Buying a house? Trust no one

“Some of the people I thought I hired to work for me were secretly working for someone else”

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by

From the November 2014 issue of the magazine.

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(Andy Ryan/Getty Images)

(Andy Ryan/Getty Images)

In last issue’s editorial, I mentioned I recently plunged into Toronto’s deranged housing market. I quickly discovered that buying a house is expensive, bewildering and stressful. To make the process a little easier, I hired a trio of professionals to look out for me: a real estate agent, a mortgage broker and a lawyer. Or at least I thought I did. By the end of the process, I realized that some of the people I thought I hired to work for me were secretly working for someone else. Here are five lessons I wish I’d learned before buying.

Follow the money. The first lesson is that if you don’t understand how your real estate agent, your mortgage broker and your lawyer get paid, you won’t understand where their allegiances lie. As a buyer, I thought my agent was working solely for me, but it turns out she gets paid by the seller of the house, splitting a 5% commission with the seller’s agent. My mortgage broker wasn’t paid by me either, but by the financial institution that provided my mortgage. And my lawyer—I thought he at least was working just for me, but it turned out even that wasn’t true, which I’ll get to in a bit.

How does that affect their service? The problem is, you may think someone is working for you when they’re not. I hired an agent to help me negotiate the lowest possible purchase price on a house, but there’s a conflict there, because the higher the house price, the more she gets paid. Similarly, my mortgage broker not only gets paid a commission by the financial institution that provides my mortgage, but he gets paid more if he locks me in at a higher interest rate! To me that’s a stunning conflict of interest, and it wasn’t revealed until I signed the mortgage papers.

You still have some control. Remember that your agent won’t get paid a penny unless you actually buy. So if you feel you’re not getting good service, you can politely but firmly tell your agent that you’ll terminate the relationship if things don’t improve. The brokerage tries to prevent this by having you sign a “Buyer Representation Agreement” that locks you in. But you can limit the term on that before signing, and most agents will let you out of the agreement if it becomes clear that they’re not going to get a sale.

Close the information gap. You’ll only go through the buying or selling process a few times in your life, but your agent, broker and lawyer do it every day. If your goals aren’t aligned, they can use that imbalance against you. When it came time to buy title insurance, my lawyer recommended one product, but I found a better one on my own. It turned out the one he recommended paid a commission, and the one I found didn’t.

The system still works. Agents rely heavily on word-of-mouth recommendations for new clients, so despite some inherent conflicts, a good agent will work hard for you to make sure you’re satisfied. In the end, my agent convinced me to drop my offer in a bidding war by almost $40,000, and she was absolutely right—I still got the house. Without her expert guidance, I would have severely overpaid. After some prodding, I got a good rate on my five-year fixed mortgage from my broker too (2.79%), and even my lawyer came through, although at the last minute I discovered that he also represents my mortgage lender, a fact he didn’t disclose until closing day.

The truth is that even though the system is far from transparent, most of us need that professional help. So do your best to find some decent, experienced assistance and treat them well. But remember: They’re not your friends. Not until the sale closes, anyway.

9 comments on “Buying a house? Trust no one

  1. A real estate agent worth hiring will disclose all of the above to you, but you will likely have to display enough interest in the process to ask the questions.

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  2. i have the same experience

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  3. I am thinking that the title should read “What to expect from hiring people that YOU are not paying for their work?” It’s all a matter of expectations and how you trust the people that you “deal” with. As a Realtor,® I am in favor of billing for my work, competence, knowledge and time. On the other hand, will YOU be willing to pay for it, is another question. That brings me to conclude that unless buyers and sellers understand that Realtors®cannot continue to work without having the guarantee to be paid in exchange for their professional services, you will only “Get what you are paying for.”

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  4. These lessons apply to all salespeople who work on commission. The ones who work at clothing or electronic stores, they’ll push the product which gives them the highest commission. If you know this in advance and do your homework, you’ll come out of the experience knowing you were an informed buyer who understood the circumstances.

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  5. How did you know that the bidding war actually existed?

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  6. The Buyer Representation Agreement allows your Realtor to work solely in your best interest DESPITE being paid by the seller. That is the purpose of the document, not to trap unwitting buyers.

