Why real estate agents lie to you
The real estate industry has a huge problem with incentives. It’s an issue that is widespread and property owners are rightly sick of it. It’s fair to say that most people that have sold a property will have had an experience where they’ve felt the agent was acting in their own interests. Those using a traditional property manager have also likely had similar experiences at one point or another. How often have you been sold false promises whilst signing with an agent only for them to walk it back to quickly close a deal? Here we break down the different incentives of agents and what you can do to make sure agents are acting in your best interests.
Damn lying sales agents!
Consider this scenario. You are ready to sell your property, so you do some research and select a shortlist of three local agents to appraise your property. After doing some research you believe that in the current market your property is worth $1m, maybe $1.05m on a good day. Agent A appraises your property and lets you know you’re likely to get somewhere between $950k and $1 million for your property. Agent B says that you’re likely to get between $1m and $1.05m. Agent C on the other hand says that the other agents are way underestimating your property’s potential and that he can easily get you somewhere between $1.1m and $1.2m with his experience and vast contact book. Who do you choose?
Psychologically it is very hard to resist Agent C. He’s sold you the dream and you don’t want to risk leaving money on the table. The reality of the situation though is that Agent A and B have actually acted with integrity and in good faith. Aren’t these the qualities you would want in someone selling your greatest asset? You sign an agency agreement with Agent C giving him exclusivity on your property for 60 or 90 days. Now that you’re locked in, the $1.2m figure is never spoken of again. Suddenly the market has changed, the economy is tougher, the one down the road went for less. The agent is spending more time working you than working the market as he tries to bring down your expectations – expectation the agent artificially inflated in the first place.
This leads to the problematic issue – the agent’s commission structure is linear. For the sake of simplicity let’s assume the agent’s commission is 2%. On a $1m sale they will receive a $20,000 commission. Yet an agent’s real value comes from getting that extra 10% out of the market for their vendor. Yet if they manage to secure an extra $100,000, they receive an extra $2,000. The whole structure incentives agents to lie to secure the business, and then quickly turnover the property so they can move onto their next deal. It’s little wonder that trust in agents are at record lows.
Property owners have the power to get a better deal and ensure that their agent is working in their best interest. When an agent appraises your property and quotes you a figure that seems rather high, ask them if they will take a reduced commission if they are unable to achieve the figure you have quoted them. After all, you’re in large part signing with them because of the price they quoted you. Alternatively, you could suggest a pricing model whereby you pay say, 1% commission up to a certain amount but then 10% of everything above the property’s reserve. Watch how hard an agent works to secure you the result they promised under that structure!
Damn lying property managers!
Property managers operate under a similar dynamic when trying to secure your business. They have every incentive to tell you that they will achieve an unrealistic price if it gets you to sign a management agreement. Property managers know that your property is a sticky asset. Once they’re managing your property, you’re unlikely to leave no matter how poor the service is. It’s all about getting you signed on the dotted line even if it hurts you financially.
Every property has a market rent at which a tenant will be promptly found. Property managers will often tell property owners that they can get them much more than this rate – and they know that they are lying. A property manager is usually paid a property management fee and a letting fee. Assume you have a property objectively is likely to achieve $1,000 a week but the agent told they will get you $1,200 a week to secure the business. The property will sit there for a few weeks, and then the agent will start trying to bring you down to the market. By this time, you’ve gone four or five weeks without rent. The average property in Sydney is vacant for 32 days or 4.5 weeks – this is not a hypothetical scenario. The vacancy has cost you $4500, whilst the agent has only forgone their management fee of $225 ($4500 x 5%).
Despite their dishonesty costing you $4500 in lost rent they have been rewarded by securing your property to manage for years to come. The property manager will still get their management fee and letting fee, it just starts a month after they signed you up. It’s evident that the incentives of property managers and landlords are badly misaligned – with property owners getting the short end of the stick.
The key to realigning the incentives of investors and property managers is to make property managers have some skin in the game. When property investors use a traditional property manager, they bear all the pain when the property is vacant, or the tenant is not paying the rent. Yet it is the property manager’s job to mitigate these risks.
Certainty Property was born out of a desire to revolutionise property management. We fundamentally believe that a property manager’s incentives should be aligned with landlords. That’s why when a property is vacant, or a tenant is behind in rent – we pay the rent instead. When we are paying the rent out of our own pocket there is a sense of urgency to getting our clients the best outcome that simply isn’t there with traditional property managers.