Financial

Buying A Home Directly With The Listing Agent Can Save You Big Bucks

If you’re looking to save money when buying a home, you may want to let only the listing agent represent you instead of having a buyer’s agent. It’s an unusual move, but one I’ve conducted three times. Overall, this strategy has saved me about $350,000.

In real estate, a listing agent is the person who lists a home for sale. With inventory down and demand up, having a listing is like winning a golden ticket. A prospective buyer normally has their own real estate agent for representation. Let’s call this agent the buyer’s agent.

An excellent buyer’s agent knows the market well in order to help their client offer the right price. The buyer’s agent should also know what type of landmines to look out for when purchasing a property. An experienced buyer’s agent is also a master negotiator.

The cost of using a buyer’s agent to buy a property is generally half the listing agent’s overall commission. The standard selling commissions is now 5%, down from 6%. Therefore, the listing agent and the buyer’s agent each get 2.5% of the final selling price of the home.

The Real Estate Commission Structure Invites Conflict

The 5% selling commission ultimately comes out of the seller’s pocket. For example, if a seller has a $1 million home to sell, the $50,000 in commissions is going to real estate agents, regardless of how it is split.

However, there are situations where the seller will feel terrible about paying a commission to the buyer’s agent. One situation is when the buyer’s agent is trying to make a low-ball offer. Another situation is when the buyer delays closing and throws a bunch of monkey wrenches once under contract to try and negotiate a better deal.

Selling a property is much more stressful than buying a property. Therefore, if you’re selling your home to a difficult buyer, you’ll feel extra bad about paying a commission to that buyer’s agent.

To help convince you that buying a home directly with the listing agent could save you money, let me recap my own experience trying to sell a home.

My Experience Paying Real Estate Commissions

When I sold my rental property in 2017, I agreed to pay a 4.5% total commission: 2% to the listing agent, and 2.5% to the buyer’s agent. It was odd the buyer’s agent got a bigger percentage, but my listing agent insisted she could only cut her portion of the commission to attract good buyers.

Think about this logic for a bit. My listing agent believed if I did not offer a high enough commission, buyers agents would not be willing to show a listing to their clients. Thank goodness for the internet.

I went along with the proposal because I wasn’t going to sell unless I got an aspirational price. Even though a 4.5% commission was better than 5%+, I still didn’t feel good about paying so much.

When my listing agent found a buyer, he was the only one. I was very conflicted about selling because the ideal holding time for real estate is as long as possible. However, the potential buyer offered a price $245,000 higher than my expectation.

Paid A Commission To Lose Money

The buyer ended up delaying closing for about two weeks. Each day beyond the closing deadline felt like five days had past. As a seller, you tend to think of the worst case scenario where the buyer ultimately does not come through. If the buyer doesn’t, the entire escrow period will have been a waste. Further, having to put your property back on the market after it failed to close escrow might bring out some vultures.

After the buyer asked for a price concession after doing an inspection, I distinctly remember asking my agent, Why am I paying the buyer’s agent 2.5% to get paid less? At this moment in time, I felt foolish.

The three main reasons why I ultimately went through with the sale was because 1) My tax-free profit exclusion period was ending, 2) As a new dad, I didn’t want to deal with rowdy tenants anymore, and 3) The price was higher than I had expected. All the same, paying a buyer’s agent felt bad

Getting The Listing Agent To Represent Both Sides

After selling my rental property, I vowed to always try and buy property directly with the listing agent to save money. I had done so with great success in 2014, despite being in a competitive bidding situation. Given I find all my properties anyway and know my local real estate market very well, using a buyer’s agent didn’t add much value. Going through a difficult property sale also gives you important experience for buying your next property.

By buying a property without a buyer’s agent, the potential savings equals half the total commission. For example, if the total commission is 5% and the property sells for $1 million, you could potentially save $25,000 off your purchase price. In order to do so, the listing agent would have to agree to represent both parties and not charge the seller the other 2.5% commission.

If the listing agent refuses to drop some or all of the buyer’s agent commission by representing you, then using the listing agent to save money won’t work. The listing agent is just greedily trying to capture more of the economic profit. In this situation, the only way to save money with a listing agent is to have the listing agent convince the seller to accept a lower price.

The Conflict Of Representing Both Buyer And Seller

Besides saving money, the other benefit of using the listing agent to represent you is information. The listing agent can provide better guidance on submitting a winning offer because he sees the other offers. Without the buyer’s agent in the way, communication flow is streamlined.

This is where many listing agents find themselves in conflict. The conflict is the main reason why some real estate agents won’t represent both seller and buyer. Not only do they feel conflicted, they don’t have the experience to manage both sides of the trade.

I once tried to buy a property directly with the listing agent. It was a mother / son team. The mother didn’t represent me, but her son did. Given the property was in high demand, there were five offers.

The son gave me color on the competing offers. Therefore, I had an edge in writing the best offer possible. Unfortunately, the winning offer was 20% higher than the second highest offer. As a result, I did not raise my offer because it felt like too much.