    Since your Realtor talked you into offering $40,000 LESS that you suggested, clearly they were thinking ONLY of your best interests. That being the case, I have to question your motives in writing the article, seeing as how, according to you, all your advisors were nothing but helpful to you.

    I can only assume from the huge price difference that the property had to be either in Toronto or Vancouver. In more ‘normal’ markets, the price difference between a winning offer and a losing one is usually $1,000-$2,000. If your Realtor talks you into offering $2,000 more than you want, at 2.0% commission that’s an extra $40 to the Realtor. Barely enough to buy a bag of dog food. Do you really think the average Realtor would risk their reputation and possibly their future livelihood for $40? Doesn’t make sense to me.

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  7. I blogged in response to this.

    http://www.macquarrie.realtor/#!Response-to-editorial-Buying-a-house-Trust-no-one/cllt/DC6EC029-5CDC-407D-BE92-4C791CFB1832

    If you are interested in a Realtor’s perspective. The confusion is two-fold, imo, Firstly the buyer is happy to hear that he does not have to pay the Buyer Representative Agent. After hearing “free” he asks no more questions. However, a good agent should disclose HOW he/she gets paid!!!

    To the person that said: ” they’ll push the product which gives them the highest commission.”

    You do not understand the implications of Agency Law that binds any Brokerage or Realtor. If your Realtor does not put your interests FIRST in a transaction, then you have a very easy lawsuit to win.

    That being said, if buyers and sellers treated Real Estate Agents like employees, ask for references, conduct an interview, etc. then greedy Realtors would NEVER be hired.

    Clients please remember: YOU ARE THE BOSS! You choose who to hire. Inform yourself.

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  8. I’ve never had anyone ask me to cancel a buyer agreement. Without a buyer rep agreement in place with a brokerage, all reps have an obligation to work for the seller and give them all the information about you, that you may think is confidential. If you want advice on value, neighbourhood amenties, etc., you have to hire the brokerage (not the rep) through the agency agreement. If your rep doesn’t disclose this to you at the earliest possible time, you shouldn’t work with them.

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  9. First hand accounts are always interesting. But your editor, didn’t require you to “balance the story” by including the “testimony” of any party-you-disparage PLUS you didn’t seek expert opinions to verify your own |newbie” conclusions-from-observation.
    I am a RE/MAX Realtor and was first registered in Ontario in 1974. The Buyer Agency Agreement in fact “ties up” the registered realty brokerage and registered realty sales rep (deemed consciously competent under legislation)more than it does the layman/buyer .Under the BRA, the Realtor(tm) is compelled to represent your interest as a fiduciary duty – your interests are supreme. If not you can sue him/her and s/he has mandatory Errors and Omissions insurance to fund that successful claim.
    The misconception that “who directly pays” is tied to responsibility-to-represent should have been explained to you – when the 3 options of Working with a Realtor(tm) were outlined (i.e. Client (you pay realty Brokerage directly), Client (you buy homes where Seller is offering an incentive to Buyer sales rep, and Customer Service (honest answers, duty of care but no representation).
    In 90+% of the GTA listings, the Seller does offe an incentive and builds that “cost” into its price expectations – so you still pay, but indirectly and its not an added Cash-on-closing expense – leaving your maximum down payment available in your hands for mortgage purposes.
    Again, as a first-timer you learned many lessons that will serve you well throughout your realty trading life – in fact next time you may discover some wonderful things that your ‘first time” Realtor(tm), Lawyer and Mortgage contact performed without fanfare ….things that you don’t know are “special favours”,
    i suggest that next time, you might be so hard-edged and cost-conscious that you may be inclined to hire another troika of pros based on the primarily on the feelings/impressions you outline here … only to find out that “special treatment” is not-always-included,
    The hallmark of sales-success in realty business is personality-in-the-face-of-adversity and a willingness to perform that little extra personal service -especially to “babes in arms” clients like you.NB a red-hot market where the Seller-is-king and there are 5 offers competing on every home is another factor that neither of us (nor your editor) dwelt on extensively herein, but is MUCH DIFFERENT in a Buyers market (yikes you’ll be selling then ….for the first time)
    In closing, for then and for now — in real estate, it’s true that “you (still and always) get what you pay for”.
    Good fortune Robert Ede, Sales Rep., Re?Max Hallmark Realty Ltd, Brokerage

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