Who Do You Take Your Advice From? | Free vs Fee
So the question is, who do you take your advice from when you are buying an investment property? There’s really two side of the equation in this industry; someone who is prepared to give you the information for free versus someone like a Buyers Agent who is prepared to charge you a fee for service but the difference is this person who is giving you free advice has a stock list and a Buyers Agent doesn’t have a stock list. So, essentially, what’s the difference? Now, if I’m going to get the information for free, we’ve got to understand that the person who is selling you the product is giving you the information because they are highly incentivised to do that because they are getting paid the sales commission from the person who are selling the property. It’s always interesting to know that quite often, these guys are getting between 6% – 10% of the purchase price as the sales commission to give you that free information. Now, if we think about a $500,000 property and you are taking property investment advice from someone who is not charging a fee to do that, they are getting between 6% – 10% of the purchase price as a sales commission, so between $30,000 – $50,000 is what their income is to give you that free advice. Versus perhaps a Buyers Agent who perhaps charge a fee for service, typically around 2.5% of the purchase price. Now, upfront, they look like they are costing you more but if you stack them up, $30,000 – $50,000 versus $12,500, you can see that it is a better value proposition. But I guess the confusing part is that the $30,000 – $50,000 is wrapped up within the purchase price so it’s kind of hidden in a way where else the buyers agency fees is really upfront and in your face. It’s brought to you attention that you are actually paying this fee and quite often people thinks, “Do I really want to pay that when I can get this information for free?” If you think about that, $500,000 on either side of the equation, this person is getting $30,000 – $50,000 commission, this person over here is earning income at 2.5% or $12,500, it stacks up quite well. So, in my view, it is important to understand how the income flow is going on these investment properties so you that you get to decide which advisor that you want to take your advice from.
The other interesting thing is having been on the free side in the very early part of my career, what I often came up against is valuation issues. We present the contract, say its $500,000, the valuer actually knows that these sales commission are locked into the price so quite often, the would value it at $460,000 or $470,000. So the question is, is it really worth $500,000? Or is it really just worth $460,000 or $470,000 plus the salesperson’s commission as a price versus the established market where you are buying via a buyers agent, quite often the valuation comes in at contract price – willing buyer, willing seller – and there’s no overinflated commission involved in there. So, when you are stacking up together, you really got to understand and have a look under the bonnet to see how the commission flow works and also to see, whether you are getting apples for apples or if you are comparing apples with oranges?
Now, ultimately, you are going to pay for the fee through lending – either way. If you buy that $500,000 property and the fees are built into it, you are going to be borrowing money to pay for the fees anyway. Where else with a buyers agent, typically you are releasing equity from your home, you’ve got a line of credit in place and when you get invoiced for your buyers agency fees, you are paying it out of lending. So, really comparing them, you are paying them the same way as well.
Now, with the Buyers Agency model, you’ve got two options: Do you pay a percentage of purchase price or do you pay a Flat Fee? On a selling agent side, you want to pay a percentage of purchase price. You want to give the real estate agent an incentive to get you as high a price as possible cause they are going to earn the highest amount of income that they possibly can but it kind of doesn’t make sense on the buyer’s side does it? Because ultimately, you want your buyer’s agent to get the best price, best terms and the best conditions that you possible can, not give you an incentive just to pay more cause it’s going to increase their income. So in my view, it’s always best to go for a flat fee versus a percentage of the purchase price when giving the two options under the fee for service model.
Ultimately, my message is really clear. When you are buying an investment property, things aren’t always as they say. You really need to take a look under the bonnet and lift the veil a little bit to see what’s going on with the income that people are earning to help you make a good decision on who you should be taking your advice from for your next property investment.