, I would want this to be legal.

As far as I'm concerned it's more like a tip, and if tipping your agent is illegal, then yes we are in trouble with this idea.

@Doug W.

My thoughts exactly, but you wrote it more tactfully than myself

Originally posted by @Eric Blackford :

     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?

@Eric - I am a big fan of this approach, especially when selling, because it addresses the core of the agency problem.  

The funny thing about this, is that lawyers There are good agents out there, but why not just align on appropriate incentives regardless? particularly the ones on BP, but they are few and far between. 

My process looks like this:

1. Agree on Market Value (e.g. $510k) with the agent

2. Settle on market commission rate (typically 2.5-3.0%) based on inventory, market velocity, quality of property, etc. I will use 2.5% for this discussion 

3. Compute expected commission at market value... AKA #1 x #2 ... ($510k x 2.5% = $12,750). This is the value that we are incentivizing towards.

4. Set a base commission rate (e.g. 2%) below the market rate and a bonus rate of ~10x that. 20% (10 x 2%) will be used for this discussion. These are your levers of "incentive". 

5. Determine anchor point that would achieve a $12,750 commission. The anchor in my example is ~$500k. The math is

[Base Commission x Anchor Point] + [(Sales Price - Anchor Point) x Bonus Rate]


Results

If house sells for market value ($510k) - the selling agent would earn $12,750 using my incentive scheme... exactly the same as they would with the market rate

If agent sells house for 10k more than market value ($520k) - The selling agent would earn $15,600 or $2,000 more than market rate. This increased commission encourages the agent to work hard for a higher price and allows them to meaningfully share in the benefits. 

If agent sells house for 10k less than market value ($500k) - The selling agent would earn $10k or $2,600 less than market rate. This reduced commission encourages the agent to not accept low offers and allows them to share in the disappointment.

PS - It would be twice as powerful if I (as a seller) paid the buyer's agent in the same way. There is a clear conflict on interest (the buyers agent makes increasingly more as their client pays me more), but as was discussed earlier, a flat fee has conflict too.