There's No Such Thing as Full Service Agency for a Discount Price

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The local dog target gave discounters several hundred thousand dollars of free puffery recently.

I'm not against discounters. I'm perfectly willing to do a discounters work for a discounter's price. Fifty percent for the pay for less than ten percent of the work and almost none of the liability is a real win as far as I'm concerned. The difference is that I'm not willing to pretend that you're getting the same value from me. In fact, the amount of value the buyer receives from their alleged "agent" is pretty much negligible.

Let's illustrate with a real example from last week. Some full service clients of mine had gotten interested in a property. They wanted a fixer property with potential and a view, and they asked me to check this one out. Yes, it had a view, but the view was of a high school stadium, making peaceful enjoyment of the property rather hit and miss, subject to the local sports schedule. It had some potential, true, but every surface in every room needed to be redone. It is going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than the owners are asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. If all you're thinking of is that $5000 rebate check, which can be fraud for reasons similar to these, you may think you got a deal.

If they had been clients of a discounter, they would have been in escrow on the first property right now. Too bad about that $100,000 they'd have to spend to get $40,000 benefit. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. What does a discounter do? Write the offer on the first property. Now you've got a property you need to put $100,000 into to make it usable, that's worth only $40,000 more than you paid. Money the discounter would have rebated: roughly $5000. If they didn't have a full service agent to compare with, it even looks like a great deal, because none of the value I provided these folks shows up on the HUD 1 form, or anywhere else as numbers on paper. The value is still there, as my clients know.

If you know enough about the state of the market, what problems look like and what opportunities look like, you may spend less with a discounter, or get a rebate, that doesn't cost you several times that difference. If you know everything a good agent does, there is no reason not to put that money in your pocket. But if you know everything a good agent does, why is the discounter making anything? Why aren't you doing your own transaction? Why aren't you in the business yourself and getting paid for your expertise?

A full service agent goes a long way past filling in the blanks on Winforms and faxing the offer. When I go out looking at 20 to 30 properties per week, I'm not just finding individual bargains. I'm also learning about the general state of the market, what things to look for in a given neighborhood, what common problems are with a given model of house. I know what's sold in the neighborhood recently, and I know what it looks like because I've been inside it, and I know how it compares to other stuff that's out there now. I have a pretty fair idea of what it's going to take to beautify properties, and I know what they'll be worth when the work is done, because I know what other stuff that already looks like that has sold for recently.

Real estate is a career. It may not absolutely require a college education, but many agents have one, and know many things you can't learn in college - because the professors don't know, either, unless they're active real estate agents. A good agent spends a lot of time and effort not only learning their local market, but keeping their knowledge base updated. This thing changes constantly, and it doesn't even change uniformly. How did La Jolla get to be La Jolla? I assure you it wasn't some random seagull anointing the neighborhood as having higher property values. Rancho Santa Fe doesn't even come close to the ocean, and it's the highest mean property value zip code in the nation. How did your neighborhood get to where it is? Is it likely to change, and how? What are the known and probable upcoming changes in the neighborhood? How is it likely to effect your prospective property? Wouldn't you like to know about that redevelopment zone - or the railroad tracks they intend to drive through the area?

Full service can be a very hard sale when all that you consider is the numbers on the HUD 1. There just isn't any space for "Agent kept you from making a $60,000 mistake," let alone, "Agent showed you an $80,000 opportunity." But people who know property know that there is a lot more to every transaction than the numbers on the HUD 1. If you're dubious, may I suggest this experiment when you're ready to buy: Find a couple full service agents willing to work with a non-exclusive buyer's agency agreements, and sign them. Then compare what happens as compared to the service of the discounter you use for properties you find yourself. There is no need to sign even a non-exclusive agreement with a discounter, by the way, as the sales contract will note the agency relationship for that transaction. Like I said in How to Effectively Shop for a Buyer's Agent, let the ineffective alternative select itself out.

I'm perfectly willing - happy, even - to do discount work for "discounter" pay. I only make half the money, but I can service a lot more than twice the clients for a much smaller level of risk and still be home in time for dinner. I'm even a better negotiator than dedicated discounters, because unlike them, I know what's really going on in the areas I serve. However, saying "full service at a discount price," does not make it so, and I refuse to pretend that it is. Furthermore, the people who approach me for discount work usually end up understanding that a real professional is worth a lot more than the extra money I make, and are happy to pay it. Most people have no problems understanding that the reason a good car commands a higher price than a bad car, let alone a skateboard, is because a good car provides more value. People will pay $100 per seat for decent - not great - musicians in concert when you couldn't pay them enough to attend a garage band practice session. Why should this principle holds any less true for expert help in what is likely to be the biggest transaction of your life?

Caveat Emptor


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This page contains a single entry by Dan Melson published on May 23, 2007 10:01 AM.

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