In some situations, a seller may simply not approve of the listing agent representing both sides. But again, it depends on how skilled the listing agent is at convincing the seller of the benefits. It also depends on how high the demand is for the home. If the demand for the home is lukewarm, it is easier to convince the seller to allow for dual representation.

The Listing Agent Tends To Be More Loyal To The Seller

Please note that most of the time, in a dual representation situation, the listing agent will be more loyal to the seller. It takes courtship to win a listing, especially when there are more real estate agents than listings.

A listing agent needs to meet the seller and pitch their expertise, marketing game plan, and likely selling price. There might be multiple pitches over many months before finally winning the listing. For the seller, so much is at stake, which is why the vetting process is more thorough than finding a buyer’s agent.

The buyer who wants to use the listing agent to save money needs to be realistic. It is unlikely the listing agent will fight as hard for the buyer as he will for the seller. The listing agent will have known the seller for much longer than the potential buyer as well.

By knowing the listing agent will be biased for the seller, you will need to fight harder to get the best terms and price possible if you let the listing agent also represent you.

How To Convince The Seller To Let The Listing Agent Represent Both Sides

As of today, I have now successfully bought three single family homes where the listing agent represented me in each situation: 2014, 2019, 2020.

Here are the keys to convincing the seller to let the listing agent represent both sides:

1) Convince the seller you are a fantastic buyer.

If you aren’t perceived to be a serious buyer with a big down payment, great credit score, and solid financials, you will never convince the listing agent to represent you.

You must be pre-approved for a mortgage. In addition, you must show you have enough funds to pay cash for the property. Waiving financing and/or inspection contingencies help too. Finally, a real estate love letter usually helps. At the end of the day, you need to want the seller to want you.

2) Convince the listing agent you are a fantastic buyer.

Before you are able to convince the seller you are a legitimate buyer, you must convince the listing agent. The listing agent is putting his reputation on the line to represent you. If the transaction falls apart, the listing agent tends to look bad on both sides.

Therefore, you must also show proof of financials to the listing agent. You should also spend as much time talking to the listing agent as possible.

I literally spent over five hours talking to the listing agent of my current home over five visits during the middle of the pandemic. Given only private showings were allowed, we got to really open up about everything. During times of uncertainty, people tend to bond. As a result, trust is created.

You will likely never speak to or trade messages with the seller directly. Therefore, it is up to the listing agent to make your case for you.

3) Highlight the value proposition of dual representation.

The full savings potential for the buyer is the buyer’s agent commission. However, you can always negotiate a smaller discount where the seller also benefits.

For example, instead of asking for a 2.5%, $25,000 discount on a $1 million property, ask for a $15,000 – $20,000 discount. This way, the seller gets to make $5,000 – $10,000 more on the sale of the property. The listing agent will still get paid his same 2.5% no matter what. There are many ways to negotiate how the buyer’s agent commission can get split up. You can even squeeze the listing agent’s commission in a buyer’s market.

In addition to letting the seller make more money, the listing agent can also pitch the seller on the benefits of more efficient information flow between parties. Instead of playing the game of haggling back and forth and waiting, an experienced listing agent can mediate an optimal outcome for both. The Saturn car company was famous for doing transparent pricing.

Again, it is very stressful to sell a house. If the listing agent can extract information from the buyer more efficiently, this helps soothe the nerves. Further, by cutting out the buyer’s commission, the seller should feel like there is more economic efficiency as well.

Always Put Yourself In The Buyer’s Shoes

So far, you should come away from my post thinking anything is possible. Everything is a negotiation. Most people never bother to try this dual representation route because they are too afraid to ask. But you must also know what you’re doing. Therefore, going the listing agent representation route should be reserved for experienced buyers.

However, even if you don’t have much or any real estate buying experience, if the listing agent represents you, he or she has a fiduciary duty to explain the entire process and get you the best deal. If you don’t understand a document, a term, or a particular part during escrow, ASK. Your agent must explain everything to you so you can proceed with confidence. If you don’t feel comfortable buying, then don’t.

Those real estate agents that get listings are likely more experienced than those who do not. After all, if you plan to sell a house, you want the best real estate agent possible for the same amount of commission.

Of course, you need to do your due diligence on the listing agent and make sure she or he has a good track record before representing you. Otherwise, the skew of the listing agent might favor the seller too much. It is hard for a dual representation agent to be completely equal in representation.

As a buyer, you must think about what the seller ultimately gets to keep. You must understand all the costs that are associated with selling a property. Then, you’ve got to think in terms of what the seller gets to KEEP after paying all commissions, taxes, and preparation costs.

Selling a property for a lower price doesn’t necessary mean the seller gets less. The seller only gets less if the listing agent represents both sides and doesn’t agree to cut the buyer’s agent commission by more than the lower offer amount.

Below is an example where a lower priced offer can compete with a higher priced offer. Let’s put ourselves in the seller’s shoes.

