The Agency Problem: How to protect yourself from picking the wrong Real Estate Agent.

The Agency Problem is one which everyone faces throughout life, whether you are trying to find an Accountant, a Solicitor or a Financial Planner, they all ultimately end up with great power over some of the biggest decisions we make in our lives. They can control lines of communication and the flow of information, and give advice that has a huge impact on our finances and our lifestyle. While anyone you engage to represent you should have a fiduciary obligation to act in your best interests, we all know that this might not always be the case. Even when you think that the incentives align your interests with your agent (like in the case of selling a house), these are not always strong enough to keep agents honest. It is impossible to encourage the right behaviour if you are dealing with the wrong people. There are a few problems that are inherent within the Real Estate Industry and as you will see we can break these down to make selecting an agent as stress free as possible. Here are the three main problems to be aware of before deciding on who will be your Real Estate Agent:

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1.???? The Price Problem

You don’t know what the selling price will be – so how do you know what you are getting for all that commission, until after the sale is already done?

2.???? The Performance Problem

You won’t be able to know how good the agent is in comparison to the others until after you have chosen one.

3.???? The Information Problem

The volume of information involved in the sales process is actually quite astounding when you get into the detail, which makes it hard to identify what is actually important for you as an owner to know.

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By breaking down these three problems separately we can shortcut the decision-making process for you and make life a whole lot easier. Once we’ve dealt with these problems, I’ll give you a couple of key things to look for in an Agent (Hint: I call them Trust and Generalism). First, let’s look at the Price Problem, the most critical and the one that causes the most issues throughout the industry.

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The Price Problem

Think about when you are looking to buy something, say a car. You look online, maybe go for a test-drive, talk to some friends about the model of car you like. You are doing your research. Ultimately, once you decide on what you want, you then start shopping for the best deal, that is, the best price. In the same way, when you are getting quotes for big ticket items like a home renovation or trying to find a builder, you are looking for the best deal. In these situations, there is an incentive for the supplier of those goods to be the cheapest. The cheapest price will mean more consumers will buy their products or services over someone else’s, simple. Well, unfortunately in some cases, it’s not that simple at all.

Take a builder, if he quotes a price that is too expensive, the builder knows that you might try and find someone else, you might even be offended that the price was so high. So, as a builder, there is an incentive to quote a cheaper price in order to get the job. Once the job starts, if costs increase a little bit, the builder can handle that later through variations, the important part is that they already have the job. Not all builders operate this way of course, but the ones you don’t want to deal with, do.

?In Real Estate, The Price Problem negatively effects people in a different way, and disadvantages more people than anything else in our industry. As the owner of a house, you want the best possible price for it. So, if you have three agents quoting you three different prices, there is an incentive for you to select the agent that tells you the highest price. In such a competitive market (there are plenty of Real Estate Agents) there is always an agent that is willing to tell the owner a higher price to get the job. Similar to the builder, some agents may think, if the price is not quite as high later on I can handle that then, at least I have the job. The critical point here is that there is usually a link between bad builders and bad quotes. Similarly, there is a link between bad agents and bad quotes. If an agent is telling you the highest price and it is well outside what your home should be reasonably worth, then that should be a red flag for you. The same agents that use a high price to “get the job” are the same agents that use all manner of shortcuts to make more money with less effort, but ultimately this costs their clients. So, how do we solve the price problem?

One shortcut is to ask the agents to provide their estimate of value, before you give them an idea of what you think the property is worth. The good news is that property also isn’t that hard to price, if you do your research. The even better news is, as you start dealing with agents, you can ask them for how they came to their assessment of value and what method and data they used. A sure-fire way to test an agent out is to ask him to explain everything so you understand it, and let’s be honest – it isn’t that hard. For a full run down of how to price property, check out this article I wrote back in 2017. In short, there are only three methods you can use to price property, and only one is considered the gold standard for residential property – the Comparable Sales method. As you go through this process with the agent, be as objective as you can about what properties have sold that are similar to yours and how they compare. The attributes we use to compare properties are the Land, Location, Accommodation, Condition and Market Conditions. Each of these five dimensions can be expanded to include all attributes, and it is a great way to maintain your objectivity as you discover what the real value of your home should be. The closer you are to knowing the value of your property, the better you will be able to judge how good the agent is at providing an estimate. Now that the Pricing Problem is solved, let’s take a look at the Performance Problem, one which is a little bit harder to solve, but not impossible to.

