Who’s paying your agent?

Many buyers forget that the ever-helpful estate agent showing them round properties is paid by the seller. They are not being polite and making small talk, they want to learn as much as possible about your motivation before they then use your indiscretions to force you to pay more than you want. Are you being forced to move because you are changing job or getting divorced? Have you got a place in a local school for your kids? Will your mother-in-law chip in another £5k if you find exactly the right thing? Well, we’ve discussed this before and my advice remains – don’t tell an estate agent anything. He is not a broker, honestly trying to find a compromise between two waring parties. He is paid to get the best deal he can.

I was reminded recently that in fact this is not always the case. The seller may think that he is getting his agents undivided attention for the 1.5% commission he is paying but the following example is worth sharing just in case you think that this chunky fee is all that counts. He earns money in other ways. In some cases he earns more indirectly from the buyer than he does from the seller, his client. Here’s the problem;-

An estate agent who offers buyers financial services usually gets paid by the institution he introduces the buyer to.  Sometimes he gets paid a lot!

Lets assume that an agent is selling a house for £200,000 and he is charging 2% for the privilege. Along comes Mr and Mrs Smith who look like great buyers. They are in rented accommodation (with no house to have to sell), they have £160,000 in the bank and a small mortgage agreed in principal of £40k. They offer the asking price of £200,000. They sound like good buyers don’t they.

Miss Jones is a young professional. Her old flat is on the market but ‘under offer’ to someone with a house to sell too. She will have £50,000 equity in her flat but she offers £195k.

Mr & Mrs Smith’s offer will earn the agent £4,000 remember. The seller will receive 195,300 (the VAT is £700). If the seller accepts the lovely Miss Jones’ lower offer, the agent gets £100 less fee but the vendor only gets £190,417.50. 
Our helpful agent has a financial services colleague who  is able to get Miss Jones a mortgage offer of £145,000 (earning him £285). 

The agents would get £185 more.

So, although Miss Jones is offering less, has a smaller deposit, is in a chain and needs a much bigger mortgage the agent will actually earn more if his client accepts her lower offer.

Now the law requires agents to disclose any such ‘interest’ to their client and I’m sure most do but of course there are no records that would let us all check. In fact it can be worse as the individual negotiator is usually paid on commission and if they have a target to meet and are short that month they might not get anything! 

If the same agent is selling Miss Jones’ flat then they get the commission on that sale. If they can get Miss Jones to use their legal services and conveyancing services there is even more to earn. 

I’m sure you’d think that it is hard for the seller not to take Mr and Mrs Smiths’ offer but even if their offer isn’t put through in the first place (which would be illegal) then the agent could ‘frustrate’ the Smiths by not taking their calls or returning them, talking the property down, undermine the price or offering other properties.

Most agents would never consider stooping to these levels but there are some who have decided to forgo the lucrative revenue stream that financial services offer to avoid the perception of this altogether. Agents who work with IFA’s avoid the problem of those who are actually owned by a financial institution have in this regard but the moral of the story is this;- agents don’t just earn fees from selling houses. Some earn  money from selling mortgages, insurance policies, legal services, removal companies, HiP providers…..