According to conventional wisdom, you should always hire a real estate agent when you’re trying to buy a house. The broker’s market expertise will help you decide what moves to make and what price to pay. Because the seller usually has his own broker, the motto “fight fire with fire” applies as well. Perhaps most important, home buyers don’t even have to pay their brokers; the seller’s broker splits the commission with your agent. Hiring a buy-side broker splits the commission with your agent.
But consider how you might use the seller’s agent to your advantage. Remember that the seller’s broker typically communicates the buyer’s offer to the homeowner and advises the homeowner on whether to accept. The seller’s agent typically receives 5% of the sale price, which she then splits with the buyer’s agent. This system would seem to align the seller’s agent’s incentives perfectly with those of her principal: the higher the sale price, the higher the agent’s fee.
A bit of probing reveals a problem: the seller’s broker has an incentive to sell quickly, to minimize her time and effort, while the seller is motivated to hold out for top dollar. For example, if a house can be sold for between $500,000 and $600,000, the seller would strongly prefer to hold out for $600,000. But the broker might be willing to take just $500,000 because the lower price would cost her only $2,500 (2.5% of the $100,000 differential). Therefore, the seller’s agent has a subtle incentive to recommend that the seller accept a low offer.
In fact, it is usually agents, rather than sellers, who propose price reductions. And in a sample of 100,000 homes in suburban Chicago, economists Steven Levitt and Chad Syverson found that real-estate agents leave their own homes on the market for 10 days longer and sell them for 3% more than the vast majority of deals in which an agent sold someone else’s house.
So, should you, as the buyer, hire an agent? If you work without an agent, the seller’s agent has an added incentive to recommend an offer to her principal, as her fee is doubled – 5% rather than 2.5%. (In the example above, the seller’s agent would receive $12,500 on a $500,000 sale if the buyer has an agent and $25,000 on a sale with no buyer’s agent). As the buyer, you could use this enhanced incentive to your advantage; by working without an agent, you could gain an ardent advocate in the conversation between the seller and the seller’s broker.
There are limits to this analysis. A seller’s agent has a fiduciary duty to her client that would constrain her legal ability to take advantage of this disconnect in incentives. In addition, in an unknown market, a potential buyer may find the expertise of a broker to be indispensable. Nonetheless, prospective home buyers should weigh the pros and cons of using an agent before succumbing to conventional wisdom.
In our FREE special report from the Program on Negotiation at Harvard Law School – The New Conflict Management: Effective Conflict Resolution Strategies to Avoid Litigation – renowned negotiation experts uncover unconventional approaches to conflict management that can turn adversaries into partners.
Related Article: Mediation in Transactional Negotiation