Example Where Selling For Less Can Compete With Higher Offers

Let’s say the property for sale costs $1 million and the total commission is 5%. The listing agent represents both sides and agrees to cut the 2.5% commission to the buyer’s agent to zero. The buyer offers $975,000 and the seller agrees.

If the seller sells the property for $975,000, the seller’s gross profit after paying a 2.5% commission plus 1% in transfer taxes = $940,875 ($975,000 X 3.5%).

The seller is a single man who bought the property for $500,000 years ago. He has no mortgage. Therefore, his net profit before taxes is $440,875 ($940,875 – $500,000). Once we subtract the $250,000 tax-free profit exclusion, the seller only has to pay taxes on $190,875 ($440,000 – $250,000).

Because the seller is in a high federal income tax bracket, his federal long-term capital gains tax rate is 20% and his state capital gains tax rate is 10%. Therefore, the seller’s tax bill is $190,875 X 30% = $57,262. The seller gets to keep $383,613 ($440,875 minus tax bill of $57,262).

Enter A Higher Competing Offer

Now let’s say there is another buyer of the property who offers $990,000, or $15,000 more than the first buyer. The first offer should be safe because the seller would also have to pay the 2.5% buyer’s agent commission for a total of 5% commission.

Therefore, the gross proceeds is $990,000 X (5% + 1% in transfer taxes) = $930,600, which is $10,275 below the gross proceeds of the first offer where the listing agent represented both parties and limited the 2.5% buyer’s agent commission.

But, what if a savvy buyer comes in with a higher offer slightly greater than the 2.5% buyer’s commission savings? Let’s say the competing buyer offers $1,001,000, or $26,000 more than the $975,000 offer.

What is the net proceeds to the seller? $1,001,000 X (5% + 1% in transfer taxes) = $940,940 (vs. $940,875). $940,940 – $500,000 (cost) = $440,940. Then, take $440,940 – $250,000 (tax-free profit exclusion) = $190,940. Tax bill = $190,940 x 30% = $57,282. Net proceeds to seller = $383,658 versus $383,613 net proceeds.

In other words, even with an above ask offer, the net proceeds is about the same. The seller will then have to evaluate each offer based on speed of closing, size of down payment, contingencies and other factors.

All else being equal, the seller should prefer the lower offer that nets a similar figure given there is less “economic waste” due to a lower commission amount paid. Not only is the seller agreeing to pay half the commission, the seller is also paying half the commission on a lower selling price.

Finally, the seller may be more comfortable with the first buyer because the listing agent has gotten to know the first buyer better. People do business with people they trust most. When it comes to selling a property, trust that a buyer will come through is extremely important.

A Buyer With A Buyer’s Agent Has To Pay More

When a competing higher offer finds out they lost to a lower competing offer it can be a big shock. What kind of seller would accept less? Now we know one of the main reasons is due to the listing agent representing the winning buyer.

If you choose to use a buyer’s agent that is totally normal. Using a buyer’s agent is a good idea for the vast majority of buyers. In some states, using a real estate attorney is required to transact. There are plenty of legal documents to understand and sign.

Although the listing agent should explain everything to you clearly, having a buyer’s agent and/or real estate attorney should give you more confidence. After all, if you’re going to spend a large amount of money, having an expert guide you through the process is useful. Just know that most of the time, if you use a buyer’s agent, you will have to pay more for the home.

The Listing Agent Was Trustworthy

In my case, the competing offer for my house was significantly more than the offer I was thinking of giving. Therefore, I ran the numbers to figure out how to ensure the seller netted a very similar amount. Then I used my negotiation skills to try and win over the listing agent to win over the seller. The process took about two weeks of convincing the listing agent and another one week of waiting to hear from the seller which offer he would choose.

I was in no rush because we were in the middle of a pandemic (April – July 2020). In fact, waiting provided a nice call option to see what the S&P 500 would do. The higher the S&P 500 rebounded while I waited, the more conviction I had in buying this temporary forever home.

I felt confident working directly with the listing agent because he worked with the largest brokerage in the city. He had a good track record based on his previous listings he had on his website. Over a five-hour period, I learned about his family, his other investments, his views about the market and so forth. He was a kind and responsive man who was struggling to raise two young kids just like me. In the end, he felt like a listing agent I could trust.

If you are an experienced buyer, the next time you try to buy a property, consider working directly with the listing agent. If you know the local real estate market well, going direct could be a winning move. It doesn’t hurt to at least have a conversation to see where things might go. You just never know unless you try!

Related posts:

Buy Utility, Rent Luxury (BURL): The Real Estate Investing Rule To Follow

How A Real Estate Lawyer Can Save You Money, Pain, And Suffering

Readers, have you ever worked directly with the listing agent to buy a property? If so, how did it go? What were some things that didn’t help you when you went with a listing agent?

Source
Buying A Home Directly With The Listing Agent Can Save You Big Bucks is written by Financial Samurai for www.financialsamurai.com

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