Should you use a buyer’s agent?
If you have considered or bought an investment property in the past, chances are that you have also considered employing a buyer’s agent. This arguable question often sparks up a debate, as people tend to have strongly opinions on this topic. Should you engage the buyer’s agent to find your next investment property gem or could you do it yourself? I have summarised the main points for your consideration in this article.
Perhaps you were also wondering who actually the buyer’s agent is and what services do they offer? In short, – it is someone who works in the complete and unbiased interest of the buyer. This includes making sure that the property fits your personal and financial circumstances the best way possible and in most cases negotiate the contract and the sales price.
Here are the main things to consider before deciding to employ the buyer’s agent or not:
Buyer’s agents are not cheap. They do not have a standard rate as it really depends on the buyer’s agent itself and the scope of the service you would like them to provide. Typically, you can either engage the buyer’s agent to lead you through the complete process or get them only to negotiate the contract conditions and a sales price for you (which may require bidding at auction). Engaging the buyer’s agent for the full service would cost you from 2% to 2.5% of the purchase price. This means that for a $800k property you would need to cater for an additional expense of around $16k to $20. Some buyer’s agent however prefer to charge a flat fee which is typically between $10k and $20k.
Important thing to note about the buyer’s agent commission is that you cannot claim a tax deduction on it, see ATO for more details. However, if you do decide to sell your property in the future, it will offset your capital gains for the purpose of capital gains calculation.
Peace of mind
With the professional buyer’s agent by your side you are removing all sorts of stress from the overall process. You should feel reassured having a professional acting on your behalf who provides you with impartial and personalised advice. This was definitely an important aspect for me when I started my property investment journey. I was afraid of making a mistake as I knew that getting my first property wrong could set me back for years.
Property due diligence
Buying an investment grade property usually requires an extensive amount of research. This step is crucial, as it determines whether the property is an opportunity or a lemon. As part of your research you may want to consider the following items and you would like to tick as many of them as possible:
- Purchase the property below market value
- Ensure the property has promising capital growth potential
- There are planned infrastructure developments that would benefit the property
- The property has renovation potential
- The type of property fits the demographics of the area
- The demand in the area exceeds the supply, vacancy rates are low
- Strata’s financial and other matters appear to be in order
- And much more…
Most of the above information is freely available (see the Resource section of the website), yet some reports that the buyer’s agents cost money. There are multiple property data providers such as RP Data, Residex, APM and PriceFinder that offer such services. The research process may be overwhelming as you need to be able to gather and collate all the information into a complete picture before moving further with it. Do you see yourself doing this research? How confident are you in your research outcome? If you believe that you can do it, it is great because you really can. Getting the basics right is not a rocket science, yet there will always be some smaller nuances that data will not tell you but the extensive day-to-day experience in the field will.
1% difference in growth over 30 years
Overall, I think most people would agree that the professional buyer’s agent run a better chance of getting things right. But how better do they need to get it before you can justify the cost of their service? Is 1% of additional appreciation per year a good justification? To demonstrate the power of an additional percent of growth, see the below chart that compares 6% and 7% average growth over the period of 30 years..
As the graph suggests, – the projected value difference over the 30 year period exceeds a million dollars. This is a significant amount by anyone’s measure. To conclude, – if you are convinced that employing a buyer’s agent would give you at least the slightest advantage in terms of the capital growth over the long-term, the buyer’s agent commission could be more than justified.
Using the buyer’s agent to run your negotiations is probably the most common reason for their engagement. Not everyone feels comfortable to negotiate the price with the selling agent. After all, their job is to sell the property at a highest price possible as he or she is representing the interests of the vendor, which are opposite to yours. Good selling agents are trained and skilled to get as much money out of you as they can. They use numerous techniques and apply them without you even knowing it. For an experienced and skilled buyer’s agent this is the opportunity to shine and demonstrate the value of their service.
It is important to note that property investment should not be an emotional roller coaster but rather a numbers game. I have seen number of times when the buyer’s rational thinking gives way to emotions and personal attachment for the property. This is where the numbers stop staking up and you are no longer playing the game you should be playing. Buyer’s agents are emotionless and have no personal attachment to any property they purchase. This should trust them to remain rational and objective throughout the complete negotiation process.
During a negotiation, it would be wise not to take anything personally. If you leave personalities out of it, you will be able to see opportunities more objectively. – Brian Koslow
Networking and connections
You can up-skill yourself on almost any of the above points and become highly competent at it, yet one area where you would struggle to match the buyer’s agent is their network. This is something that takes years to build. Unless you are doing it full-time you will find it extremely difficult to put in place and maintain. In my experience, this could be the single lever that produces an n-time return on buyer’s agent commission.
Buyer’s agents are always on the ground day-to-day building relationships with selling agents. The moment a great investment property becomes available, the buyer’s agents are the first ones to know of it. Off-market opportunities are not uncommon. The selling agents (representing the vendor) sometimes need to cater for vendor’s requests to make a quick or a quite sale. This means that you may never see the property being advertised on the market and hence never run a chance of bidding for it.
To summarise, – I understand that employing a buyer’s agent comes with a hefty price tag, but in my view the advantages outweigh the cost by quite a margin. Based on my experience, – the good buyer’s agent makes the process structured and consistent making the results more predictable and secure. Having a professional buyer’s agent by your side helps you to remain emotionless and rational throughout the process, so that you can keep playing the only game that matters in property investment, – the numbers game.
I wish you a very successful and happy investing!
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