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The Performance Problem

What makes a great Real Estate Agent? Well, of course it is the price they get and the experience the client has during the sale. The first indicator of performance is easy, the price achieved after any costs. No good getting a great result if the agent or marketing companies get most of it, which is why we talk about the result after any fees. The second measure of performance is a little harder to pin down - a great selling experience. This isn’t easy to produce, as selling is a stressful time and with lots of moving parts a calm moment can be hard to come by – but they do come. The reason Performance is so hard to judge when you are selecting an agent is because you don’t actually know what you are getting until you have already chosen someone. It is impossible for an agent to show you everything that they do, and so you make the best decision you can with the information they have given you. So, how do you increase your chances of making the right decision? Here are a few tips to test out an agent before you sign with them:

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1.???? Ask them lots of “Why” questions

Why are you suggesting this timeline?

Why do you think we should market the property in that medium or channel?

Why should we be considering that method of sale, auction or private sale?

2.???? Ask them specific questions about how they deal with interested buyers

How do you run your open for inspections?

What questions do you ask and how does this help us?

What can you do that none of the other agents can?

3.???? Test them out

Go to open for inspections or auctions run by the agent

Ask them to explain how they negotiate and why they do it that way

If you have been referred to the agent, ask the person that referred you what they were like to deal with and why they had a great experience

Don’t be afraid to put some pressure on the agent, those that know what they are doing will be able to handle the tough questions. The buyers will also be trying to put them under pressure. Best you find out how they perform before you select them as your agent. Now that you have a few tools, including breaking down what they are recommending in layman’s terms, it’s time to simplify and summarise the selection process.

The Information Problem

In the past, agents used to be the only ones with access to the sold results, properties for sale and most of the other information required. Now, everything is out there for you, so what do you actually need to look at? How do you distil what is important and filter out the irrelevant? If we just look at the most critical elements, it can take a huge amount of stress out of selling. Luckily, by solving the Price Problem and the Performance Problem, we don’t need to worry as much about the Information Problem:

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1.???? The Price

No matter how beautiful the home is, how much you spend on marketing and how well the campaign is run, no house that is priced above what anyone is Willing to Pay will sell. The invisible hand of the market guides buyers, agents and sellers to the value of their property. If you are going to do research, spend the time researching the price. Make sure you only use Sold Results, not advertised prices. Advertised prices are only agreed to between an agent and an owner, and no one has actually agreed to pay that price yet!

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2.???? The Agent

Selecting a great agent that genuinely has your best interests at heart is the one decision you will make that will make all the other issues irrelevant. You are hiring a professional to guide you through the sale, so spend the time to get the right agent, and you won’t have to worry about the rest.

There are plenty of people that distrust agents once they have selected them and this can lead to some very bad outcomes. When there is a friction between the owner and the agent, there tends to be mistakes and miscommunication, neither of which help during a sale. While some things may seem simple and common-sense, sometimes in sales you need to be careful about how things are perceived, it can be a delicate process. If you put the agent under pressure to do or say certain things, it can actually have a detrimental effect on the campaign. The point here is that if you have selected an agent that is experienced, knowledgeable and has done the job before, trust them to do it again.

Summary… & two things to look for

The short version is this: If you do your own research on the price of your property, interview multiple agents and ask them the right questions, you will have all the information you need to make the right decision. You will know which agents did the research, who knows their stuff and who is just full of platitudes and sales-speak. The final two points I’d like to make are arguably the most important (maybe I should have led with them, but hey, here is a treat for those that read this far).? The first is about finding a Generalist, someone with a broad range of skills that can be applied to many situations. Selling a property involves a huge amount of detail across a wide variety of topics. From knowledge of economics, market conditions and finance to advertising and consumer psychology, an agent needs to be a Generalist to be able to provide the right advice and get the best outcomes. They need to be able to advise and manage building works & renovations as well as have an eye for detail when finishing off the styling or dealing with contract documentation. By looking for a broad range of skills from your agent you will have the best advisor on your side to make the most out of what can be the greatest financially rewarding experience of your life.

The second, and equally important trait to select for in an agent is trust. Once you have gathered all the information, make sure you ask yourself two important questions:

1.???? Do I trust this person to do the right thing by me?

2.???? If I was buying a house, would I trust them?

Once you have established the Generalist that you can Trust, give them the freedom to do their job unencumbered and that is what will ultimately get you the best price and the best chance of a great selling experience.

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