I recently had a call from a client wanting advice about pitfalls to be wary of when dealing with real estate agents on the sale of a property.
Here’s the things we discussed:
If the property is tenanted be heedful of the fact that the tenant’s co-operation in showing prospective buyers the property is paramount.
So why not, to encourage your tenants to give this co-operation freely, reduce the rent by say $20 to $30 per week during the period that the property is on the market.
This won’t mean much to you an investor at the end of the day for such a short period but it will to most tenants. To them it is the cost of a large pizza and a DVD every Sunday night.
Which Agent to Use
Understand the thinking of the Real Estate Agent.
Wherever possible, use the same Agent to sell who has been managing the letting of the property. Appreciate that the reason the Letting Agent on most occasions has been dutifully managing the letting of your property over the last few years has not been for the meagre 7.5% commission they pick up on the rental paid to them.
The bigger picture to them is that management of the letting will usually also lead to the eventual sale of the property through their office at some time in the future.
The co-operation between the Letting Agent in helping to organise inspections of the property through the Selling Agent will go a long way in helping to achieve a sale. Where the Letting Agent and the Selling Agent are one and the same company this will facilitate the process.
How little co-operation you see though, where an investor has given no thought to this issue and has engaged another agency to sell the property.
The first that the annoyed Letting Agent hears of it is when they are asked by the owner, through another Agent, for access to the property to show a prospective Buyer.
If you were that Agent, just imagine how offended you would be after years of good service, you are not given the chance to sell a property on behalf of someone with whom you already have an established relationship.
Little co-operation is often forthcoming in these circumstances and clients regularly complain about the Agent’s attitude in frustrating their efforts to sell the property. If only the investor had given the matter a little more thought.
When is Commission Payable?
Under standard documentation, commission is payable by the Seller in a number of circumstances.
Firstly, if settlement takes place.
Secondly, if the Buyer defaults under the Contract and forfeits (loses to the Seller) their deposit money.
Finally, if the Buyer and Seller, for whatever reason, agree to simply release each other from the Contract and go their own ways.
In my opinion, a Real Estate Agent’s success is an “all or nothing” affair.
I believe they should only be paid if the matter proceeds to settlement. I recommend that investors carefully read the fine print in the Agency Agreement and make alterations to provide that commission is only payable on settlement.
In my opinion, they are paid handsomely if this result is achieved. [sam id=32 codes=’true’]
Receiving commission if a deposit is forfeited to a Seller will usually result in the Seller receiving very little of the deposit monies with most of the deposit monies going to the Agent in payment of commission (particularly where the deposit in many transactions in todays market is not much more that the Agent’s commission in any case).
So too, if the Buyer and the Seller simply release each other from the Contract for whatever reason. My last experience with this was where the male and female Buyers were both made redundant before the settlement of the purchase of their new home with no real prospect of re-employment.
In theory they were bound to settle the purchase but when they approached the Seller to let her know of their misfortune, the Seller responded at a human level by releasing them from their obligation under the Contract.
She lived in the same town as them and knew their redundancy and prospects of re-employment were real. why should an Agent be entitled to commission in these circumstances?
Don’t let the Agent’s greater negotiating and sales skills seduce you into agreeing to something different.
And don’t let the Agent dismiss your objection to this issue with the elegance and ease of a comment like “Oh, don’t worry about that, we would never charge you commission if the matter didn’t proceed to settlement.” “Famous last words”, I say.
It reminds me of the medical staff in a bulk billing medical practice who are under pressure to push patients through when they say to you “Oh, don’t worry about it, it just looks like a rash to me.”
Before granting to any Real Estate Agent a sole or exclusive agency ensure your written Agreement with them provides that they must join with another Agent who has a Buyer in order to achieve a sale.
Make sure also that The Agency Agreement does not state the Agent’s obligation (as with the case of one of Australia’s major franchise Real Estate chains) to do so only applies after an Auction and then on a 80/20 commission share basis.
No other Agent will be motivated to introduce a Buyer to your sole/exclusive Agent if they are to receive anything less than 30 or 40% of the commission.
Penalties to Lender on Loan Payout
Always, and I mean always call your lender before you place the property on the market to check what the payout will be on the loan where you have a loan for a fixed number of years.
If interest rates have fallen since you took out that loan there will certainly be a penalty payout (sometimes called “break costs”).
Understand that your lender, upon receiving a payout of the loan, will then lend that money out again in a new marketplace where they will receive a lower interest rate than what you had agreed to pay them for say, the next two or three years.
Your loan contract therefore will nearly always provide that there is a penalty payable to the lender in these circumstances being the economic cost to them of receiving repayment of the monies early.
Don’t be surprised too if they advise you that the penalty is $10,000 or even $15,000. This is not an uncommon experience in today’s market. That will make you think twice about whether you want to sell now or in a year or two’s time when the penalty does not apply.
Negotiation the Agent’s Commission
When listing a property for sale I recommend against negotiating the Agent down in their commission.
It will only disincentivise them.
Why would an Agent work hard on the sale of your property if, though tough bargaining you had forced them to accept the job on the basis of say a commission rate of say 1.5%, if they are being paid say 2.5% by other sellers who have engaged their Agency.
Where would their sales efforts and energies be directed? Not at your property.
If however at the time they produce a Contract to you, their earlier promises to you have not matched their performance (ie. they overpromise and under deliver) you can then raise the issue of commission and negotiate a lower figure if you think it is appropriate.
If you do this however at the start of the process you are being of disservice to yourself as well as to the Agent.
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